Is an interest rate limit on credit cards a good idea?
“No doubt credit card issuers are driven by profit, not compassion; equally undoubtedly, thousands of Americans have gotten in over their heads with high-interest, revolving credit card debt. But does mitigating these risks justify jeopardizing the benefits of the credit card boom—such as convenience, rewards programs and increased liquidity—for millions of households, probably the majority, who manage debt well?”
High-interest-rate credit card debt is squarely in the sights of a new legislative proposal from Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Bernie Sanders (D-Vt.). Their bill, known as the Loan Shark Prevention Act, would impose a mandatory 15% interest rate limit on credit card charges, while allowing states to impose even lower limits. (The median interest rate now stands at a budget-busting 21.36%—a big jump from 12.62% roughly 10 years ago. Those with the lowest credit scores are most likely to get the highest rates.)
By imposing a 15% cap on interest, the proposed legislation aims to protect borrowers from sinking under unmanageable high-rate debt. The sponsors of the bill note that their cap is comparable to the 18% cap currently imposed on debt issued by nonprofit credit unions. “Rates higher than 15% are predatory debt traps, designed to keep working families underwater and allow predatory companies to enrich themselves off the misfortune of others,” Ocasio-Cortez said.
There’s no doubt that, if passed, this law would be sweet relief for many borrowers. Any interest-rate limit would make it easier for them to manage their debt and pay off loans. But what about unintended consequences? This Washington Post editorial argues that mandating interest-rate reductions may result in card companies limiting access to credit, imposing more fees, and making it harder for certain borrowers to get credit cards at all. Those borrowers might instead seek loans from potentially sketchy characters, like payday lenders, whose terms would make them worse off than if they’d gotten a high- rate card to begin with. Without accompanying regulations to fix these related issues, the proposed legislation will likely have a difficult time achieving its goals of lowering Americans’ credit card debt and interest payments. Credit card regulations were last overhauled with the passage of President Obama’s CARD Act in 2009. Maybe it’s time for another look at the financial services and credit industries, but that’s unlikely to happen until after the 2020 election.
Until then? Don’t wait for the Loan Shark Prevention Act or any other law to help pay off your credit cards. You should always pay your entire balance each month, every month (not just the minimum payment). If you do find yourself carrying debt from month to month, wiping it out should be one of your top money priorities. There are several strategies to lower your rate and make paying your debt easier. You can call your credit card company and ask them to offer you a better rate. (It can actually work!) Or you can move the balance to a zero- or low-interest balance-transfer card while paying it off—just keep your eyes glued to the small print detailing any fees and the duration of the low-rate deal, so you’re not caught off guard when the rates jump back up. It may be tempting to surf from card to card and try to juggle the debt indefinitely, but that can catch up with you.
Most people agree, credit cards are useful and sometimes necessary. (Ever tried renting a car with cash?) And by helping a user build a credit history, they can be useful for securing auto and home loans at reasonable rates down the road. But credit cards are dangerous, too. Even with a legally imposed 15% cap on interest, it’s up to borrowers to practice good habits.