Credit card interest rates and debt have reached record highs, driven by increased consumer spending during the pandemic and the Federal Reserve’s decision to raise borrowing costs. Currently, there is no federal cap on credit card interest rates, except for certain exceptions.
To address this issue, Senator Josh Hawley from Missouri introduced the Capping Credit Card Interest Rates Act in September. This bill aims to impose a maximum interest rate of 18% on credit cards, as well as prevent card companies from raising other fees to evade the cap.
In addition to legislative efforts, the Consumer Financial Protection Bureau (CFPB) proposed a rule earlier this year to reduce fees for late credit card payments. This proposed rule would lower fees for missed payments from as much as $41 to $8.
Lawmakers and regulators are increasingly pushing for interest rate caps and lower fees on credit cards as total credit card debt surpassed $1 trillion for the first time in the second quarter of 2023. The average interest rate for all cardholders also spiked to over 21% in August, the highest on record.
While some politicians are in favor of these measures, their success is uncertain. Democrats are likely to support Hawley’s bill, but it may not overcome a filibuster in the Senate and faces challenges in the Republican-controlled House.
Credit cards have become the most prevalent form of household debt, with 70 million more credit card accounts open compared to 2019. The Federal Reserve’s decision to raise benchmark interest rates in an effort to reduce inflation has resulted in higher interest rates for credit card holders.
Currently, credit card interest rates generally remain below 36%, but there is no federal ceiling on rates. Some exceptions include the Military Lending Act, which caps interest for active duty servicemembers at 36%, and federally chartered credit unions that have an 18% limit.
While lawmakers and regulators strive to cap credit card interest rates, the financial services industry largely opposes such measures. Trade groups representing lenders argue that caps would restrict credit availability and eliminate popular card features like cash back rewards.
Industry analyst Ted Rossman advises consumers to aim for a personal credit card interest rate of 0% by paying their bills in full and on time each month. This strategy can help avoid interest charges, regardless of any potential capped interest rates.
The average credit card balance is nearly $6,000, and at an 18% interest rate, cardholders who only make minimum monthly payments would be in debt for 206 months and accumulate $7,575 in total interest expenses.
In conclusion, while efforts are being made to cap credit card interest rates and reduce fees, their success remains uncertain due to political obstacles. However, consumers can take steps to minimize their own personal interest rates and avoid long-term debt by paying their credit card balances in full and on time.