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Some lawmakers and regulators are calling for interest rate caps and lower fees on credit cards as debt continues to rise.
Total credit card debt topped $1 trillion in the second quarter of 2023 for the first time ever.
According to the Federal Reserve, the average interest rate for all cardholders rose to over 21% in August, the highest on record. Some cards — particularly retail cards — charge more than 30%, said Ted Rossman, industry analyst at CreditCards.com.
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Sen. Josh Hawley, R-Mo., introduced a bill in September that would cap credit card fees – also known as annual percentage rate (APR) – at 18%, citing “increased financial burdens” borne by working people would have to.
The law, the Capping Credit Card Interest Rates Act, also aims to prevent card companies from charging other fees to avoid a cap.
Meanwhile, the Consumer Financial Protection Bureau earlier this year proposed a rule to reduce late credit card payment fees. Part of the rule would reduce missed payment fees from up to $41 to $8.
In June, four senators — Sens. Richard Durbin, D-Ill.; Roger Marshall, R-Kan.; JD Vance, R-Ohio; and Peter Welch, D-Vt. – Introduction of the Credit Card Competition Act. This law aims to reduce transaction fees on merchant cards that may be passed on to consumers.
“I think some of them [political] “At least when it comes to credit card issues, the lines are starting to blur a little,” Rossman said.
However, it is unclear whether these measures will be successful.
For example, Democrats are “likely to adopt” Hawley’s bill because progressives have long supported a federal interest rate cap, Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in a recent research note. But it probably doesn’t have enough support to overcome a filibuster in the Senate and is almost a non-starter in the Republican-controlled House, he said.
“We see no path forward for legislation capping credit card interest rates,” Seiberg said.
The CFPB is also embroiled in a Supreme Court battle that, depending on the outcome, has the potential to wipe all agency regulations from the books.
There is virtually no federal cap on card rates
Americans have relied more on credit cards to pay their bills as pandemic-era inflation pushed up prices for food, housing and other consumer goods at their fastest pace in four decades.
According to the Federal Reserve Bank of New York, credit cards are the “most common form of household debt” and their use continues to grow. There are now 70 million more credit card accounts opened than in 2019, it said.
Interest rates have risen as the Federal Reserve raised its key interest rate to reduce inflation.
Because of banks’ “self-restraint,” credit card interest rates have largely remained below 36%, although that’s still “extremely high” for a credit card, said Lauren Saunders, deputy director at the National Consumer Law Center.
However, current federal law generally does not impose a cap on rates, she said.
I think some of them [political] At least when it comes to credit card issues, the lines are starting to blur a little.
Ted Rossman
Industry Analyst for CreditCards.com
There are some exceptions: The Military Loan Act limits interest rates for active military members and their dependents on consumer loans to 36%. Federally chartered credit unions have a limit of 18%.
Previous legislative proposals have also attempted to lower interest rates. For example, Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, DN.Y., introduced a measure in 2019 that would have capped tax rates at 15%.
Reps. Jesús “Chuy” García, D-Ill., and Glenn Grothman, R-Wis., proposed a 36% cap on consumer loans in 2021. Grothman plans to reintroduce the legislation next year, his office said.
“The 36% interest rate cap on military members and their families has proven to be a highly effective measure to protect against predatory lending practices,” Grothman said in an email. “Why shouldn’t we extend these protections to veterans and all Americans?”
The financial services industry continues to largely reject the introduction of a cap.
Eight trade groups representing lenders such as banks and credit unions wrote a letter to Senator Hawley in September saying his proposed cap would have negative impacts, including limiting credit availability and eliminating or reducing popular card features such as cash back rewards .
According to a 2022 study published by the Federal Reserve, interest income accounts for 80% of corporate profits from credit cards.
How to reduce your personal card rate to 0%
Rossman’s general advice to consumers: Set your personal credit card rate to 0%.
This means you must pay your bill in full and on time every month. These customers are not charged interest, while those who carry a balance from month to month typically incur interest fees.
That advice wouldn’t change even if the rate were capped at, say, 15% or 18%, he said.
“[Such rates] would be better, but not a walk in the park in my opinion,” Rossman said.
According to TransUnion, the average credit card balance is nearly $6,000.
According to Rossman, at an interest rate of 18%, cardholders with an average balance who only make the minimum monthly payment would be in debt for 206 months and have a total interest expense of $7,575. The latter figure does not include payments on capital.
“The calculation of minimum payments is brutal,” he said. “Your debt can stretch for decades.”
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