New Bill to Limit Credit Card Interest Rates
Four Democratic Party senators have introduced a bill in Congress that would limit how much interest credit card companies can charge. According to Payments Journal, the Senators want to prohibit credit card companies from charging more than the maximum interest allowed in the state where a cardholder lives.
Most states have usury laws which set the maximum interest rate that a lender can charge on loans. In Florida, the maximum rate is 18% on a loan up to $500,000 and 25% on a loan of $500,000 or more. If a lender charges more than these limits, he could be charged with a criminal felony.
However, the situation with credit card companies is somewhat different. Credit card companies are often issued from national banks which don’t neatly fit within one state. For example, you might live in Florida but have a card issued by a bank in North Dakota.
In 1978, the Supreme Court of the United States ruled that a bank located in State A could charge an interest rate allowed by State A to cardholders located in State B. So imagine that State B had a maximum interest rate of 20%, but State A allowed an interest rate up to 30%. Because the bank was located in State A, it could charge up to 30% in interest to cardholders in State B.
The Senators want to change that. Instead, they want to limit the maximum interest rate to that of the cardholder’s state—regardless of where the issuing bank is located.
The Senators make a compelling case. Among the points they argue are:
- Americans currently have over $420 billion in credit card debt. Billions of dollars go to interest payments each year, making it harder for people to get ahead.
- The current system allows a “race to the bottom” where states compete for business by increasing the maximum interest rate that can be charged. This is unhealthy for everybody.
If the Senators succeed, then some cardholders could see lower interest rates on their balances.
Will the Bill Make a Positive Difference?
Restraining the ability of banks to charge interest might sound like a good idea, but there could be problems as mentioned in the Payments Journal article. For example, banks currently price interest rates based on the risk posed by the borrower. This won’t change even if Congress passes the law. If you are a riskier borrower, you can expect to pay more.
Also, if a state doesn’t allow banks to charge high interest rates, then people who live there might have limited access to credit. A bank that can’t adequately price for risk will respond by not extending credit at all. That could hurt consumers, who can’t build their credit histories and can’t make necessary purchases.
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