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Analysis | Biden should limit credit card interest rates, not just late fees


As part of an effort to get rid of “junk” fees, President Joe Biden wants to limit how much consumers owe if they are late on a credit card payment. Instead of hitting customers with a whopping $41 fine, card issuers could typically charge up to $8.

For anyone who has had to pay one of those fees, the cap is welcome news. But if the plan goes ahead, banks and other card issuers are likely to look for ways to recoup the estimated $9 billion loss with lower late fees. One possible target: interest rates judged by balances, which is where the industry gets most of its revenue in the first place.

I’m not saying the late fee cap shouldn’t happen. But it should come with some effort to get interest rates under control.

After hovering around 16% for most of the past five years, credit card interest rates have risen as the Federal Reserve raised rates. At the end of January, rates averaged an eye-watering 23.39% for a new card, according to LendingTree. Greg McBride, chief financial analyst at Bankrate, predicts credit card rates will hit a four-decade high by the end of this year.

And, in fact, there’s nothing stopping issuers from continuing to raise them as much as they want — even faster and further than the Fed.

There is no federal rule on the books limiting credit card interest rates. Many states have their own usury laws that limit the amount of interest charged, but tend to exempt banks and credit unions. In addition, banks can often get around state rules if they are headquartered in a no-limit state – then they can abide by the rules of their home state, not the consumer’s.

Credit card rules passed in 2009 protect consumers a bit by specifying that issuers must give customers 45 days’ notice before raising rates. But as long as the rate is disclosed to you – either when you sign up for the card, or 45 days before a rate increase – the sky is the limit.

For years, market forces have kept rates below 30%, but that is starting to change. Store brand cards from retailers such as Macy’s, Gap, Dick’s Sporting Goods and Wayfair, as well as gas companies Exxon and Shell are now offering cards with rates in excess of 30%.

Amid higher prices and a weakening economy, more cardholders are carrying a balance. At the end of last year, about 46% of cardholders had month-to-month debt (meaning they had to pay interest), compared to 39% a year earlier, according to Bankrate. And balances are rising, with data from the New York Federal Reserve showing that credit card balances increased 15% in the third quarter of 2022 compared to the previous year – the biggest increase in more than 20 years.

While the industry’s standard argument against change in favor of consumers is that they will be forced to stop serving the low-income and poor credit, that rarely happens. Instead, they usually just find ways to charge them more. The industry made the same complaint before the 2010 Dodd-Frank reforms, and credit did not dry up.

Sure, there are other fees lenders can come up with to make up for the losses from smaller late fees, but the 2009 credit card law has been quite effective in curbing most hidden back-end fees.

And it’s worth pointing out that how different card issuers respond to a late fee cap will depend on how much of their revenue actually comes from late fees. Issuers who have more subprime customers tend to collect more money in late fees, as do issuers of private label cards, which can usually only be used in a single store or affiliated stores.

Setting an interest rate ceiling is not without precedent. Credit unions typically limit their interest rates to 18%. And members of the military generally can’t be charged more than 36% on many types of consumer loans. Adjustable rate mortgages also have limits (although they are guaranteed by the house as collateral, unlike credit cards).

The Biden administration and the Consumer Financial Protection Bureau said they are focused on late fees because the fees card issuers charge customers far exceed the fees they incur if someone pays late. The federal government should use the same argument to crack down on lenders who charge sky-high interest.

More from Alexis Leondis at Bloomberg Opinion:

• How to protect your money after you are laid off

• Early 401(k) withdrawal penalty creates an unfair burden

• How to pay for a renovation if you can’t afford to move

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Alexis Leondis is a Bloomberg Opinion columnist on personal finance. Previously, she oversaw tax coverage for Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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