In a new push to address affordability concerns on voters’ minds before the midterm elections, President Donald Trump has recently called for a cap on credit card interest rates, without a clear plan on how he would do it.
Experts and analysts say that a cap on rates is not as straightforward as it seems, and banks and some Republican lawmakers have pushed back against Trump’s proposal.
Similar measures have garnered the attention of lawmakers in Congress, including last year when Sens. Josh Hawley (R-Missouri) and Bernie Sanders (I-Vermont) introduced legislation to cap credit card interest rates at 10 percent, though that bill has yet to progress. Trump even called Sen. Elizabeth Warren (D-Massachusetts) for the first time, partly to discuss the rate caps.
But banks and some analysts warn that rate caps could reduce access to credit, especially for those with lower credit scores. Such laws could also slash credit card rewards programs that many consumers love. Here’s what to know about a proposed cap on credit card interest rates.
What is Trump proposing?
Trump wrote in a Truth Social post this month that he was calling for a 10 percent cap on credit card interest rates to last for one year beginning Jan. 20. He didn’t say how the proposal would be implemented. Enforcing such a cap would probably require legislation from Congress.
The cap would cut credit card interest rates significantly, as they now sit at an average of about 22 percent, according to the Federal Reserve Board.
How much could this save American borrowers?
Credit card balances in the U.S. stood at $1.23 trillion in the third quarter of last year, according to the Federal Reserve Bank of New York, a $24 billion increase from the previous quarter. A recent survey from Bankrate found that nearly half of Americans who have credit cards carry debt. Much of that debt comes from people who’ve had emergency expenses.
A study from Vanderbilt Universitylast year found that a 10 percent cap on credit card interest rates could save consumers $100 billion per year. That could mean hundreds of dollars saved each year for some individual consumers.
What about my credit card rewards?
Analysts have speculated that banks would pull back on rewards programs to make up for profit losses. But banks also use rewards programs to compete with one another to attract loyal customers and would probably not want to pull back too far.
The Vanderbilt study noted that a 10 percent cap would mean banks could reduce reward programs to some customers, although it speculated that consumers would still come out on top.
“And in every tier, the money saved by customers in the form of lower interest would far exceed the value of any rewards lost,” the study noted.
What are banks saying?
The opposition from groups representing financial firms was swift. The Bank Policy Institute, American Bankers Association, Consumer Bankers Association, Financial Services Forum and Independent Community Bankers of America said in a joint statement shortly after Trump’s post that a 10 percent cap “would reduce credit availability and be devastating for millions of American families and small business owners who rely on and value their credit cards.”
Addressing a question about general price controls on credit card interest rates during a company earnings call last week, JPMorgan’s chief financial officer, Jeremy Barnum, said it would be bad for the company and consumers.
“Specifically, people will lose access to credit, like on a very, very extensive and broad basis, especially the people who need it the most, honestly,” he said. “And so that’s a pretty severely negative consequence for consumers and frankly, probably also a negative consequence for the economy as a whole right now.”
Would this mean some get cut off from credit cards?
Banks are suggesting that such a proposal would mean they might have to reduce access to credit, especially to those who have lower credit scores and therefore seen as riskier customers, to maintain their profits.
Many analysts echo that, saying it could push people who can no longer access credit into riskier or more expensive types of loans. This type of proposal could have “major unintended consequences,” said Ted Rossman, a senior industry analyst at Bankrate, especially if banks had to cut back on access to credit.
“The card issuers that would be hit the hardest by the rate cap are the card issuers lending to the weakest customers,” said Adam Levitin, a professor of law and finance at Georgetown University Law Center.
Others noted that banks have enough profits baked into their business models. Many spend so much on advertising and reward programs that they could afford to take the hit to their income streams and still provide access to credit for most consumers, said Brian Shearer, author of the Vanderbilt study and director of competition and regulatory policy at the Vanderbilt Policy Accelerator.
“There’s a lot of fat to cut, and also the profits are massive,” he said.
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