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Should Credit Card Interest Rates Be Capped at 10 Percent?
- A federal-government-imposed cap on credit card APRs as severe as 10 percent would likely upend the credit card industry‘s current business model, requiring drastic changes in account underwriting standards, promotional programs, account fees, purchase reward programs, and other account services to ensure card issuance remained profitable.
- Issuers would cancel most existing near-prime and subprime accounts. Many cardholders facing cancellation likely have limited access to alternative sources of credit, and those sources may charge interest rates as high or higher than current revolving credit card balances. Rewards programs would be drastically curtailed and rationed among consumers with high-prime and super-prime credit scores, while most accounts would see increases in annual fees and late payment fees to compensate for lost interest revenue.
- Congressional intent notwithstanding, the unanticipated but inevitable changes necessitated by a legislated 10 percent APR cap are unlikely to be popular with many voters once they see the effects.
[Key Points]
- The credit card market is highly competitive, with few barriers that prevent card issuer entry.
- Issuers earn headline annual percentage rates (APRs) on only a portion of card account balances. Account APRs appear to be aligned with cardholder risk profiles and historical account loss rates.
- A 10 percent legislative cap on credit card APRs would upend the industry, forcing major revisions to account underwriting standards, card fees, and services.
- The cap would severely curtail access to consumer credit for near-prime and subprime cardholders.
- Issuers would cancel most existing near-prime and subprime accounts. Many cardholders facing cancellation likely have limited access to alternative sources of credit, and those sources may charge interest rates as high or higher than current revolving credit card balances. Rewards programs would be drastically curtailed and rationed among consumers with high-prime and super-prime credit scores, while most accounts would see increases in annual fees and late payment fees to compensate for lost interest revenue.
- Congressional intent notwithstanding, the unanticipated but inevitable changes necessitated by a legislated 10 percent APR cap are unlikely to be popular with many voters once they see the effects.
[Key Points]
- The credit card market is highly competitive, with few barriers that prevent card issuer entry.
- Issuers earn headline annual percentage rates (APRs) on only a portion of card account balances. Account APRs appear to be aligned with cardholder risk profiles and historical account loss rates.
- A 10 percent legislative cap on credit card APRs would upend the industry, forcing major revisions to account underwriting standards, card fees, and services.
- The cap would severely curtail access to consumer credit for near-prime and subprime cardholders.
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