US Lawmaker Proposes 18 Percent Credit Card Rate Cap

September 25, 2023
As US credit card debt reaches an all-time high, a Republican senator has introduced new legislation to limit the annual percentage rate for credit cards to 18 percent.

As US credit card debt reaches an all-time high, a Republican senator has introduced new legislation to limit the annual percentage rate (APR) for credit cards to 18 percent.

In addition to the 18 percent cap, the Capping Credit Card Interest Rates Act would also prevent credit card companies from imposing new fees to evade the cap and impose penalties on credit card companies that violate the maximum limit.

Josh Hawley, the Republican from Missouri who introduced the bill, said it was intended to protect working Americans who “are being crushed under the weight of record credit card debt”.

Hawley argued that although the US government bailed out banks in the spring, they have “ignored working people struggling to get ahead”.

The announcement comes as Americans are facing record credit card debt.

According to a quarterly household debt report released by the New York Federal Reserve in August, US consumer credit card debt had reached $1.03trn, the highest amount ever.

Rising debt is partially related to recent interest rate hikes by the Federal Reserve as most credit cards have a variable rate linked to the Fed’s benchmark.

During the last 18 months, the Fed interest rate has risen 11 times in a row, representing the fastest pace of growth since the early 1980s. At the central bank’s most recent meeting on September 20, however, it decided to keep the target range for the federal funds rate at 5.25 percent to 5.5 percent.

New data from LendingTree calculated the average US credit card APR at 24.45 percent, meaning if the bill was introduced it would reduce current rates by more than a quarter.

“Working people face higher financial burdens at the same exact time the biggest banks are booking bumper profits and wielding immense power over the market,” Hawley said.

In April, Reuters reported that UK-based Barclays beat profit expectations with its first-quarter profit of $3.24bn as its US credit card business offset pressure on other business segments.

Citigroup and American Express also recorded higher revenue from credit card spending in April, although they had to set aside larger sums to cover potential defaults, according to the newswire.

The New York Times also noted that JPMorgan Chase, Citigroup and Wells Fargo made “banner earnings” as a result of the high interest rates, which allow the banks to charge borrowers more for loans than what they pay depositors.

A credit card interest rate cap could therefore potentially impact the attractiveness of credit cards for banks as it may bite into their profit margins.

Banks might also become more stringent in their risk assessment and lending practices if a cap is in place, or may decide to compete in different ways to maintain profitability.

The bill has quickly sparked opposition from US banks, with the American Bankers Association (ABA) arguing that the bill “would severely restrict card availability for everyday consumers” and “harm the very people it seeks to protect”.

The banking lobby group criticised the fact that the bill would not only cap credit card interest rates but would also include all associated fees, penalties and add-on products, such as warranties, in what they call “arbitrary ‘all-in’ APR calculation”.

“Including annual fees and other fees in the calculation will cause credit cards to exceed the cap, resulting in the elimination or reduction of valuable credit card features like cash back and other rewards,” the bankers said in a letter sent to Hawley.

They further argued that the proposed cap would impede innovative credit cards with non-credit features that are typically offered to underserved groups because “even a nominal annual fee could result in an all-in rate that exceeds the cap”.

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