Matthew Lynn

We need a free market in credit cards – just like everything else

We need a free market in credit cards – just like everything else
Text settings

There are some commercial decisions that are intrinsically difficult to defend. The plot of the last Captain America film, for example. Ryanair’s charges for bags that are slightly too big. The price of the new iPhone, and just about anything done by the lovable folks over at Foxtons. Credit cards changes come very close to that category. Almost but not quite. In fact, if the Labour party gets its way, and imposes controls on them, we may find that out to our cost.

In what will probably be the first of a whole week of populist measures, the shadow chancellor John McDonnell today announced that, if in office, he would impose limits on what could be charged on cards. No one would have to pay back more than they originally borrowed. In effect, the rate of interest would be controlled, a move which, according the Labour party, would help those trapped in persistent debt.

True, that might sound good idea. The UK certainly has a problem with debts running out of control. In the last year alone, the total has risen by more than 10 percent, and there is now an estimated £200 billion outstanding in credit card loans and overdrafts. Lots of people are living way beyond their means, and taking out bigger and bigger loans to keep buying stuff they can’t really afford.

But hold on. A cap is effectively a form of price controls, and we have a couple of centuries of economic history to tell us that those always do more harm than good. Drill down into the detail, and it is not really clear why we need any form of limit at all. Of the £200 billion out-standing, £14 billion is estimated to have been advanced to people in ‘persistent debt’, and who therefore might be helped by the policy. That is  7 percent of the total. Admittedly, that is a lot of people, and many of them end up struggling.

But it also means the other 93 percent are using their cards perfectly sensibly. They are spreading out their purchases throughout the year, taking advantage of Black Friday at Amazon, keeping themselves ticking over during a thin patch at work, or, very often, just taking advantage of one cash-back offer or another. If prices are controlled, then inevitably there will be fewer companies offering credit cards, and they will do so on less generous terms. The market will be destroyed for everyone. For those that use them sensibly, cards will be more expensive. For those that use them badly, they may not be available at all, even though in emergencies there are people who really need them, and they may be forced to rely on even more usurious pawn shops or unofficial lenders instead.

In truth, the UK has a retail/services based economy that is largely driven by spending and debt. That may not be too everyone’s taste: lots of people seem nostalgic for a time when men worked in factories, and they saved up for anything they wanted to buy. But, good or bad, it is the economy we have. Labour’s planned cap on interest is not the most damaging policy it has proposed – heck, the list is a long one, led by re-nationalisation and state investment. But it would still hurt ordinary consumers, and it would hurt the poorest most of all. Some people might need more education in how debt can rack up, and we certainly need to do more to improve wages for people right at the bottom of the earning ladder. But a free market in credit works as well as a free market in everything else, and we won’t do ourselves any good by destroying it.