Pros and cons of capping credit card interest rates at 15 percent
You would think the idea of a 15 percent limit on the interest credit card companies could charge would be met with a collective sigh of relief from the nation’s consumer debt holders. After all, by Federal Reserve reports, U.S. consumers have amassed almost $4 trillion in active debt, and more than a quarter of the total comes from revolving debt like credit cards. But that doesn’t mean there aren’t a couple of potential drawbacks to the legislation introduced by Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, which the two dubbed the “Loan Shark Prevention Act.”
The intent of the legislation would be to cap credit card interest rates so companies couldn’t charge more than 15 percent interest. It also lets states set yet lower limits if they wish. From Sanders’ perspective, that would halt big banks from charging outrageous interest rates. For those with poor credit scores, the current average is about 24.99 percent. That’s just the average, though, so a portion of the population is paying even higher interest, an amount equal to maybe a third of their charges on an annual basis. “Wall Street today makes tens of billions from people at outrageous interest rates,” Sanders told the Washington Post. But while Sanders is a prominent Democratic presidential hopeful and AOC an outspoken pillar of the newly seated Democratic-controlled Congress, there are some non-political pluses and minuses to the idea. Here are a few of the ripples the legislation to cap credit card interest rates at 15 percent could initiate:
The banks would not be all that happy
This is kind of a given, but worth stating. S&P Global Market Intelligence figures show that banks tallied some $113 billion in credit card interest and fees 2018. And this revenue is something they have had a few years to get used to. The total interest and fees have increased steadily since 2012, up 35 percent in the six-year period.
We might say goodbye to credit card rewards
Some financial experts see the legislation as having the same effect as the 2010 Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It limited how much issuers could charge retailers for interchange fees. The resulting pinch on bank revenues led to many of them terminating their debit rewards programs. “Anything that hits banks’ bottom lines hard, as this certainly would, could lead to less lucrative credit card rewards,” Matt Schulz, chief industry analyst at personal-finance site CompareCards.com told MarketWatch. “Banks are already a little queasy about the high cost of the rewards arms race, so taking a big bite out of their interest revenue certainly wouldn’t help.”
Credit card fees could increase
Since this particular legislation does not regulate fees, that might be a place banks try to make up the revenue stream currently coming from credit card interest. So woe betides the future credit card holder who’s enjoying 15 percent interest rates but then runs up against a punitive fee for, say, cash withdrawals or late payments.
Credit seekers might turn to payday loan places
The higher interest rates for people with worse credit ratings theoretically offset the lender’s expenses for defaults. So some experts theorize a lower interest cap might cause banks not to extend credit cards to those with less than stellar credit. Those folks might then have to turn to personal loans or go to the payday places. And while the “Loan Shark Prevention Act” also caps interest rates at those places, loan origination fees can be brutal.
Credit card interest rates would be lots lower
The legislation is unlikely to pass the Republican-controlled Senate, so political watchdogs are mostly philosophizing when they talk about a potential 15 percent credit card interest rate cap. But if it did come about, it would set substantially lower interest rates, particularly for anyone who is paying the Maximum APR. Credit card companies have pushed maximum APRs to levels that are “well above 20 to 25 percent,” CreditCard.com said. For now, they’ll probably stay there. In the future, who knows?