The idea of capping credit card interest rates has become an unexpected point of unity across the political spectrum. In recent months, Rep. Alexandria Ocasio-Cortez, a progressive powerhouse from New York, and Rep. Anna Paulina Luna, a staunch MAGA advocate from Florida, have co-sponsored a bill to limit credit card interest rates (APRs) at a maximum of 10%.
This bipartisan support for capping credit card interest rates signals a growing concern over the financial burden of credit card debt. But is a 10% APR cap the right solution? And what does this shift mean for credit card users and issuers alike?
In this post, we’ll break down why credit card rates have become such a hot-button issue and explore the pros and cons of implementing a cap, with insights from lawmakers on both sides of the political aisle.
Why Capping Credit Card APRs Has Gained Bipartisan Support
The idea of limiting credit card interest rates is gaining traction on both ends of the political spectrum.
In addition to Ocasio-Cortez and Luna, other notable figures, like Senator Bernie Sanders and Senator Josh Hawley, have introduced similar legislation. Their bills seek to cap credit card APRs at 10% for the next five years. But why is this issue attracting such wide-ranging support?
The Credit Card Debt Crisis:
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Rising Interest Rates: The average APR for credit cards has soared in recent years, now averaging about 21.5%, up from 14.7% in 2020. This sharp increase has left millions of Americans struggling with escalating debt.
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A Growing Crisis for Consumers: Around half of credit card holders are carrying a balance month to month, while 13% of cardholders are making only the minimum payment. This means that many Americans are trapped in a cycle of debt, paying off just a fraction of their balances while accumulating more interest.
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Political Timing: The move comes at a time when many consumers are feeling the effects of rising interest rates. Lawmakers are using this as an opportunity to challenge credit card companies and make good on promises to protect everyday consumers.
What a 10% APR Cap Could Mean for Credit Card Users
While capping credit card interest rates at 10% is a popular proposal, it also raises several important questions. Would this cap provide relief to consumers or end up having unintended consequences?
Potential Benefits of a 10% Credit Card APR Cap:
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Lower Debt Burden: A lower interest rate would make it easier for consumers to pay off their credit card balances. This could provide much-needed financial relief, especially for those struggling with high-interest debt.
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Reduced Delinquencies: Credit card delinquencies are on the rise, partly due to sky-high interest rates. A cap could help reduce late payments and defaults, providing a safety net for consumers who are living paycheck to paycheck.
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Increased Financial Stability: By limiting interest rates, consumers would have more predictable monthly payments, helping them manage their budgets and plan for the future.
Potential Downsides to a 10% Credit Card APR Cap:
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Limited Credit Access: Critics argue that limiting APRs to 10% could restrict access to credit for individuals with poor credit scores. Credit card issuers would be less willing to lend to high-risk borrowers if they can’t charge higher interest rates to offset potential losses.
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Shift to Alternative Debt: Some economists warn that capping interest rates on credit cards could push consumers toward other forms of debt, such as payday loans or buy now, pay later plans, which could be even more expensive and less regulated.
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Decreased Credit Card Rewards: If credit card companies can’t make enough money from interest charges, they may reduce the rewards programs or annual perks that come with certain cards, potentially leaving consumers with fewer benefits.
Is a 10% Cap Too Strict?
While capping APRs at 10% sounds like a reasonable solution for many consumers, the question remains: Is 10% too low?
Some financial experts believe that such a low rate could harm both consumers and credit card companies. They suggest that a higher cap—perhaps 25% or 35%—could provide a better balance between protecting consumers and maintaining access to credit.
The Trade-Offs:
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Maximising Consumer Benefit: The goal is to strike a balance where as many consumers as possible benefit from lower interest rates without cutting off credit access for those who need it most.
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Minimising Negative Consequences: As Breno Braga, a senior fellow at the Urban Institute, put it, “You want to maximise the number of people that benefit from it and minimise the number of people that suffer from it.”
What the Data Says: Global Examples of Credit Rate Caps
The debate over credit card interest rates is not unique to the United States. Around the world, many countries have implemented usury laws that place limits on interest rates, and studies have shown mixed results.
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76 Countries: According to the World Bank, at least 76 countries have imposed limits on lending rates, with 26 countries setting caps on all types of credit, not just payday loans.
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Mixed Results: Some studies suggest that credit caps successfully reduce payday loan usage without pushing consumers into more dangerous debt traps. However, other studies warn that such limits may inadvertently push consumers toward unregulated forms of borrowing.
How Credit Card Companies Could Respond to Interest Rate Caps
If a 10% APR cap becomes law, how will credit card companies adjust?
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Tighter Lending: Issuers may raise fees or tighten lending criteria, making it harder for people with bad credit to qualify for cards.
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New Fees: To offset the loss in interest revenue, companies might introduce higher annual fees or late payment fees.
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Reduced Credit Limits: Some credit card companies may lower their credit limits, especially for high-risk borrowers, to protect themselves from potential defaults.
Conclusion: Is a 10% APR Cap the Right Move?
Capping credit card APRs at 10% is an idea that resonates with both populist lawmakers and ordinary consumers. While the potential for lower interest rates would benefit many, the full impact remains uncertain. The trade-off between affordable credit and access to credit will likely shape future legislation and financial policy.
As the debate continues, it’s clear that both lawmakers and credit card issuers will have to balance consumer protection with the need to maintain a stable and accessible credit system.
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Photo credit: Business Insider
