Capping Credit Card Interest Rates: A Bipartisan Approach

This article explores the recent push by lawmakers to cap credit card interest rates, the potential implications for consumers, and historical context.

Key Topics Covered

• Recent bipartisan proposals to cap credit card APRs
• Rising credit card costs and consumer behavior
• Potential risks and outcomes of interest rate caps
• Historical context of usury laws
• Impact of the Military Lending Act

Introduction

Limiting credit card interest rates is becoming a popular policy idea for lawmakers from both the left and right. Recently, Representative Alexandria Ocasio-Cortez and Representative Anna Paulina Luna introduced a bill to cap credit card Annual Percentage Rates (APRs) at 10%. Similar proposals have been made by Senator Bernie Sanders and Senator Josh Hawley, also aiming for a 10% cap.

The Current Landscape

With average credit card APRs soaring to about 21.5%, up from 14.7% in 2020, the cost of credit has become a significant concern. Many consumers are piling up debt, with 50% of credit card accounts carrying a balance monthly and 13% of cardholders only making minimum payments.

Bipartisan Support

Although these bills may not pass soon, the bipartisan support indicates that interest rate caps may gain traction in the future. This policy could resonate with many voters, especially those burdened by high-interest debt.

Challenges of Rate Caps

While capping rates may seem beneficial, it could result in reduced access to credit for individuals with lower credit scores, as lenders may find it less profitable to extend credit under strict limits. This could lead to less borrowing and a greater reliance on other, potentially more expensive forms of credit.

Finding the Right Balance

Experts like Breno Braga from the Urban Institute warn that finding the right interest rate cap is critical. A cap that is too low may harm those it aims to protect, while a higher cap could still provide valuable consumer protection.

Historical Context

Usury laws to limit lending rates aren't new; many countries impose restrictions, and numerous states in the U.S. have laws against payday lenders. Yet, studies show mixed results on the impact of such regulations.

A Test Case: The Military Lending Act

One example to consider is the Military Lending Act, which capped interest rates at 36% for active-duty service members, including credit cards. Research indicated that the cap had minimal impact on access to credit for those affected, highlighting the complex outcomes of such regulations.

Conclusion

The proposed 10% cap by Ocasio-Cortez and Luna would likely affect a much larger audience than previous regulations. While limiting interest rates may pose challenges, it also opens the door for necessary discussions on consumer debt and financial protection.

Future Outlook

A bipartisan bill to extend the Military Lending Act’s 36% interest cap to all Americans was once close to passing, indicating that with the right political will, discussions about interest caps may resurface.