Lower APRs for You
According to CreditCards.com, the average annual percentage rate (APR) across all credit cards is 17.73%. How does your card's APR stack up? Could you benefit from a credit card interest rate cap of 15%?
Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez (AOC) say yes, recently releasing a plan to cap credit card APRs at 15%. Any credit card cap legislation is unlikely to pass under the current political climate, but Congressional progressives are letting Americans know what to expect should they win control of Congress and the White House in 2020.
Would a 15% APR cap help or hurt your situation? If you're in the group of struggling consumers that progressives are trying to help, it could go either way.
Savings Are Available
According to ValuePenguin, the average credit card debt for households that carry balances from month to month is $9,333. To illustrate how a 15% cap would affect the average consumer, let's assume Joe and Jane Average cut up their cards and decide to pay off their $9,333 debt over the course of a year.
At the average interest rate of 17.73%, Joe and Jane will pay $854.45 per month and incur $920.41 in interest costs. Drop the interest rate to 15% and monthly payments go to $842.38 while interest costs fall to $775.57. Stretch the payment period out to two years – a more likely scenario if you're struggling with debt – and interest costs balloon to $1,820.42 at 17.73% and $1,527.61 at 15%.
High-risk consumers, the true target of the legislation, would benefit enormously. If Joe and Jane were average bad-credit consumers with a 25.33% APR in the above scenario, they would pay $1,329.52 with a one-year repayment and $2,658.93 in interest with a two-year repayment. With a 15% rate cap, Joe and Jane would save $553.95 in interest on the one-year plan and a whopping $1,131.32 on the two-year plan.
Unfortunately, there's a fundamental problem with a 15% cap. It could completely choke off credit to high-risk borrowers.
Risk Matters
Progressives see the rate cap proposal as cutting down excessive credit card profits. However, credit tightening is likely to follow.
Interest rates vary based on risk – that's why the average APR for bad credit is 25.33% and why penalty APRs for missing payments approach 30%. There's a significant cost associated to extending credit to high-risk consumers. Credit card charge-offs are at a seven-year high, with almost $4 billion written off in Q1 2019.
If credit card companies can't charge interest beyond 15%, they'll simply raise qualification standards. Risky consumers may be forced toward payday loans – another target of progressives – or even worse unregulated options. Progressives would be wise to combine these efforts with subsidized microloan programs or other alternatives targeting the high-risk consumer. (Yes, taxpayers will pay for such programs, but that fits with general progressive philosophy).
If you have good credit, why should you care? Credit card issuers will trim back perks and rewards programs to compensate for higher internal costs – unless they get out of high-risk cards altogether.
There's already an alternative for Americans struggling with high interest credit card debt. Cards issued through credit unions are already capped at an 18% APR – and there are over 6,000 credit unions throughout America. Credit unions are often more willing to work with consumers with less-than-stellar credit records, and most Americans can qualify for at least one of them.
The Takeaway
Bernie and AOC may mean well with their plan to cap interest rates, but the likely effect will be to cut off a vital source of credit for people who need it the most. The bill is unlikely to pass in this Congress, but who can predict what will happen after the 2020 election?
With some planning, you can keep a 15% rate cap from affecting your life at all.
If you're dealing with a high credit card APR, is it because you've shown higher-risk behavior with your accounts, or have you just not bothered to shop around? Consider other card options to see if you're getting the best deal. If you want more credit, check out our list of credit card offers.
If you don't qualify for better offers, look for the reasons why. Check your credit report for any signs of fraud or identity theft that could be dragging down your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips. Make all payments on time every month. Create a realistic budget that controls spending and keeps debt to a minimum. Over time, your credit score will increase as you show more responsible credit behavior – and better offers will follow.
However, there's a surefire way to be unaffected by credit card APRs. Never charge more than you can afford to pay off at the end of the month. If you never carry a balance, interest rates are irrelevant.
Protect your credit – protect your identity – protect yourself with a free MoneyTips trial.
