Put A Lid On It: New Bill Wants To Cap Credit Card Interest Rates. Here’s What You Need To Know
Forbes Advisor
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A Note From Kelly Anne:
Hello and welcome to Forbes Advisor’s Weekly Brief, where we dive into the realities of consumer finance and empower you with knowledge to help make your financial journey easier.
A new proposal could change the way Americans borrow money, but will it really help consumers?
U.S. lawmakers are proposing a 10% cap on credit card interest rates, a move they say will protect consumers from excessive debt. Given that the average credit card interest rate currently sits at over 20%, a limit on interest rate charges could sound like a good deal. But some experts are warning it could have unintended consequences.
This week, we’re breaking down the details of the credit card interest rate cap proposal, what it could mean for you, and how you can tackle your credit card debt once and for all.
Sincerely,
Kelly Anne Smith
Lead Editor, Growth Projects
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Put A Lid On It: New Bill Wants To Cap Credit Card Interest Rates. Here’s What You Need To Know
There’s currently no limit on how much interest credit card issuers can charge cardholders who carry a balance. The bill, proposed by Sen. Bernie Sanders (I-Vt.) and Sen. Josh Hawley (R-Mo.), would create an interest rate cap of 10%.
The average credit card balance in 2024 was $6,730, according to credit bureau Experian, and the average interest rate sits at 22.8%, according to November data from the Federal Reserve. Introducing a cap at 10% could save some consumers hundreds of dollars each month—or thousands each year—in interest charges.
And while this could be a win for consumers—especially for those who carry a credit card balance—some experts are warning of the unintended consequences such a cap could have on the lending market.?
One World Bank study found that interest rate caps set below market rates could actually reduce access to credit for low- and middle-income borrowers. Experts add that banks would have less of an incentive to lend to borrowers with less than stellar credit, which would decrease their access to credit options.
With reduced lending access comes additional risks. These marginalized consumers would have to turn to alternative financing, like payday lenders, whose fees can be as high as 300% to 600% of the amount borrowed, according to a 2022 Pew Charitable Trusts study.
While experts agree that consumers need relief, there is no perfect solution. Some say a credit card interest rate deduction on tax returns could be more effective, whereas buy now, pay later plans may be a better solution for subprime borrowers who could be bumped out of the lending market should the interest rate cap pass.
If you’re struggling with paying off your credit card bill, making a plan to pay it off is key—whether that’s through a 0% APR credit card, a personal loan or working with a non-profit debt management company. You have options.
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