A proposed bill with bipartisan support seeks to limit credit card interest rates to 10% for the next five years in response to escalating rates and mounting delinquencies. This rate cap would significantly lower the current average interest rate of 21.5%, potentially benefitting consumers while also posing challenges, according to industry experts.
Senators Bernie Sanders (I-Vt.) and Josh Hawley (R-Mo.), the bill’s sponsors, selected the 10% rate target with a specific goal in mind. In a past campaign commitment, President Donald Trump pledged to implement a similar rate cap to aid working Americans in catching up financially. The senators are determined to hold Trump accountable for his promise.
Despite the senators’ efforts, historical precedent suggests that the bill may face obstacles in Congress. A previous proposal by Hawley to cap rates at 18% did not progress, and banking industry leaders have expressed skepticism about the current bill’s feasibility. Some leaders argue that imposing a 10% cap could restrict access to credit for many consumers, potentially driving them towards costlier and less regulated credit sources.
The mounting credit card debt in the United States, exceeding $1 trillion for the first time, has raised concerns amid economic challenges such as inflation and rising interest rates. Credit card companies rely on interest revenue to mitigate risks associated with lending to customers, particularly those with weaker credit profiles.
If the proposed rate cap were to become law, some industry observers speculate that credit card companies might reduce approvals for individuals with limited or poor credit history, impacting lower-income and financially vulnerable segments of the population. This restriction could hinder young adults entering the workforce and seeking to establish credit histories.
The interplay between high interest rates and delinquencies creates a complex dynamic, prompting card companies to raise rates to offset losses from unpaid balances. Without the flexibility to charge higher rates, analysts suggest that card issuers may need to reassess their lending practices and potentially restrict access to credit for certain demographics.
“They will cease the issuance of cards to customers deemed risky,”
explained Nicholas Anthony, a policy analyst at the Cato Institute, a libertarian think tank.
“Individuals on the higher end of the risk spectrum will simply be denied.
This creates a significant issue because those who are most in need will effectively be excluded from the system.”
John Cabell, managing director of payments intelligence at J.D. Power, a consumer analytics firm, raised concerns about the potential impact of a proposed 10% cap becoming law.
He warned that there might be a reduction in opportunities for consumers to obtain credit cards across the entire credit spectrum.
If credit cards are no longer an option, consumers may turn to alternative forms of credit that could be less favorable.
Some might opt for ‘buy now, pay later’ services, a form of short-term borrowing that allows payments over time.
While this option has gained popularity, it can lead vulnerable borrowers to accumulate more debt than they can manage.
Others may resort to payday loans, which are short-term, high-interest loans due on the borrower’s next payday.
The additional charges associated with these loans can escalate the overall cost beyond the borrowed amount.
Critics argue that the credit card industry has previously made dire predictions that did not materialize.
For instance, concerns were raised about the consequences of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, which imposed limits on fees and mandated issuers to notify customers before raising rates.
Subsequent evaluations revealed that the 2009 legislation actually saved consumers money and broadened access to credit.
Carter Dougherty, communications director at Americans for Financial Reform, a progressive advocacy group, urged caution when industry representatives claim that regulations hinder access to credit.
Although a 10% cap may not be feasible, many industry experts condemn the escalating interest rates, which commonly exceed 30% on store cards.
Moreover, card companies are currently enjoying record-high margins, resulting in increased profits.
Considering the possibility of setting an interest rate cap at 20% or 30%, the proposed 10% cap could initiate discussions on whether Congress would entertain the idea of capping card rates at a higher threshold.
While federal credit unions are restricted from charging more than 18% interest on credit cards, the Military Lending Act limits card rates to 36% for active-duty service members and their dependents.
John Cabell from J.D. Power suggested that it might be conceivable to set a maximum commercial card rate at around 30%.
Nevertheless, Cabell cautioned that any cap could have adverse effects on consumers, emphasizing that these financial products are inherently riskier with no collateral, extending loans to consumers based on trust, which incurs a cost.
The article from USA TODAY discusses a Senate bill proposing a cap on credit card rates and questions the potential repercussions for consumers.
