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On credit card interest rates, be careful what you ask for

There are benefits and possible pitfalls to capping

There are benefits and possible pitfalls to capping credit card interest rates. Photo Credit: Brandon Laufenberg

The devil is in the details. At first glance Sen. Bernie Sanders' and Rep. Alexandria Ocasio-Cortez’s proposals to cap credit card interest rates at 15 percent would be welcome for a nation of people with more than $1 trillion in credit card bills.

It’s not surprising then, that in a recent survey by CompareCards.com, 80 percent supported capping rates.  

But you should take a look at the pluses and minuses and decide whether a cap adds up to all you hope it will.

Credit card rewards lovers beware

“Credit card rewards systems are expensive to maintain. Banks typically use some of the money made from high interest rates to fund them,” says Leslie Tayne, a debt resolution attorney with the Tayne Law Group in Melville.

Reducing banks' revenue from interest would likely cause them to cut way back on their rewards programs or ditch them entirely if they couldn’t afford them. Or banks might try to find ways to fund those programs with added costs to the cardholder, like higher fees.

Other painful pitfalls

If caps were instituted, the bottom tier of borrowers would find it much harder to obtain credit. If the government has a 15 percent cap on consumer lending interest rates, banks and financial institutions would adjust, too, changing their customer eligibility criteria for the new interest rate, says James Lambridis, CEO of financial technology platform DebtMD.com.

Consumers would compete fiercely for credit cards or loans due to their scarcity. Only borrowers with the best credit would be able to take advantage of lower rates.

Says Lambridis, “This brings us back to shutting out those with poor credit and/or lower income. An interest rate cap would have negative consequences on the exact group of people it is designed to help.”

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