New Proposal Seeks 10% Cap On Credit Card APRs

As Americans face record levels of credit card debt, a new proposal is seeking to rein in the sky-high interest rates that many consumers are paying. The 10% Credit Card Interest Rate Cap Act, introduced by Senators Bernie Sanders and Josh Hawley, would set a federal limit on interest rates at 10%, drastically cutting down the cost of borrowing for millions of Americans.

The bill, which aligns with a promise made by former President Trump during his campaign, comes as the average credit card APR hovers around 28.6%, leading many borrowers to struggle with growing balances and mounting interest payments. 

The proposal has drawn praise from consumer advocates while banks and credit card issuers strongly oppose it, warning that it could reduce access to credit and drive consumers toward riskier lending alternatives like payday loans.

Why Credit Card Interest Rates Are So High

Banks can borrow money from the Federal Reserve at rates as low as 4.5%, yet many consumers are being charged APRs that are five to six times higher. In 2022, credit card companies collected an estimated $130 billion in interest and fees, with Visa, Mastercard, and American Express each reporting billions in profits while raising rates.

For consumers carrying credit card debt, the difference between a 28% APR and a 10% APR can be staggering. A borrower with a $5,000 balance at a 28% interest rate making only minimum payments could end up paying nearly $11,000 in interest over 24 years. At 10%, that same borrower would save over $7,000 in interest and pay off the debt much sooner.

Pros And Cons Of A Cap

Of course, there are pros and cons of capping credit card interest - depending on who you ask.

Supports of a cap say it's about fairness and financial relief. Credit card companies are engaging in predatory lending, charging rates that amount to “legal loan sharking.” A 10% cap on interest would potentially save consumers thousands of dollars and prevent borrowers from being trapped in a cycle of debt. 

However, opponents say it will limit credit access generally. Banks warn that a cap could reduce access to credit, particularly for low-income Americans and those with weaker credit. Credit cards may also have to tighten lending requirements, making it hard to qualify for cards, even for those who are creditworthy. 

The result is that consumers may have to turn to payday loans or other high-risk alternatives. 

What Will Happen Next?

The final text of the bill has not been released yet, but it's like that it will face strong opposition. 

Banks and credit card companies will argue that such a drastic interest rate cap could hurt consumers rather than help them. Some economists warn that lenders could offset losses by increasing fees, cutting rewards programs, or reducing access to credit. 

The debate over the bill highlights larger concerns about credit affordability and financial fairness, especially as Americans struggle with rising costs of living. Whether the bill gains enough bipartisan support to pass remains to be seen, but it has already reignited the conversation about how credit card companies treat borrowers.

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