Bill Introduced To Cap Credit Card Interest Rates at 15%
Senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez have put together legislation aimed at curbing high credit card interest rates. It is very clear that this is something they are quite passionate about – they live streamed their announcement on Facebook and spoke strongly about their conviction to see this through. Senator Sanders and Congresswoman Ocasio-Cortez have condemned the current interest rates as “outrageous” and “extortion”. They make several valid points but let’s explore some of the possible ramifications this type of legislation.
Current Credit Card Interest Rates
One of the hallmarks of this bill is that it is being pitched as a “simple fix”. All credit card issuers would be required by law to charge 15% or less on credit card interest. A typical credit card has an interest rate ranging from 17% to 25.99%. Store branded credit cards are notorious for having higher interest rates, closer to 30%. Finally, cards designed for individuals with poor credit often have even higher interest rates.
There is a vicious reality within the lending community that disproportionately impacts individuals with poor credit. These same individuals are typically also the worst off financially. If your credit is poor, you are going to be eligible for only the worst credit card products. This problem does need to be addressed but determining the best method is a difficult endeavor and it is unclear if Bernie and AOC have hit the mark with this proposal.
Is a 15% Interest Rate Cap The Solution?
This is a very complicated issue but the first thing which must be considered is understanding why banks offer different interest rates for consumers depending on their credit scores. Every line of credit issued by a bank comes with the risk of the individual not paying their balance. The more likely a consumer is to pay off their credit card, the less of a risk they represent to the bank. This is why consumers with great credit will receive the best interest rates. Conversely, those with poor credit are considered by the banks to be at much higher risk of default.
With this in mind, it is easy to see how legislation like this would be a great idea. Simply set a limit banks can charge does feel like an easy fix on the surface. What is unclear is how this would impact a banks ability to offer credit. A possible drawback to this legislation is that it may result in consumers with poor credit having an even harder time getting approved for a credit card. Banks would have to rebalance their systems for approving consumers for credit as their entire risk profile would be altered. In this case, the legislation could have a negative impact on the very people it was designed to assist most.
There is no doubt that this bill will face strong opposition from Wall Street and it is unclear at this point what type of support it can expect to find in Congress.
Re-Thinking Credit Card Interest Rate
The question is not whether a problem exists with current credit card interest rates. There absolutely is. Consumers pay unbelievable interest on their credit card balances. However, it is not clear if an interest rate cap is the best solution. As mentioned above, legislation like this could have the undesired impact of limiting credit availability to all but the most credit worthy individuals. This could put many people in an even worse place than they were before if they can no longer access any credit cards. Some of the most popular alternative solutions to tackle credit card interest include:
- Require banks to gradually decrease interest rates for responsible consumers
- Lower the current maximum which sits at a whopping 79.9%
- Provide better access to credit to individuals with poor credit
- Consumer education programs to teach financial literacy to all
- Require banks to offer reduced interest rates on secured credit cards
It is very difficult to understand why the current maximum interest rate is allowed to sit at nearly 80% – as Bernie and AOC would say, this is outrageous. It is worth noting that only a very small percentage of credit cards have interest rates anywhere near this limit. Reducing this interest rate limit would only impact a very small percentage of a banks business but would drastically relieve the individuals who are currently using those products.
Would Credit Card Rewards Be Impacted?
The bill introduced by Bernie Sanders and Alexandria Ocasio-Cortez does not directly address credit card rewards but it is safe to say that this bill would significantly cut in to the bottom line of credit card issuers. The first thing to suffer would likely be credit card reward programs.
Current Solutions For Individuals With Poor Credit
As we stand today, consumers with poor credit have a tough time finding credit card options. However, there are some very good options available – here is more information about the best credit cards for consumers with poor credit. The first place consumers should look is a secured credit card. Secured cards are far and away the best option for consumers who are having a hard time finding a credit card option.
For instance, The Discover Secured Card offers an interest rate of 25.24%. This is a very reasonable interest rate for a consumer with poor credit by our current standards (remember, the current maximum allowed is nearly 80%). Secured credit cards work exactly like a traditional credit card with the exception that they require an initial security deposit to ensure consumers will not default on their card. This is an area Bernie and AOC should look in to further. Requiring banks to offer lower interest rates on products like secured credit cards would greatly reduce financial strain while ensuring consumer access to credit is not negatively impacted.
Final Thoughts – Bernie and AOC 15% Credit Card Interest Rate Limit
There is no question that drastic inequality exists among credit card users based on their credit scores. This is simply a product of the system and there is likely no easy way to fix this. Banks have to manage their risk and interest rate is the primary way this is achieved. An interest rate cap needs to be studied further to better understand what sort of consequences it would have. If access to credit is even more limited for consumers with poor credit, then this is not the proper solution.
Legislators may consider focusing on the groups most impacted by these inequalities – those with poor credit. While there are credit options available for these individuals (such as secured cards as mentioned earlier), perhaps there are changes to the law which may allow better credit access while not impacting the availability of credit to consumers as at large.
What are your thoughts about this legislation? Would you support a interest rate limit? Are you worried it may impact credit availability to consumers? Let us know in the comments below!