Would a 10% Credit Card Interest Rate Cap Be a Totally Good Thing for Consumers?

On Tuesday, Sen. Josh Hawley, R-Mo., and Sen. Bernie Sanders, I-Vt., proposed a bill that would cap credit card interest rates at 10%. The legislation would be in effect for five years.

For context, the average credit card interest rate as of November 2024 is 21.47%, according to the Federal Reserve. And average interest rates have never fallen to 10% in the 30 years the data has been recorded.

This isn’t the first time Hawley and Sanders have proposed a bill to cap interest rates, but it seems now they’re capitalizing on President Donald Trump’s initial support of a cap he voiced in September 2024.

So what does that mean for you as a consumer? Would a 10% cap on interest rates help or hinder you?

[Read: Best Credit Cards.]

Pros of a 10% Cap on Interest Rates

Credit Card Debt Relief

According to the Consumer Financial Protection Bureau, Americans were charged more than $130 billion in credit card interest and fees in 2022. And credit card balances reached $1.17 trillion in the third quarter of 2024. So a cap on interest rates can be seen as a welcome reprieve.

“When large financial institutions charge over 25% interest on credit cards, they are not engaged in the business of making credit available,” Sanders says in a news release. “We cannot continue to allow big banks to make huge profits ripping off the American people. This legislation will provide working families struggling to pay their bills with desperately needed financial relief.”

Let’s do some math: Say you have a credit card balance of $10,000 with an interest rate of 21.47% (the current average). If you made monthly payments of $200, it would take you almost 11 years to pay off the balance, and you’d pay over $15,000 in interest. With a 10% cap, it would take you a little over five years to pay it off, and you’d pay about $3,000 in interest.

[Read: Best Rewards Credit Cards.]

Cons of a 10% Cap on Interest Rates

Access to Credit Could Become More Selective

Factors like your debt-to-income ratio, your income and existing debt all influence the interest rate on your credit card. And consumers who are considered high-risk are approved with a higher interest rate as a way for banks and issuers to compensate for the possibility of default.

So critics say that a cap could cause lenders to become more selective when approving credit, effectively excluding consumers with lower incomes and credit scores.

The American Bankers Association issued a statement in September 2024 saying the “ABA has opposed similar interest rate cap proposals in the past … because they would result in the loss of credit for the very consumers who need it the most. Instead, these consumers would be forced to use less regulated, more risky alternatives, including payday lenders and loan sharks.”

Reduced Credit Card Rewards

In an effort to make up for lost profits from higher interest rates, it’s possible lenders could pull back on rewards and up fees. Because what helps to fund the rewards cardholders enjoy is those interest charges.

This isn’t a surprise when you compare credit union credit cards to credit cards from large issuers. Federal credit unions usually offer lower interest rates. When you compare the rewards and perks offered by credit union cards vs. cards from larger lenders, the difference becomes obvious.

[Read: Best Cash Back Credit Cards.]

Final Thoughts

While a 10% cap would help consumers exponentially with their credit card debt, it could have unintended consequences. And depending on what you value most, such a low cap could be both a good thing and a bad thing. In addition, it’s unclear what the chances are that this bill would become law.

More from U.S. News

Does It Matter for Your Credit Card Who Wins the Election?

Payday Loan Alternatives: What Option Is Best for You?

How to Lower Your Credit Card Interest Rate

Would a 10% Credit Card Interest Rate Cap Be a Totally Good Thing for Consumers? originally appeared on usnews.com

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