In recent years, credit card interest rates have significantly increased, reaching average levels above 21%, resulting in a rise in bankruptcies. To address this growing financial pressure, a new bipartisan bill proposes to limit credit card rates to 10% for the next five years, reducing the current average by about half. However, while this measure may seem appealing to consumers, it is raising concerns among financial experts who fear it could lead to unintended consequences.
The bill, supported by Senators Bernie Sanders and Josh Hawley, draws inspiration from a promise made by President Donald Trump during his 2024 election campaign, when he pledged to limit electronic payment rates to “around 10%” as part of a plan to help American workers recover from rising debt. However, while a cap on interest rates may appear to be a positive step to ease the pressure on consumers, analysts are divided on the effectiveness of this proposal.
Credit cards, while useful for managing daily finances, are a risky financial product. The companies that issue them charge high rates to compensate for the risk of defaults, which have seen a sharp increase in recent years, with default rates exceeding 3%, the highest level since 2011. These high fees are also the primary tool used by credit card issuers to cover losses from customers who fail to repay their debts. Without these high rates, companies may be less willing to extend credit, especially to consumers with higher risk profiles.
Some industry observers warn that a 10% cap could lead banks to restrict access to credit, particularly for consumers with short or irregular credit histories. Credit cards may become harder to obtain for young people and those with low incomes, who could find themselves excluded from the traditional financial system. In fact, analysts suggest that without the ability to charge high rates, companies might stop issuing credit cards to these vulnerable consumers, depriving them of one of the most accessible forms of credit.
If consumers were excluded from traditional credit cards, they might turn to riskier credit alternatives. Among these, “buy now, pay later” loans have become increasingly popular. However, this type of loan, while seemingly a convenient option, can lead financially fragile consumers into deeper debt, negatively impacting their financial well-being. Other solutions, such as payday loans, involve high-interest rates and tougher terms, worsening the situation for those already in financial difficulty.
Despite the concerns about a drastic 10% cap, some experts suggest that a more balanced solution might involve setting a higher interest rate cap, such as 20% or 30%, which would allow credit card companies to continue issuing cards while maintaining some control over the rates charged. Indeed, existing laws, such as those regulating federal credit unions, which set an interest rate cap at 18%, demonstrate that it is possible to apply limits without compromising access to credit.
While the proposal could offer immediate relief to consumers, experts warn that it might reduce credit access for many, particularly for those who need it most. The challenge for Congress will be to find a balance that protects consumers without compromising access to credit products that are crucial for the financial stability of millions of Americans.
