Credit Unions + Usury Cap = Still Profitable!
Harvard economic doctoral candidates Ryan Bubb and Alex Kaufman published this interesting op-ed in the New York Times Tuesday. Their study of credit cards issued by credit unions dispels the industry claim the recent passage of the Credit CARD Act will make things worse for most credit card users. They found that credit unions, non-profit institutions owned by their members, offer credit cards with lower interest rates, lower penalties, and lower annual fees than the cards issued by banks. And the credit unions still manage to earn money, even without gouging their customers!
For some reason, the op-ed doesn’t mention the most striking difference in the credit card lending by credit unions – their interest rates are subject to a usury cap, a benefit to borrowers that was omitted from the Credit CARD Act. All credit union loans are currently subject to an 18% APR ceiling, a limit which can only be changed by the National Credit Union Administration every 18 months and with the approval of the appropriate Congressional committees, the Treasury, and Federal regulators. Credit unions are the only depository institutions to operate under a usury cap. Their customers were spared the recent experience of millions of holders of bank credit cards who saw their interest rates suddenly jump to 23% or 29% or even higher.
The consumer protection granted by a usury cap should be extended to all credit products, from credit cards to short-term loans to mortgages. Whether you’re buying a new pair of shoes or a home, you should not have to pay a usurious interest rate. It’s not justified, and it’s not fair.
There are currently two pairs of bills that would provide an overall cap on the interest rate associated with consumer borrowing. The Interest Rate Reduction Act, championed by Sen. Bernie Sanders and Rep. Maurice Hinchey (S 582 and HR 1640), would essentially extend the credit union rate cap to all lenders. The Protecting Consumers from Unreasonable Credit Rates Act, introduced by Sen. Dick Durbin and Rep. Jackie Spier (S 500 and HR 1608), would provide an across-the-board fee and interest rate (FAIR) cap of 36%.
In the meantime, you can always join a credit union!