Credit card debt and interest rates are at their highest levels ever, with people relying on their credit cards for purchases as a result of pandemic-driven inflation. The Federal Reserve has increased their interest rate, and there isn't currently a federal ceiling on credit card interest. In September, Sen. Josh Hawley, R-Mo., proposed the Capping Credit Card Interest Rates Act which would set the maximum interest rate at 18%. According to a specialist, people should aim to get their own interest rate to 0%.
Lawmakers and regulators are advocating for caps on interest rates and lower fees on credit cards in the wake of debt levels continuing to rise. A new record was set in the second quarter of 2023 when total credit card debt surpassed the $1 trillion mark. The interest rate charged by issuers of these cards averaged at a high of 21% for the month of August. Certain retailers even charged over 30%, according to Ted Rossman of CreditCards.com. In an effort to mitigate the financial stress this causes working people, Senator Josh Hawley, R-Mo., brought forward the Capping Credit Card Interest Rates Act, which seeks to limit APR to 18%. This law would also prevent card companies from raising other fees to maintain high interest rates. Meanwhile, the Consumer Financial Protection Bureau proposed a rule in the beginning of 2020 to decrease fees for late credit card payments. These fees stood at $41 but are now set to be reduced to $8. Finally, four senators, comprising of both Republicans and Democrats, introduced the Credit Card Competition Act, aiming to lower the transaction fees that merchants pass on to their customers.
Rossman commented that some of the political divisions may be fading on credit card matters. Nevertheless, it is uncertain if these efforts will be successful. Progressives have been in favor of imposing a federal interest-rate cap, as indicated in a Cowen Washington Research Group research report. However, this has a low chance of passing the Senate due to insufficient support and would not likely make it in the Republican-controlled House. Seiberg suggested that he did not anticipate any progress for this bill. On top of that, the CFPB is in a legal battle at the Supreme Court, which might overturn any rules implemented by the agency depending on the end result.
As prices on food, housing, and other consumer items skyrocketed during the pandemic due to inflation, Americans began turning increasingly to credit cards to cover their bills. The Federal Reserve Bank of New York noted that credit cards are now the "most prevalent form of household debt." In fact, there are now 70 million more open credit card accounts than there were in 2019. Simultaneously, the Fed's benchmark interest rate has gone up, leading to increased credit card rates, though the majority of those rates remain below 36%. Banks have shown self-restraint in keeping their rates low, but these numbers are still considered "extremely high" by Lauren Saunders of the National Consumer Law Center. As of now, federal law does not place a limit on credit card rates.
Exemptions do exist - the Military Lending Act has set a cap of 36% for active duty servicemembers and their dependents for consumer credit, while federally chartered credit unions have an 18% limit. Over the last few years, lawmakers have sought to introduce legislation that would significantly reduce the interest rate, for instance Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, D-N.Y,. had proposed a 15% limit in 2019. Reps. Jesús "Chuy" García, D-IL, and Glenn Grothman, R-WI, proposed a 36% upper limit on consumer loans in 2021, with Grothman's office stating they plan to reintroduce the legislation next year. Grothman noted, "The 36% interest rate cap for active-duty servicemembers and their families has proven to be a highly effective measure in providing protection against predatory lending practices. Why should we not extend these same protections to veterans and all Americans?" The financial services industry however, has largely opposed capped rates, with 8 trade groups representing lenders like banks and credit unions writing a letter to Sen. Hawley in September, stating his suggested cap would have negative effects such as shrinking credit accessibility and eliminating popular features like cash back rewards. A study published by the Federal Reserve in 2022 shows that approximately 80% of company profits on credit cards come from interest income.
Rossman's suggestion for consumers is to make their personal credit card rate 0%. Accomplishing this requires consistently paying off the entire balance every month. This way, those who are diligent about paying their credit card bills off are not charged interest. Rossman believes that even if the rate were to be capped at 15% or 18%, it would still not be ideal. He stated, "It would be better, but no picnic in my estimation."
TransUnion has reported that the average credit card balance is nearly $6,000. Rossman believes that if a cardholder with a median balance only makes the smallest monthly installment at an interest rate of 18%, it could take 206 months and incur $7,575 in interest payments, not counting payments towards the principal. He described this as "minimum-payment math" being "brutal," adding that debt can drag on for ages.
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