Interest rates, fees under fire as credit card debt tops $1 trillion

on Oct10
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Some lawmakers and regulators are calling for interest rate caps and lower fees on credit cards as debt levels march higher.

Total credit card debt topped $1 trillion in the second quarter of 2023 for the first time ever.

The average interest rate for all cardholders jumped to more than 21% in August, the highest on record, according to Federal Reserve data. Some cards — retail store cards, in particular — charge more than 30%, said Ted Rossman, industry analyst for CreditCards.com.

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Sen. Josh Hawley, R-Mo., introduced a bill in September to cap credit card rates — also known as the annual percentage rate, or APR — at 18%, citing “higher financial burdens” shouldered by working people.

The legislation, the Capping Credit Card Interest Rates Act, would also aim to prevent card companies from raising other fees to evade a cap.

Meanwhile, the Consumer Financial Protection Bureau proposed a rule earlier this year to slash fees for late credit card payments. One prong of the rule would lower fees for a missed payment to $8 from as much as $41.

In June, four senators — Sens. Richard Durbin, D-Ill.; Roger Marshall, R-Kan.; J.D. Vance, R-Ohio; and Peter Welch, D-Vt. — introduced the Credit Card Competition Act. That act aims to reduce merchant card transaction fees that may get passed on to consumers.

“I think some of the [political] lines are starting to blur a little bit, at least on credit card issues,” Rossman said.

However, it’s unclear if these measures will succeed.

For example, Democrats are “likely to embrace” Hawley’s bill since progressives have long favored a federal interest rate cap, Jaret Seiberg, analyst at Cowen Washington Research Group, wrote in a recent research note. But it likely doesn’t have enough support to overcome a filibuster in the Senate and is almost a nonstarter in the Republican-controlled House, he said.

“We do not see a path forward for legislation to cap credit card interest rates,” Seiberg said.

The CFPB is also embroiled in a legal fight before the Supreme Court that, depending on the outcome, has the potential to erase all agency rulemakings from the books.  

There’s virtually no federal cap on card rates

I think some of the [political] lines are starting to blur a little bit, at least on credit card issues.

Ted Rossman

industry analyst for CreditCards.com

There are some exceptions: The Military Lending Act caps interest for active duty servicemembers and dependents at 36% for consumer credit. Federally chartered credit unions have an 18% limit.  

Past legislative proposals have also sought to slash interest rates. For example, Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, D-N.Y., introduced a measure in 2019 that would have capped rates at 15%.

Reps. Jesús “Chuy” García, D-Ill., and Glenn Grothman, R-Wis., proposed a 36% cap on consumer loans in 2021. Grothman plans to reintroduce the legislation next year, his office said.

“The 36% interest rate cap for active-duty servicemembers and their families has proven to be a highly effective measure in providing protection against predatory lending practices,” Grothman said in an email. “Why should we not extend these same protections to veterans and all Americans?”

The financial services industry remains largely opposed to imposing a ceiling.

Eight trade groups representing lenders such as banks and credit unions wrote a letter to Sen. Hawley in September, stating that his proposed cap would have adverse effects including restricting the availability of credit and eliminating or reducing popular card features such as cash back rewards.

Interest income accounts for 80% of company profits on credit cards, according to a 2022 study published by the Federal Reserve.

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The average credit card balance is almost $6,000, according to TransUnion.

At 18% interest, cardholders with an average balance who make only the minimum monthly payment would be in debt for 206 months and make $7,575 in total interest expenses, according to Rossman. The latter figure doesn’t include payments toward principal.

“Minimum-payment math is brutal,” he said. “Your debt can drag on for decades.”

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