Selena Cooper is a 26-year-old entrepreneur from Ohio. An issue is her credit card debt, which totals about $6,000 spread out over three different cards. Her struggles with money are a window into an escalating emergency. Indeed, 37 percent of American adults currently have credit card debt, pushing total outstanding credit card debt in the United States to over $1 trillion. Cooper’s worries underscore this deeply concerning regression. To fix it, he’s looking at a proposed limit on credit card interest rates to 10% for one year with no fees recently introduced by Senators Josh Hawley and Bernie Sanders.
Credit card APRs have skyrocketed in recent years. As of November 2023, they currently average close to 22%, up from a meager 13% a decade ago. This dramatic price increase has put a deep financial squeeze on many consumers like Cooper. “It would help a little bit, but it’s still not going to get me out of debt,” Cooper remarked, illustrating the complex financial situation many Americans face.
While the details of this proposed cap are still being debated, the prospect has already evoked strong opposition from banking industry CEOs. These professionals counter that capping interest rates would limit consumers’ access to credit. Chief executive of Citigroup Jane Fraser sounded the alarm over the damage the measure could cause. She said it would dramatically reduce access to credit and consumer purchases across the country.
Benedict Guttman-Kenney, an assistant professor of professional practice in finance at Rice University, echoed those worries. In response, he proposed that banks could raise lending standards for people with subprime credit scores. “It’s not clear that people are going to be better off,” he stated, emphasizing that even with lower interest rates, many borrowers may still end up paying similar amounts due to fees or reduced credit availability.
The sentiment among consumers appears mixed. Morgan, a 31-year-old with $6,700 in credit card debt, said her financial situation is causing her “a ton of anxiety.” “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,” she explained. Morgan noted the importance of the proposed cap, stating, “It’s one of the few things he’s done that prioritises people over businesses.”
The numbers related to credit card debt are grim. Interest charges in 2024 are estimated to bring in $160 billion worth of revenue for banks and other large financial institutions. As consumers continue to struggle with mounting debts and rising interest rates, experts warn that solutions must be carefully considered.
Financial expert Brian Shearer acknowledged the complexity of the situation, noting that “no policy is without some pros and cons.” While acknowledging there’s no palatable solution, Castillo suggested interest rate caps would provide more immediate relief for distressed borrowers. It could result in reduced rewards and perks for consumers with higher credit scores. “To continue lending, banks would have to reduce rewards to some extent,” Shearer added.
Susan Schmidt, a third financial analyst, reiterated how necessary it is to understand what people are dealing with right now. “It does show that consumers are feeling pinched. They’re going to continue to feel pinched,” she stated. Schmidt expressed skepticism about the effectiveness of a 10% cap: “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.”
Tension surrounding the proposed new cap is already escalating. Lawmakers will have difficult choices to make as they weigh the impact of their actions on the nation’s consumers and financial institutions. The complexities surrounding credit card debt and interest rates require thoughtful consideration as policymakers seek to balance consumer protection with the realities of lending practices.