Oct 9, 2024
Credit card debt has been a pressing issue in America, and former president and Republican presidential nominee Donald Trump has proposed a solution to alleviate this burden.
“While working Americans catch up, we’re going to put a temporary cap on credit card interest rates,” Trump spoke to a packed audience during a campaign rally in New York on Sept. 18. “We’re going to cap it at around 10%. We can’t let them make 25 and 30%.”
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This proposal stands out given the average credit card interest rate was 21.76% as of August 2024, according to the Federal Reserve. Rates have climbed in recent years, but they've never fallen to the 10% mark based on data going back to 1994.
High interest rates pose a challenge for those with credit card debt, as balances can balloon if repayments don’t keep pace.
The Federal Reserve Bank of New York reported a $27 billion surge in credit card balances in the second quarter of 2024, pushing the total outstanding balance to $1.14 trillion.
It’s a big business for banks. The Consumer Financial Protection Bureau estimates that, each year, Americans pay a whopping $120 billion in credit card interest and fees.
Price control concerns
Trump did not provide details on how he plans to implement the cap, but critics have raised concerns about the pledge.
Peter Schiff, chief economist and global strategist at Euro Pacific Asset Management, warned that the 10% interest rate cap would “destroy the entire industry.”
“Trump just proposed his own version of price controls… Millions of Americans would lose their credit cards,” Schiff wrote on X.
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Schiff, who has expressed support for Trump in this election, stated that he doubts the plan will actually be carried out. Others have echoed this concern.
“Government-imposed price controls on credit card interest rates would harm all cardholders, especially the lowest income Americans who these measures are intended to help,” an insider from the Consumer Banking Association told the New York Post.
“This will result in credit cards only being given to consumers who have high income and credit scores who post little risk to card issuers.”
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Trump, Sanders and AOC
The American Bankers Association expressed similar concerns.
“While we don’t know the specific details of this proposal, ABA has opposed similar interest rate cap proposals in the past, including one from Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez during the 2020 campaign, because they would result in the loss of credit for the very consumers who need it the most,” the American Bankers Association (ABA) told CNBC.
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“Instead, these consumers would be forced to use less-regulated, more risky alternatives including payday lenders and loan sharks.”
Credit card interest rates are influenced by several factors, such as an individual's credit score, income, and overall financial profile.
A higher credit score typically results in lower interest rates because it indicates to lenders that the individual is a low-risk borrower, likely to pay back the borrowed amount on time.
Conversely, a lower credit score suggests a higher risk, prompting lenders to charge higher interest rates to compensate for the increased risk of default.
Income also plays a crucial role, as higher incomes often lead to better rates. This is because lenders typically view a stable and high income as an indicator of the borrower's ability to meet their financial obligations.
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Additionally, factors such as the individual's debt-to-income ratio, employment history, and existing debt can also impact the interest rate offered.
Therefore, the concern is that, if interest rates were capped at an artificially low level, lenders might become more selective in approving credit, effectively excluding those with lower credit scores or incomes. This could force financially vulnerable consumers to turn to less-regulated, higher-risk alternatives.
It’s noteworthy that Trump’s proposal resembles one from across the aisle. In 2019, Sanders and Ocasio-Cortez proposed a bill to cap credit card interest rates at 15%, though it didn't pass.
Sanders called high credit card interest rates a “profound moral issue.”
“Every religion understands that usury and loansharking are immoral. And let’s call this what it is, this is loan sharking,” he stated.
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
