Credit Card Interest Rates: A Battle Brewing

The idea of capping credit card interest rates at 10% for a year is back on the table, thanks to a push from the President. This proposal, which was part of his campaign promises, has sparked a heated debate. On one side, there are those who believe it could save Americans a significant amount of money. On the other, the banking industry is strongly opposed, arguing that it could limit access to credit for some people. The President's recent social media post did not clarify how this cap would be implemented, whether through executive action or legislation. However, one Republican senator mentioned that he had discussed the idea with the President and would work on a bill with his support. The goal is to have this cap in place by January 20, one year after the President took office. The banking industry, which has been supportive of the President's agenda, is not happy about this proposal. They argue that such a cap could hurt poor people by limiting or eliminating their access to credit. They also warn that it could drive people to seek out high-cost alternatives like payday loans or pawnshops. Researchers who studied this proposal found that Americans could save roughly $100 billion in interest a year if credit card rates were capped at 10%. However, the credit card industry would take a major hit, although it would still be profitable. Credit card rewards and other perks might be scaled back, though. About 195 million people in the United States had credit cards in 2024 and were assessed $160 billion in interest charges. Americans are now carrying more credit card debt than ever, to the tune of about $1. 23 trillion. Further, Americans are paying, on average, between 19. 65% and 21. 5% in interest on credit cards. This is significantly higher than a decade ago, when the average credit card interest rate was roughly 12%.The banking industry has long argued that lowering interest rates on their credit card products would require them to lend less to high-risk borrowers. They point to a previous instance where Congress enacted a cap on the fee that stores pay large banks when customers use a debit card. Banks responded by removing all rewards and perks from those cards. The U. S. already places interest rate caps on some financial products and for some demographics. For example, the Military Lending Act makes it illegal to charge active-duty service members more than 36% for any financial product. The national regulator for credit unions has capped interest rates on credit union credit cards at 18%. Some researchers and left-leaning policymakers argue that banks earn enough revenue from merchants to keep them profitable if interest rates were capped. However, there are historic examples that interest rate caps can cut off the less creditworthy from financial products because banks are not able to price risk correctly. The White House did not respond to questions about how the President seeks to cap the rate or whether he has spoken with credit card companies about the idea. However, one senator mentioned that the effort is meant to “lower costs for American families and to reign in greedy credit card companies who have been ripping off hardworking Americans for too long. " Legislation in both the House and the Senate would do what the President is seeking. Sens. Bernie Sanders and Josh Hawley released a plan in February that would immediately cap interest rates at 10% for five years, hoping to use the President’s campaign promise to build momentum for their measure.