Will regulators ever cap credit card rates?

Credit card interest rates have reached high levels recently, causing some to wonder whether they are the highest rates to date. While credit card rates are high, they are not the highest rates ever. That’s a small comfort to those trying to pay off thousands in debt from high interest rates. Many believe that it is time for federal regulators to cap credit card rates, but it is not a new issue. Furthermore, it is also not an easy issue to resolve.

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Government regulations have aimed at controlling the credit card industry many times over the years, and the results have been a mixed bag. Once one area is under control, then the credit card companies find a new way to generate profits at the expense of users’ debt. Watchdog groups are constantly promoting new regulations, but many fall through for one reason or another. Despite public outrage at high interest rates, the true path to reduced interest rates is through the consumer.

Regulations on Credit Cards through History

It used to be that credit card companies and banks could only offer their products to residents of the state where the bank or credit card company was located; the interest rates of those products had to abide by each state’s usury laws governing interest rates. However, a Supreme Court ruling in 1978 changed all that, according to a report from the Federal Deposit Insurance Corporation (FDIC).

The ruling allowed banks and credit card companies to offer credit cards with interest rates that were governed only by the state where the bank or company was located. So the credit card companies and banks moved to states that had lax usury laws and began offering high-interest credit cards to residents in all states.

In 2009, many regulations were passed under the Credit CARD Act, an amendment to the 1968 Truth in Lending Act, according to the Federal Reserve, but capping interest rates was not one of them. While fees and the terms governing how interest rates could be changed were capped or regulated, the credit card companies responded by raising average interest rates before the regulations took effect.

Current Movements to Cap Credit Card Interest Rates

Many watchdog groups, government officials and the public at large have expressed support for capping credit card interest rates, but such proposals can and do die easily. The credit card companies have a lot of money for lobbyists, but it is also the American way of free enterprise that keeps credit card interest rate caps on the back burner. Recent proposals include:

A charge led by two Republicans to cap interest rates at 16% in late 2009
A 2011 proposal to cap interest rates at 15% by NY Congressman Maurice Hinchey, as reported by CNN Money
An effort by a group of Democrats in late 2011 to introduce legislation that would effectively reverse the 1978 Supreme Court ruling that took interest rates out of states’ jurisdiction

Why Credit Card Interest Rates May Never Be Capped

regulators capping credit card rates Credit card companies charge interest rates to offset the risk that consumers pose for nonpayment. If a consumer has low risk, then that person’s credit card interest rate will be lower. Those with high risk, as shown through a low credit score, will have a higher interest rate because they are more likely to default on what is essentially a loan.

It is almost a necessary evil, according to an article in the Dallas News. Capping credit card rates will only mean that even more people will not qualify for a credit card at all, because the banks will not offer them one due to their high risk. This will make credit even harder for some people to get, and will cause the credit card companies and banks to impose other fees on credit card users to continue to stay profitable.

How Consumers Can Control Interest Rates

What it really boils down to is that credit card companies and banks give the people what they want; it’s good old supply-and-demand. Thanks to the Credit CARD Act of 2009, consumers know just what they are getting into when they sign up for a high-interest credit card. They know what the interest rate will be when they swipe their cards, and yet they keep using that high-interest credit card as a form of payment.

If consumers wouldn’t use credit cards with high interest rates, then the credit card companies wouldn’t make any money on such a product. No profit, no product! The credit card companies and banks would stop offering them. The report mentioned above about a high-interest credit card was offered by Premier BankCard. It had a 79.9% interest rate to be offered to subprime customers, but the company lowered it to 59.9% when too many customers defaulted. That’s a user paying $59.90 for every $100 borrowed. The company eventually disbanded the high-interest product in early 2011 due to profit issues, but not before 300,000 people signed up for the card.