Would Capping Credit Card Interest Rates Help Or Hurt Consumers?

Many Americans are carrying more than $10,000 in revolving credit card debt, some with an APR of over 20%. But while the idea of putting a more reasonable ceiling on these rates might seem like a way to help get these folks out of debt and back in the black, some say it would likely have no positive effect on the economy at large.

SmartMoney.com ponders the notion of setting a credit card interest rate cap at somewhere around 10% over prime, which, according to some, would result in $5 billion that goes to the consumer and not the bank.

But a senior financial analyst at Bankrate tells SmartMoney that the average interest rate on credit cards is around 13%, which is near or below the level of this theoretical cap — which would be around 13.25% if it went into effect today.

And for those people with bad credit or no credit history, telling banks they can’t charge the high interest rates “would further restrict credit to households with less-than-stellar credit.”

On the opposite end of the argument is an economist at Center for Economic Policy & Research, who tells SmartMoney, “The 13% is an average rate… Some people are borrowing at 6% to 7%, but some are paying 20% to 25%. This means in principle this cap would save a decent chunk of change.”

SmartMoney used the Federal Reserve’s Credit Card Repayment Calculator to figure out how long someone with $16,000 in credit card debt would need to pay back that amount, paying only the minimum and making no further charges.

At an APR of 20%, it would take 78 years and cost about $78,000 in interest. Drop that APR to 13% and the balance would be paid off paid in 31 years with only around $18,000 in interest.

Which would be nice for the person paying back that particular card. But SmartMoney’s calculation figures that the savings would only be about $3.2 billion over 50 years, not a huge chunk of change in the big multi-trillion dollar picture.

As for the idea that a cap would restrict credit to people with bad or no histories, a professor from the University of Michigan says, “If this cap is imposed, it will probably save indebted consumers more money than it should… When consumers are faced with multiple debts, we find that the size of the balance is a better predictor than interest rate of how eager consumers are to repay a particular debt, which is generally inconsistent with rationality. So they may be distracted by a small debt while a larger, higher-interest debt continues to rack up interest charges, a mistake we call ‘debt-account aversion.’ If there’s some kind of cap on interest rates, that won’t prevent this mistake, but at least it will make the mistake less costly.”

And of course, as exhibited during the recent attempt to reform debit card swipe fees, financial institutions do not react kindly to the government telling them they can’t earn as much money as they are used to.

And still others note capping credit card interest rates would adversely affect the profitability of banks to the consumer’s detriment. “Banks will just stop lending money on consumer segments that turn unprofitable after the interest rate caps,” predicts the CEO of CardHub.com.

Will Capping Credit-Card Rate Help Consumers? [SmartMoney.com]

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  1. AcctbyDay says:

    They have usury laws in most states, I’m still not sure how 30% interest does not count as usury in Texas.

    Maybe there is something I’m missing?

    • Derigiberble says:

      All of the cards are issued by banks or bank subsidiaries nationally chartered in states which have no usury laws (Delaware, South Dakota, etc). Nationally chartered banks are not subject to any usury laws except those of the state in which they are chartered.

      You can thank a 1978 court ruling involving an interpretation of a 1860’s law for that stupidity: Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.

    • TouchMyMonkey says:

      Because people in Texas can’t spell USURY. You know, because of those really great public schools Republicans in that state are always talking about.

  2. sirwired says:

    Capping credit interest rates (a long-lost idea known as ursury laws) would indeed protect the financially stupid and/or ignorant. (However, I’m guessing that many of those people so situated are destined for eventual BK, making the theoretical interest rate less relevant.)

    Whether or not we should protect people from themselves I will leave as an exercise for the reader.

    • Fumanchu says:

      well those same people would probably just go down the street and get payday loans or car title loans if they coudn’t get access to a credit card and those types of loans can have just of high of interest rates and in some cases are higher than credit card interest rates.

    • crispyduck13 says:

      I had a rate of around 12% in 2008 with my Citi card that I’ve had since 2006. Used it for gas, payed it off in full every month, was never late, never hit my limit. Then after shit hit the fan in 2008/2009 I got a letter saying my interest rate was being increased to 25%, for no other reason than the poor economy. In fact I recall Consumerist doing a post on it, thousands of Citi customers got this letter and rate increase. So now that things have calmed down I’ve gotten the rate back down to 17% by making requests via their customer service line every few months. A law like this would help me quite a bit because I did absolutely nothing to deserve the rate hike.

      I’m a responsible person who pays their bills every month. My husband has some irresponsible customers who have flaked out on several thousand dollar bills which we’ve had no choice but to hold on this credit card. Does this make me financially stupid/ignorant?

      Seriously, there is more to every situation than black and white.

      • Bsamm09 says:
      • Loias supports harsher punishments against corporations says:

        My credit union card caps me at 7.99% APR.

        Just sayin’.

        • crispyduck13 says:

          My credit union caps at 9.99 and they’ve given me a very high limit. Unfortunately I’ve had to use that much more than I’d like. The Citi card was the last resort.

          • AustinTXProgrammer says:

            If you are on a last resort card, your husband is self employed and has flaky customers causing you to carry high interest debt, you are a high risk borrower. You may have been responsible in the past, you may be responsible now, but you sound really high risk to me.

      • wrjohnston91283 says:

        More likely than not, citi would have kept your limit at 12%, and cut your credit limit. You would have been unable to make additional purchases on this card, and would have had to come up with some other way to hold those customer’s bills.

      • wackydan says:

        I have a citi card since 1988 and my rate hasn’t gone up… I’m at 9.99 or something like that…. Stellar credit.

        If yours jumped that high, I suspect you had activity on your credit report that dictated the rise.

    • VeganPixels says:

      Oh, you mean like when CC, car and consumer loan interest was deductible for decades prior to 1986.

  3. Wachusett says:

    I think this would do more harm than good.

    Anyone paying a few percentage points less in interest would be helped a little…but nobody is going to get rich from the improvement.

    It would undoubtedly lead to some people being unable to get credit at all– and that could really cripple them.

    • Fumanchu says:

      that, and i garuntee you that if you cap interstest rates, they will raise credit card fees by a ton. Which really just punishes people who pay their credit card off in full every month. Seems like the governments policy for awhile now has been to punish the resposible for what the irresposible do or don’t do.

      • kujospam says:

        You wouldn’t be punished at all. You are mental. Instead of buying it on credit and paying it off at the end of the month. Wait till the end of the month to save up the money, then buy it. That way, you will always have that money. If you followed the rule that you never spent more then you could pay off in one month. Which is what you are saying. What you are saying is, you believe in socialism where the many pay for the few. Where everyone is treated the same even though they are not.

        • katarzyna says:

          That’s an overly simplistic way of looking at things.

        • Fumanchu says:

          actually i am saying i believe in the opposite of socalism. artificially lowering the rates benfits those that the poorest/riskiest/most irrespoisble with debt and hurts. lowerign the rates would cause the fees to go up wich hurts everyone else. This is pretty much the definition of socialism, relieve the suffering of the poor at the cost of everyone else by force.

  4. Ed says:

    The cap won’t do anything. Banks will still make what they need to make to be successful. If you put a cap in place, then the 20-25 day grace periods will shrink or vanish, benefits will go down, fees will go up and new fees will be introduced.

  5. stevoisonfire says:

    cap interest rates, get more “fees”. the banks will get their profits one way or another

  6. Loias supports harsher punishments against corporations says:

    Capping would have an additional consequence:

    If the average is 13%, and as mentioned some are paying 25%, then forcing the cap to be 13.25% would probably force banks to change EVERYONE at that cap rate.

    So it’s another example of the irresponsible paying for the responsible, such as credit card reward programs.

    We would likely see the vast majority of credit cards automatically charge near or at the max rate, with only the very choiciest client receiving significantly less.

    • scottydog says:

      Actually, if the cap is low, as in your example of 13%, banks would no longer be able to lend to more riskier populations.

      • iamlost26 says:

        I think Loias meant that if some people are paying 7% and some are paying 25% (so, an average of around 13%), then, with the cap, BOTH of those groups will now pay whatever the cap is (say, 15%).

      • Awesome McAwesomeness says:

        Good. Risky people don’t need loans or credit cards (I personally don’t think anyone needs them, but that is a different story.) These people are risky for a reason. The less debt they get themselves into, the better. People with money problems might actually learn to manage their money better if they HAVE to live off what they make and can’t get CC’s, payday loans, etc… We live off what we make. We don’t have much savings except for retirement. When our car broke down and had an expensive repair, my husband took the train to work and we saved the cash.

        You’d also be surprised how many “affluent” people use pay day loans and charge up cards. I know someone who lives in a monster house with all new stuff that had declared BK twice, takes out payday loans regularly, etc…

        People need to learn to live on what they make and save for emergencies.

    • Kate says:

      Part of the problem with the economy is that banks would lend too much money to people who couldn’t pay it and didn’t care. Capping interest rates would force banks to be more responsible and cut down on wild swings of the economy as we have recently been dealing with.

      But more to the point would be to make them more vulnerable to people going bankrupt and go back to how it was before that regulation was watered way down.

    • Jawaka says:

      Isn’t that exactly what happened with credit card swiping fees?

  7. humphrmi says:

    I was alive when usury laws were in effect at somewhat of a national level (banks couldn’t just set up shop in Delaware and issue cards in other states), and the effect was: Most people didn’t have credit cards, but other types of cards (retail store cards, gas station cards, even credit cards that were only good at certain restaurants) were abundant. Those that did qualify for general purpose credit cards had only one or two. Credit was generally well managed by affluent families, default rates were low.

    Whether that’s better or not depends on your perspective. From the credit card company’s perspective, they make a lot more money now than they did then, so while on one hand they’re going to dump customers that don’t fit their risk model with a usuary cap, on the other hand they’re going to start finding ways to take more money from the customers that remain.

    • bravohotel01 says:

      Go check out some classrooms at your local college. Thanks to that SCOTUS ruling, credit card applications infest college classrooms like influenza at a daycare.

      I once tried removing all the cc applications from every classroom in one building at school, to see how many there were. I had to quit before I got ‘em all, because my backpack was full and my pants were falling down due to the stacks I’d stuffed in my pockets.

      CC companies are like crack pushers.

      • humphrmi says:

        Forced 10% interest rates will take care of that. Banks can’t make money off ‘po students at 10%. Not sure if that’s good or bad.

  8. Such an Interesting Monster says:

    I dunno, I’m kinda torn on this one. On one hand limiting the ways banks can rape and pillage those who are poor and/or have poor credit is a good thing. But ultimately banks are just going to find new ways to make money off of the rest of us so I’m not entirely sure this is going to solve the problem. They’re likely to raise the rates they charge for everyone else to make up for the reduction in the high end. But I do think there needs to be some kind of upper limit as to what they can charge, especially since they are free to change rates at will.

    • Fumanchu says:

      people that can’t afford or don’t know how to use a credit card properly shouldn’t be applying for them though. Personal responsibilty has to come into play here at some point.

      • Awesome McAwesomeness says:

        I agree. People with bad credit aren’t getting cards at gunpoint. There is a huge risk in lending to these people. Banks should be able to charge what they want as long as the rates are clear. It’s an agreement between consenting parties. I agree it should be capped at 25-30%, but beyond that, high risk people should get high risk rates. This type of cap will end up punishing those with good credit as everyone will get the same rate to make up for lowering the ceiling on the rate.

        • Such an Interesting Monster says:

          The problem with this mentality is that often the people with poor credit are also just poor. Charging them more money doesn’t do them any favors. And I’m not talking about people that abuse the system, I’m talking about genuine hardworking people that live paycheck to paycheck that are one car breakdown or medical emergency away from complete financial collapse. Those that need credit the most are often the ones who either can’t get it or can’t afford it if they do get it. Stomping on people when they’re already down really shouldn’t be business as usual.

          I really believe the whole high-risk/high interest rate rhetoric is just a fallacious excuse to milk more money out of people who are more likely to fall back on credit in emergencies. 99% of bad credit card debt incurred by banks is written off with virtually zero consequences to them. High interest rates + their inability to pay more than the minimum monthly payment = PROFIT. And this kind of predatory lending really bugs me.

          • Bsamm09 says:

            “99% of bad credit card debt incurred by banks is written off with virtually zero consequences to them.”

            So if you loan money to someone and they do not pay it back and then enough time passes that it can be written off as bad debt, there are ZERO consequences?

            How about not having your principal back?

            • Such an Interesting Monster says:

              They write it off their taxes, just like any other business that incurs losses. Between the tax deductions and what they get from selling the debt to collections agencies they cover over 90% of their actual losses. And very often thru creative accounting they can actually MAKE money from these kinds of debt. This is why the whole risk schtick is a fallacy. It’s just another way for them to make extra money off the backs of people who can least afford it.

              Trust me, banks have every angle covered. The don’t go into anything without knowing full well they’re going to make money regardless of the outcome. Except, y’know, when they crash the economy due to their own greed. But that’s a topic for another time.

          • Fumanchu says:

            the truth in the USA anyways is that people don’t have the right to health care or to be able to get to work which means they also don’t have the right to have access to credit in order for them to obtain those things. regardless on how you feel about social health care systems like Canada or welfare states like the Scandinavian countries, its not going to change in the USA unless you amend the constitution.

            On those lines, if the interstate commerce law hadn’t been expanded to the point where it is now over the years Obama care wouldn’t have even the little toothpick of legality it has to stand on now. The only path to reforming these sorts of things is amending the constitution.

          • Fumanchu says:

            the truth in the USA anyways is that people don’t have the right to health care or to be able to get to work which means they also don’t have the right to have access to credit in order for them to obtain those things. regardless on how you feel about social health care systems like Canada or welfare states like the Scandinavian countries, its not going to change in the USA unless you amend the constitution.

            On those lines, if the interstate commerce law hadn’t been expanded to the point where it is now over the years Obama care wouldn’t have even the little toothpick of legality it has to stand on now. The only path to reforming these sorts of things is amending the constitution.

      • Cor Aquilonis says:

        Or better yet, the banks could actually perform some kind of due diligence before extending credit. But asking for banks to be responsible is anti-American, or so I’ve been told.

  9. John says:

    The ideal use of a credit card is one where you pay it off at the end of each month (and then get all the benefits and protections not available from a debit card) so interest rate should be irrelevant. HOWEVER, it is never a good idea to artificially tamper with supply and demand. Randomly picking a top interest rate will guarantee lack of credit card access to everyone who would have been assigned a higher rate based on risk analysis.

    Let it be … that way people can at least have access.

    • consumeristjohnny says:

      ” never a good idea to artificially tamper with supply and demand.”

      So if a person who makes loans for a family makes it at 300% interest, there should be no law against it? If a person wants to sell their child, their should be nothing to tamper with supply and demand? If I want to sell drugs, their should be no law to tamper with supply and demand?
      That is the most ridiculous statement ever.

  10. scottydog says:

    It’s called risk based pricing. Banks and other financial institutions charge higher interest rates to people with less than stellar credit to help make up for losses they will incur from this segment of their population. While not everyone with a 600 FICO will charge-off, the percentage of people within this segment that will charge-off is significantly higher than the segment of cardholders who’s FICO is greater than 700. Being able to charge higher interest rates allows them to be able to lend to individuals with poor credit. Now if you have great credit and your credit card has an interest rate above 15% then you need to find a new card.

    Of course this doesn’t necessarily hold true to most store branded charge cards. The interest rate on those seems to start at 20% for those with great credit. The higher rate on store cards probably helps pay for the cost associated with having a card to offer, overall higher loss rates on the entire population, and zero rate/payment promotions.

    • scottydog says:

      Oh, and to actually answer the question, I believe capping rates would hurt all consumers not just those with bad credit. Just like capping interchange fee’s will have many unintended consequences.

    • consumeristjohnny says:

      So would you be in favor of risk based pricing for alcohol sales? Those that drink more are riskier to the population as a whole, so they should pay more for their alcohol? How about we start risk based pricing on everything. The problem with the entire theory is that you believe credit scores are accurate and a good representation of risk. It says NOTHING about how much money you make. It says past history will repeat itself. It has ZERO ability to predict the future. If risk-based pricing had ANY basis in reality, there would not have been a mortgage and credit crisis in 2008. The models used are flawed

      • Fumanchu says:

        actually they have risk based pricing on things like alcohol and cigarettes already. its called sin tax and its always justified by saying things like people who drink and smoke cost the society more money due to the dangers affiliated wit them so those things should be taxed to help off set that cost.

        pick another example for hyperbole ;)

        • ajlien says:

          that’s not a comparable scenario, fella…I know you think you cleverly shot someone else’s comment down, though, so I’ll let you gloat

          • Fumanchu says:

            Wait…. whats not a comparable senario? What I discribed is almost exactly like what he was putting forth as being a rediclous never going to happen sort of thing.

            You pay more than the market price (including regular sales tax) on things like alchohol and cigarettes due to really high additonal taxes on alchohol and tabacco because of punitive taxes that are always justified by saying those that consume those types of goods are more likely to cost the society alot of money/hardship then those that don’t cosume those things.

            See second point under support for sin tax http://en.wikipedia.org/wiki/Sin_tax

  11. crazydavythe1st says:

    I don’t know…how did the Durbin amendment work out for everyone? My debit card *used* to have a rewards program. Just glad it’s still free.

    The government needs to stay away from my CCs.

    • Solkanar512 says:

      My debit card remained awesome, join a credit union.

    • OutPastPluto says:

      Since the swipe fees charged to consumers always seemed blatantly absurd to me, the Durbin Amendment means nothing to me. I wasn’t foolish enough to use debit cards before the amendment and that still remains the case now.

      The 1% should not be free to take advantage of the 99% regardless of how much the 99% whine about it.

  12. Fumanchu says:

    Credit Card companies are private corporations that are issuing a product that is not neccesary to have and no one is forced to get. Shouldn’t they be able to make the interest rate as high as they want to?

    Doesn’t matter if the interest rate is 10000000%, as long as you pay of the balance in full each month you won’t be charged any interest. Almost any other form of finance is better than letting things sit on your credit card bill month to month.

    • Loias supports harsher punishments against corporations says:

      The Federal Government has the authority to regulate interstate commerce.

      • Bsamm09 says:

        The Federal Gov’t has a lot of powers. Just because they can do something doesn’t mean they should.

      • TuxthePenguin says:

        Which basically they’ve extended into they can regulate anything…

        I think his point is at some level, this is self-regulating. You’re free to charge $500 annually for a “Black Card” Visa, but its going to be difficult to sell that without some really nice benefits (I got one the other day… the card would be made of carbon fiber or something… nah…).

        But the problem here is that the government has made it so anyone with a pulse can pretty much get a credit card (or had allowed that) and, in turn, morons got credit cards and got burned. Now we have to protect people from themselves but not so much that they can’t get access to credit. Hence the whole problem with payday lending…

        • Fumanchu says:

          yeah its self regulating as long as you have actually enforced non-collusion and anti-monopoly laws. Something that has fallen away in this country since the mircosoft mess.

  13. yurei avalon says:

    I’m neither in debt nor financially stupid but I would love it if they would cap the rates on cards. I have a fairly decent credit score- was at just shy of 750 last month. I’ve dropped it down a bit as I wanted to open a few new cards and figured I’d take the hit all at once and get it over with so I can start building up a higher score in case I have to co sign for a house or car loan in the next few years with the S/O.

    I pay the entire balance on every card off every month and always have- but my interest rates on my existing cards were all in the 20-25% range as I had no credit history when I opened them about 2 years ago. Ok, fair enough. I just got approved for a few more cards after having those cards plus paying off a car loan early and they’re still offering 20+% APR even with a much better credit score and no missed or late payments ever. The heck? Who do I have to blow to get a decent interest rate from? These aren’t crappy little store cards either- these are big bank cards. Granted they are cash rewards cards so I would expect a bit higher interest but really, still 20+%?

    Because the interest rates are so high I refuse to carry a balance, ever. I’m a cheap person, I don’t like paying interest on top of the price of things if at all necessary. If they offered something more reasonable like a 12-14% rate (which is still absurd in my book, but 6-7% is probably not going to happen again anytime soon with cards, if ever), I might consider letting them earn some money off of me once in a while in an emergency but at that rate, forget it. I’ll figure out how to do without something before I pay them that kind of money. CC companies are only shooting themselves in the foot in my opinion.

    • StarKillerX says:

      Have you tried calling the issuers of the cards and asking for a rate reduction? If you’ve haven’t missed or been late with a payment for extended periods they will often do that, but you have to ask, it’s not automatic.

      Also if your credit score is so good maybe you should shop around as there are cards with much better rates which are fairly easy to get.

  14. balthisar says:

    Anti-competitive laws might help sub-prime people, but it also limits competition (choice) for us non-sub people. It’s better to be free.

  15. McRib wants to know if you've been saved by the Holy Clown says:

    I can only agree with a cap if it is used _only_ to prevent extraordinary interest rates. Putting a cap at 30% above prime? Sure. We should be preventing people from borrowing who can not get rates lower than that, just to protect social and economic fabric of society and all that rot, but otherwise? No. Capitalism is about risk and if banks cant charge rates that allow even prudent if high risk lending, then we all suffer.

  16. Gambrinus says:

    Maybe make it so that it’s still legal to go over this new cap, but if they do, the customer must sign a special consent form? At least that way they couldn’t present it like it’s a good rate, which I’ve had credit card companies try to do to me before…

  17. wiggie2gone says:

    I wouldn’t know I have never paid interest on a card to even know what it feels like.

  18. stopthelunacy says:

    i’m trying for a credit rating of Zero by going cash only. i don’t have any credit cards, or loans. I’m going to prove a point that a credit score means nothing.

    • Remarkable Melba Kramer says:

      I agree with you and so does Dave Ramsey. But this is where Dave and I disagree (and on the life insurance issue as well). But until the day that we are not a FICO based society I will do all I can to maintain my excellent credit score.

    • wiggie2gone says:

      Had a friend try that. He bought a house a car and other things with all cash. He wanted to buy a really nice truck one day. Went to a local Credit Union and 2 other large banks and was turned down for lack of credit history from them all.

    • rob391013 says:

      You’re going to fail and later come to find that the idea was idiotic, but good luck anyway.

  19. stopthelunacy says:

    i’m trying for a credit rating of Zero by going cash only. i don’t have any credit cards, or loans. I’m going to prove a point that a credit score means nothing.

    • OldSchool says:

      Despite what the naysayers might have you believe this is definately doable, I have been at it for more then 10 years myself. 31/2 years remaining on my 15 year mortgage and I will be completely debt free.

      You don’t need “a realy nice truck” or anything else like that Right Now, you can save for them or better still come to the realization that an adequate truck sufficient for the required task will serve just as well.

      You will want to have at least one major credit card to use when the consumer protections offered by using one are meaningful but even then you should be paying it off immediately and as a result the interest rate is immaterial. This is particularly true if you travel or make purchases online frequently.

      You also need an emergency fund so that you can self-finance through unexpected problems.

  20. CubeRat says:

    Most high rate credit cards are issued by companies that are not banks; store credit cards historically have one of the highest rates. I know Citi has looked at the non-bank issuers and said, “WOW, we can triple our rates and people will still use the card.” Smart people do not, and I wish more consumers would make that smart decision.

  21. crispyduck13 says:

    All the commenters here elaborating on the idea that only financially irresponsible people have high interest rates and that they deserve it because they’re financially dumb, etc. have really, really short memories.

    Here are a few examples of why this sort of thing is needed (not that I know the best way to go about it):

    April 2010
    February 2010
    November 2009
    October 2009

    and the real doozy: BOA Hikes Rates on Millions of Customers

    I’m not saying this legislation is right or wrong, but after reading down the comments I’m pretty surprised that so many of you are against it because it “helps irresponsible people who shouldn’t have credit cards”.

    • Amp says:

      I like how no one has yet responded to your post, which includes actual abuses against the average credit user. Judging by the other comments, they’re all too busy worrying about how some “welfare-stater” might abuse any new changes instead.

      Personally, I don’t think this is an effective idea, since there’s a way around nearly every poorly-thought out piece of legislation, and this seems a little too narrow to do much good. The banks’ response to a cap on transaction fees resulted in an additional 3$-5$ a month fee for the privilege of using a debit card, and raising their monthly checking account fees. Plus, I haven’t seen any merchants lowering their prices for the “savings” the cap supposedly provided, and stores that deal in small transaction amounts have seen their costs rise instead. I’d imagine curtailing interest rates would result in more of the same ‘creative solutions’ to keep the flow of money as steady as it was before.

      But at least you’ve presented some compelling evidence on why some kind of measure is needed, and it’s a shame no one is discussing it.

  22. Nigerian prince looking for business partner says:

    I’m sure the pawn shop, pay day loan, and car title loan industries would love it if credit card interest rates were capped.

    • Firethorn says:

      The federal government passed a law sort of like this, but included ‘alternative credit’ places like payday loan areas for military members and their dependents. The interest rate limit? 36%. Even at 36%, payday loans are no longer offered to military members – they claim they can’t make a profit at that rate. For military, with guaranteed paychecks, payday loans are unwilling to extend credit at 36%. In some cases, the effective interest rate was 2500%. Yes, 2 zeros.

      Credit cards are actually pretty far down the list if we’re going to go after predatory loans. Credit cards are a step up for a lot of people.

  23. SilverBlade2k says:

    I don’t think it’ll help or hurt consumers.

    A stupid consumer with a credit card is a stupid consumer with a credit card. If you cap interest rates, then the consumer will just think “I can spend MORE.”…you can’t make laws against stupidity.

  24. Matthew PK says:

    Aren’t currently reaping the real-estate rewards of artificially low interest rates?

    • humphrmi says:

      Different problems with oppose results. In the late ’90’s and early ’00’s, the government encouraged lending to sub-prime borrowers via quasi-government-backed mortgage buyers. They didn’t mandate low rates, but that was a side effect. In that case, a lot of people who probably shouldn’t have gotten mortgages did, and when they couldn’t pay them, the meltdown ensued.

      Here you’re talking about mandating a low(er) rate on cards. This will have the oppose effect of the housing boom – credit card companies will actually substantially reduce who they offer cards to. Right now with unrestricted rates, they can offer a credit card to almost anyone and the high rates (and high numbers of people who carry a balance) help make that all profitable. At lower capped rates, their risk profile changes… they will have to cut off the so-called sub-prime credit card holders, and only issue credit to people who they know will pay them back, i.e. people with higher credit ratings.

  25. shepd says:

    Depends on if:

    – You don’t mind your 11% card increasing to the capped rate
    — You don’t mind all of your cards having a monthly/yearly fee
    — You are okay with all of the benefits on your cards disappearing
    — You enjoy finding random extra surcharges on your cards
    — You don’t mind credit card companies beginning to freak out with extreme surcharges if your payment was 1 day late

    Whenever the government regulates something, companies will respond to it in the absolute most unpleasant way they can get away with. Witness your telephone bill.

    • stinerman says:

      If any of those would be the case, I’d just use my debit card for everything. I use my rewards cards because I’m better off than not. If they want to kill my rewards, I’ll just stop using the card.

    • Amp says:

      This guy. He gets it.

  26. gaya2081 says:

    After senior year at college and my first apartment I managed to get myself into about 16k of debt. Some of it was my own fault, some of it was because my loans didn’t cover the cost of living expense increase my senior year. I struggled making the minimum payments due to unexpected cost of living increase-but I made them. Then my interest skyrocketed from ~16% to 29.99% for NO reason. I tried to apply to other lower interest cards for a balance transfer but I couldn’t get approved. Thankfully my in-laws were kind enough to give me a loan to cover the cost of my debt at 10% interest. Interest was to be calculated 6 months after the beginning of the loan, then once a year afterwards. I have been paying for the last 2 years and will be paying it off next month-1.5 years ahead of schedule. The terms of the loan required I NEVER carry a balance my card during this time and I haven’t. My husband and I payed for his new car this summer in cash. We plan to buy a house this spring as we will have the money put aside for a down payment by March.

    Thanks to my generous in-laws I am now out of debt. If it wasn’t for their help I would still be over 10,000 in debt. I was also able to get a 0% balance transfer (9 months) credit card about 8 months after they helped me and I transferred my car loan to that enabling me to pay that loan off about 16 months ahead of schedule (that loan was 12%).

  27. madmallard says:

    the financially ignorant will not be helped by legislation. Only by education.

  28. dcamsam says:

    The assumption in some of these comments is that the bank charges 25% because if they charged any less, they would be unprofitable; if they were forced to charge less, they simply wouldn’t lend.

    But if the banks were in that position, their profits would reflect it – they’d be nonexistent. They aren’t. Which tells me that their claim that they could not continue to lend the amount of money they do if they were forced to charge any less is bull – they could, they simply couldn’t do it and maintain their current profits.

    Which really isn’t of concern to anyone, except perhaps the bank’s investors.

  29. Sam2k says:

    Yes, we should absolutely desire the government to step in and interfere with yet another credit market. After all, it worked so, so well with the housing market where Fannie and Freddie effectively did just that. Government manipulation for the win!!!!!! GOOOOOOOOOOOOAAAAAAAAAAAAAAAAAALLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL!!!!!!!!!!!!!!!!!!!!!!!!

  30. gman863 says:

    Why is capping rates a bad idea? Let me count the ways…

    * The main factor in setting rates is risk. Should my 7.24% rate on my Visa go up to 13.24% to subsidize late paying deadbeats who currently are paying 25-30%. I think not.

    * The second factor in setting rates is customer stupidity. Anyone with a high credit score who is paying 20-25% rates on their credit card hasn’t shopped around. This is the same type of customer who takes the salesperson’s bullsh*t to heart when purchasing an $80 Monster Cable for their new TV.

    * If rates are capped, customers with marginal credit will instead be hit with high annual fees. (remember, American Express gets away with annual fees as high as $500 per card). A $300 annual fee at 13.24% with a low credit line is just as much profit for the bank as a no annual fee card at 26%.

    * Although debit transaction fees were capped, there is no limit on the interbank credit card processing fees MasterCard, Visa, Discover and AMEX can charge merchants. Cut the interest rates in half and the banks will quickly add another 2% on what stores pay to accept plastic. This way everyone gets to share in the misery of higher prices even if you’re paying cash.

    • Fumanchu says:

      my only problem with your analysis which is really good is that while yes you can technically get credit cards with lower interest rates they are often small credit unions/small operations that aren’t accepted very many places, they aren’t companies that one would or should trust your information with or they are companies that have really bad fraud protection.

      Sure there is probably a few out there that don’t fit any of those 3 discriptions but they aren’t easy to find and may not be available or accepted in your area.

  31. Extended-Warranty says:

    I used to benefit greatly from my free checking and generous CC rewards. Since a lot of people like to live beyond their means, I lose out. It’s sad that personal responsibility is not an option in trying to get this country balanced.

  32. quail says:

    It would raise the rates those with good credit would be paying. Companies would not be willing to forgo their overall return on investment. The smart people out there who shopped for cards with good rates would have to shop even harder if this went through. Cards that did keep low interest rates might start charging a program fee.

    BTW: Thank goodness for Usury laws. Many states have gotten rid of their payday loan companies because of the law. (Only thing stupider than a payday loan is a car title loan.)

  33. hmarsh says:

    Or people could be smart and not over spend all the time. If you are $10,000 or more on credit cards and you can not pay them with in a month or two there are problems. So if you want to save people from themselves cut the limit down on the card. Cutting rates will not change anything. People will likely just spend more money. So how is this a good idea again?

  34. AustinTXProgrammer says:

    Is 13% really the average rate? Sure I could get 6% cards, but most of my cards are 14-20% (rewards cards I pay in full. I do not pay any attention to the interest rate when selecting cards).

  35. soj4life says:

    A cap in the mid teens would save people money, especially with the rates that are being charged on new cards now. What would also help out would be that annual fees are not taken out until the second year. Banks are making alot of money on cash that they are paying close to nothing to borrow.