Amid a surge in credit card interest rates and arrears have risen, the bill with bipartisan support will cap to 10%, about half the current five-year average.
This law dramatically lowers card rates to an average of 21.5%. Still, industry experts say the law can help and interfere with consumers.
Sen. Bernie Sanders, I-Vt, sponsor of the bill. , and R-Mo. Josh Hawley selected a 10% target for reasons. %, “At least temporarily, “while working Americans are catching up.”
Trump has pledged to a 10% limit on card fees. Will he follow?
Now, the two senators want to bind the president to his pledge.
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“Working Americans are drowning in record time credit card debt, but the biggest credit card issuers get richer and more enriched by hiking interest rates a month,” Holy said in a statement. . “It’s an easy way to keep credit card rates at 10%, just like President Trump campaigning, and provide meaningful relief to working people.”
History suggests that the bill is likely not to be passed. Holy proposed a more modest cap in 2023 with a 18% card fee. That scale died. Banking industry leaders predict that Congress will not be warmed by this.
“I know they understand how problematic this is, and I think we have a strong resistance to it,” said Lindsay Johnson, CEO of the Consumer Banks Association.
Industry leaders have written letters to two senators against the law.
“The bill eliminates access to credit cards for millions of consumers and drives them to a much more expensive and unregulated source of credit,” they write.
If Congress caps interest rates, will credit cards be removed?
Credit card companies take risks when expanding their credit to consumers with unstable credit. These customers often pay the highest fee. Credit cards make money on interest. Revenues also protect them from losses to consumers who don’t pay back the money.
Credit card default rates are at the top 3%, the highest since 2011, when 2011 was born out of the Great Recession. Card company default spelling loss.
According to some industry observers, if Congress gets a 10% cap, the card company will likely suspend credit card approval for people with or shorter credit history. That could mean millions of low-income, financially vulnerable Americans will no longer be able to use their credit cards, analysts said. Younger consumers may not have access to credit as they are entering the workforce and are trying to establish a credit history.
“The truth is, the 10% cap is really, really restrictive,” said Ted Rothman, a senior industry analyst at Bankrate, a personal finance site. “Frankly, it wouldn’t be beneficial for card issuers.”
Rothman and others operate in a vicious cycle, with high card fees and increased late payments. A higher fee will cause some customers to stop paying. Card companies reduced their losses by increasing fees.
If the credit card company fails to charge a high fee, analysts say they will stop issuing cards to dangerous customers.
“People on the top of the risk spectrum will be completely denied, and that’s where you have a big problem,” says Nicholas, a policy analyst at the Cato Institute, a libertarian think tank. Anthony said. “The people who need it the most are effectively cut out of the system.”
“We’re committed to providing a range of services to our customers,” said John Cabell, managing director of payment intelligence at consumer analytics firm JD Power.
Without a credit card, borrowers may seek worse options
If the credit card is away from the table, consumers may seek other forms of credit.
“I think a lot of people will be drawn to ‘buy now, paying later,'” Rothman said. The product is rapidly gaining popularity, but it will start to take on more debts than vulnerable borrowers can afford.
Other consumers can rely on payday loans. A payday loan is a short-term, high-profit loan that is usually scheduled for the next payday. Interest and fees can boost effective costs beyond the amount of borrowing.
Critics point out that the card industry has had these worst arguments before. The industry predicted unintended consequences from the 2009 Credit Card Accountability, Liability, and Disclosure Act. This limited the number of punitive fees and card issuers to alert customers before hiking fees and more.
Subsequent analysis found that the 2009 law saved consumers money and increased access to credit.
“We must be very skeptical of industry lobbyists and apologists who say regulations lead to loss of access to credit,” says Carter Dougherty, director of communications at Financial Reform, a progressive advocacy group. states.
A 10% cap may not be realistic, but many industry observers blame spiral interest rates. Meanwhile, credit cards companies charge record margins and effectively increase profits.
What about the 20% or 30% interest rate cap?
The 10% CAP proposal could serve as the opening salvo on whether Congress will cap higher numbers of card fees.
Federal Credit Unions cannot charge more than 18% interest on credit cards. The Military Loan Act caps card fees at 36% for active service members and eligible dependents.
“We could probably imagine an upward cap, for example, 30% or less,” says JD Power’s Cabell.
However, he said any cap could have negative consequences for consumers.
“It should be noted that these are high-risk financial products,” he said. “There is no collateral. There are loans that are honestly extended to consumers, but that costs money.”
