Selena Cooper, a 26-year-old mother from California, recently pulled out her Discover card to pay for childcare. She’s been adjusting to unemployment since May and taking care of her two-year-old daughter. Her financial issues have caused an increase in a current credit balance up to $6,000 spread across her three credit cards. Now interest rates are rising, which exacerbates her trouble. The result has been a renewed focus on President Donald Trump’s proposed 15% cap on credit card interest rates.
The proposal as it stands goes into effect on January 20. It would temporarily set a national cap on credit card interest rates of 10 percent for one year. Trump’s plan arrives on the heels of out-of-control credit card debt in the U.S., which recently surpassed $1 trillion. More than one-third of adults – 37% – carry a balance on their credit cards. At the same time, average interest rates have skyrocketed—from 13% a decade ago to about 22% as of this past November.
Cooper’s plight is a part of a larger, alarming trend of increasing consumer debt, worsened as high-interest credit cards have become the only option. She learned that her Capital One interest rate had doubled to 16%, and her American Express had gone from 10% to 18%. Perhaps you were able to get a lower rate of closer to 3% for one card through a service member benefit program. Your other cards’ rates are still punishing, though.
“It does show that consumers are feeling pinched, they’re going to continue to feel pinched,” said Susan Schmidt, a financial analyst.
That’s why the legislative proposal to cap credit card rates has drawn substantial bipartisan interest. Senators Josh Hawley and Bernie Sanders introduced a similar bill last Congress, aimed at this same goal. Surprisingly, there are significant concerns about what this cap could mean. Join Jane Fraser, CEO of Citigroup, in raising concerns about how this kind of proposal will affect access to credit and consumer spending.
Even with a cap, analysts are cautioning the public relief consumers are counting on might not come. Benedict Guttman-Kenney, an assistant professor of finance at Rice University, warned that banks may soon begin to tighten their lending standards. This would disproportionately impact people with lower credit scores. In addition, banks may attempt to find new sources of revenue by raising fees in other areas.
“No policy is without some pros and cons,” said Brian Shearer, a financial expert. “To continue lending, banks would have to reduce rewards to some extent, especially to people with lower FICO scores.”
Some policy wonks counter that capping high-interest rates at least as a stopgap could provide some immediate relief. They emphasize that this approach will not address the root causes of consumer debt. Here’s what debt-saddled Morgan had to say about the cap. She thinks it will help a little bit, but won’t take care of her financial burdens completely.
“I think the Trump administration is trying to find a way out of it,” Morgan added.
Economic analysts have pointed out that the savings from reduced interest could outweigh any loss of rewards for many consumers. They continue being wary about the upstream impacts on credit availability overall.
“It’s one of the few things he’s done that prioritizes people over businesses,” Morgan said.
Capping interest rates could provide enormous benefits, but there is not consensus among researchers on its effectiveness. Other advocates and experts have cautioned that people who are already economically disadvantaged wouldn’t experience significant benefits from a policy change like this one.
“A 10% cap may not be the right solution because the people that are already in trouble, that’s not necessarily going to help them,” said Schmidt.
Given all of these moving pieces, it’s not surprising that millions of consumers are still scared about their financial prospects. Cooper acknowledges her difficulties weigh on her, laying awake at night as she thinks about her $6,700 student debt load. She’s confident that once she gets a job again, she’ll be able to pay it down. Her confidence and determination keep her focused on fighting for a bright future.
“I’m losing sleep over the $6,700, but I have a little wiggle room to be able to do that because once I get a job, I can pay it off,” Cooper stated.
Discussions about the proposed cap are intensifying in statehouse corridors. In the meantime, people like Cooper are already experiencing the effects of accruing debt and interest rates, a fate they share with an increasing majority. Given the growing fiscal pressure felt nationwide, the urgency for powerful new solutions is more palpable than ever.
