Credit cards featuring interest rates of maximum 16 percent may sound too good to be true, but if a number of congressional Democrats have their way, this could be coming soon to a credit card near you.
Last Wednesday, U.S. Rep. Louise Slaughter, D-Fairport said she planned to introduce legislation next week which, if passed, would cap credit card interest rates across the board at 16 percent APR. The bill, referred to as the Renewing America’s Commitment to Consumers Act, would also limit credit card fees, including late fees, to a maximum of $15.
“Watching how credit card companies have exploited people by increasing rates up to 30 percent and more is criminal, and this bill will allow us to put an end to this,” Representative Slaughter said in a statement announcing the bill. “Things were a lot better for the average person in this country when we had usury caps.”
When Congress passed new protections for credit card users as part of the Credit CARD Act in May of this year, the provisions did not include a limit on the interest rates card issuers are allowed to charge. An amendment trying to include a rate cap at 15 percent was killed in the Senate.
With lawmakers up in arms about the recent round of credit card interest rate hikes, the new legislation may meet with greater success than previous attempts to cap interest rates. Lawmakers have been flooded with complaints about exorbitant credit card interest rate hikes from their constituents, who are already struggling in the face of a prolonged economic downturn and record unemployment rates. Half of Americans have seen their credit card interest rates raised over the past six months, and many are now shouldering credit card debt burdens accruing interest at 20 to 30 percent per year.
Congress has made several attempts to prevent credit card companies from tightening terms in advance of the new law. In early November, the House passed a bill to move up the effective date for the new credit card law to December 1 this year instead of February 2010. A companion bill introduced in the Senate by Banking Committee Chairman Christopher Dodd, however, was blocked by Senate Republicans.
The American Bankers Association opposes the proposed new legislation, stating that interest rate caps on credit cards would cause tighter credit card terms and make it difficult for many consumers to get approved for a credit card. Surprisingly, though, in a recent interview with the Boston Globe, Citigroup chief executive, Vikram Pandit, stated that Citi would support a cap on credit card interest rates for new accounts should lawmakers revive efforts to put a ceiling on interest rates.
“We’re completely in support of having a rational rate structure,” Pandit said, as long as rate limits would be applied across the industry and only on new accounts.
Rate caps on credit card interest was commonplace until 1978, when a Supreme Court ruling allowed credit card issuers to charge the prevailing interest rate in the state in which the bank is based, instead of where cardholders are based. In the wake of that decision, most credit card companies placed their headquarters in states like Delaware or South Dakota, which have virtually no interest rate caps on credit cards, effectively undermining the usury laws of states with more stringent consumer protections.
Co-sponsors of the bill include Democrats John Tierney and Michael Capuano. The bill comes at a time when the House Financial Services Committee is already working out details of financial reform with tighter regulations and more oversight over banks and capital markets in order to prevent a repeat of the severe credit crisis and economic recession, which followed at the heels of the reckless lending practices in the mortgage market.
