new york
CNN
—
It's easy to see why many Americans would welcome former President Donald Trump's proposal to cap credit card interest rates at more than half their current level, even if only temporarily.
Americans have a record high of $1.14 trillion in credit card debt, according to data from the Federal Reserve Bank of New York. Meanwhile, the average credit card interest rate was 21.5% in May, up 6 percentage points from pre-pandemic rates, according to Federal Reserve data.
“We're going to put a temporary cap on credit card interest rates until working Americans catch up,” Trump said at a rally last week. “We can't let them charge 25% or 30% interest.”
But his proposal is almost certain to stall in Congress. Similar plans It was introduced by progressive lawmakers including Republican Senators Josh Hawley and Bernie Sanders and Representative Alexandria Ocasio-Cortez.
But if lawmakers approve President Trump's bill and it survives inevitable legal challenges from the credit card industry, it might be best to hold off on celebrating.
According to Experian data from the third quarter of last year, the average American has $6,500 in credit card debt. That means they're paying $116 a month in interest at the average interest rate of 21.5% in May. But if the interest rate cap was 10%, they'd be paying $54 a month in interest.
In addition to the money you'll save, the time it takes to pay off your credit card debt will be “dramatically” reduced, Matt Schultz, chief credit analyst at LendingTree, told CNN.
But it could hurt your ability to get credit in the future.
“A 10% interest rate cap will undoubtedly see card issuers loosen their grip on credit as they figure out how to remain profitable in the new normal,” he said.
Why: Interest rates are a way for credit card companies to manage the risk that customers won't pay their credit card bills on time.
Customers with lower credit scores are typically considered higher lending risks. To compensate, lenders tend to charge higher interest rates than borrowers with higher scores. But if card issuers, or banks, can't charge the interest rates they should because of the caps, they'll be forced to stop lending to certain customers, said Schultz, author of “Ask Questions, Save Money, Make More: How to Take Control of Your Financial Life.”
This disproportionately affects younger, lower-income, and less-educated borrowers who tend to have lower credit scores and are more likely to turn to credit cards to pay for goods and services in dire situations when funds are not readily available.
Trump campaign spokeswoman Caroline Leavitt told CNN that Trump's proposal is intended to “provide temporary, immediate relief to hardworking Americans who are struggling to make ends meet and can't afford high interest payments on top of the rising costs of mortgages, rent, groceries and gas,” but Leavitt did not offer any details about how the cap would work.
Even if you currently have no credit card debt and have a top-notch credit score, the 10% credit card fee cap can still put you at a disadvantage.
This could seriously undermine the rewards you receive.
This came after a law went into effect in 2010 that limited the fees banks could charge on debit card purchases to about 21 cents plus 0.05% of the transaction amount. Banks followed suit, eliminating debit card perks for customers.
Similarly, banks and credit card companies have warned that they will discontinue credit card points and rewards if restrictions such as President Joe Biden's attempt to cap late credit card fees to $8 are enacted.
“Certainly, I think that would be the case if there was a 10% cap on credit card fees,” Schultz said, adding that Federal Credit Union's offers, which have an 18% interest rate cap, are generally inferior to other credit cards that don't have a fee cap.
The main group that would benefit from the cap are people with very good credit scores, who rarely carry a card balance and pay a low interest rate to pay it off.
But overall, “the house always wins,” he said.
