Bad debt

November 20, 1991

First President Bush jawboned high credit card interest rates, then Sen. Alphonse D'Amato, the New York Republican who is facing re-election next year, introduced a bill to do exactly what Bush seemed to be asking. Before you could say "charge it" the Senate had passed the bill, and the next day the stock market took its fifth biggest plunge in history.

Even though most states still have usury laws, it's generally conceded that fixing interest rates by law just doesn't work. So the politicians hastily retreated in face of the panic in the banking industry, and it's unlikely Congress will pass the interest rate caps which Bush seemed to yearn for last week but which he promises to veto this week.

Even so, the discussion of this issue has been worthwhile. For one thing, it alerted millions of Americans that they are still paying interest rates in the range of 20 percent. For another, it exposed the banking industry as a proponent of profligacy. With straight face, bank industry spokespersons warned that if the interest caps were mandated, 60 million Americans would suddenly find themselves cut off from credit. It seems that most of these people are almost by definition bad credit risks, but the banks desperately need them in order to maintain profits.

This means, in short, that people who pay their bills must pay high interest rates in order to subsidize the bad debts of those who don't pay their bills. That's a little like raiding the industrious ant's larder to feed the lazy grasshopper in Aesop's famous fable.

The interest rate flap also demonstrates a built-in discrimination against lower-income Americans in the cost of credit. Under the broad tax-reform package enacted in 1987, credit card interest has been phased out as a deduction on federal income tax. Still intact, however, is the deduction for interest on home mortgages. This means that someone with a sizable equity in a home can borrow money at half the prevailing rates being charged on credit card purchases, and in addition get an income tax refund of a third of that interest. In practical terms, this means 20 percent interest for the struggling, 7 percent interest or the affluent.

The laws of economics may not make it possible for Congress to fix interest rates; but the laws of justice certainly make it possible to correct the inequity that now prevails.

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