Capping Credit Card Rates and Fees Won’t Ease Consumer Debt Crunch
Viewpoint: Would capping interest rates and late fees on credit cards help debt-laden Americans as much as both parties say? J.D. Power data suggests some might not even notice the difference.
The inflation rate may have finally relented, dipping under 3% this summer for the first time since March 2021. But U.S. credit card customers are far from out of the woods.
After dealing with the persistently high cost of goods, consumers are grappling with the fallout of having to patchwork their finances for the past two years. In many cases, that means taking on significant credit card debt to bridge the gap between wages and the rising cost of goods.
Just how much debt? The Federal Reserve Bank of New York reported a $27 billion surge in credit card balances in the second quarter of 2024, with the total coming to $1.41 trillion. J.D. Power data indicates that just over half — 51% — of credit card customers now carry revolving debt.
It should come as no surprise that 54% of card customers are financially unhealthy, according to the 2024 J.D. Power U.S. Credit Card Satisfaction Study. That number represents a significant increase from a year earlier. In addition, fewer customers say they can meet their monthly obligations, and many say they have not developed long-term financial plans.
To mitigate this mounting pressure, regulators, lawmakers and political candidates have introduced ideas to ease that burden by capping credit card late fees and interest rates. And as the two main concepts — one from each side of the political spectrum — have been bandied about, it remains unclear just how effective these measures would actually be.
Credit Card Caps Don’t Solve the Underlying Problem
This year has seen two separate solutions proposed to help card revolvers. In March, the Consumer Financial Protection Bureau announced that it would be capping credit card late fees at $8 per occurrence for covered card issuers. The news came as a welcome sign for consumers. In the spring, 25% of credit card customers told J.D. Power that they had paid a late fee in the past 12 months, and 73% of those had paid more than $8. But in May, the American Bankers Association and U.S. Chamber of Commerce filed a legal challenge, and a federal judge agreed to temporarily block the CFPB’s plan to curb fees. The matter remains tied up in the courts, including shifts in jurisdiction.
Then in September, former President Donald Trump made a campaign promise that, if elected, he would support a cap on credit card interest rates. The plan would see credit card interest rates, which the Wall Street Journal reports is 21.5% on average as of May 2024, max out at 10%. [Editor’s note: Trump characterized it as a “temporary fix” to help Americans get caught up. Interestingly, in 2019 Democrats Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez proposed a 15% cap.)
An Interest Rate Cap Could Have Unintended Consequences
After the late fee cap was stayed, the concept of a credit card interest rate cap was introduced, which consumer advocates would view as huge win. However, a cap would fundamentally change the economics of the credit card industry.
First, it’s quite possible issuers may get pickier about who they let take out cards, leaving some lower-income customers without an avenue to become cardholders. But a rate cap would also change the way existing members interact with their cards.
Americans have an insatiable appetite for credit card rewards, and issuers aggressively market to those desires with escalating cashback and incentives. An interest rate cap would spell a sudden reduction in issuer revenue, and that would likely present financial challenges to issuers trying to grow or even maintain these popular programs.
Provided the cap was going to make a huge inroad in helping customers out of debt, it would certainly seem like a worthy disruption. But the jury remains out on just how much capping rates would actually help. Debt levels remain at historical record levels.
Help with Card Debt Might Not Have the Payoff Politicians Anticipate
Offering this relief to customers with credit card balances paying nearly as high as a 40% interest rate certainly has proven to be a popular ideal among cardholders.
But J.D. power data show that a credit card interest rate cap alone would likely have limited effects on customer satisfaction among U.S. cardholders. In fact, some may not even know if they were benefitting from the proposed legislation.
How so? Just 27% of cardholders report having paid an interest charge on their credit card account in the past 12 months — curious given that 51% are revolving.
Nearly one-fourth (24%) of all cardholders can specify they have a card interest rate above 10%. Yet a whopping 59% of all cardholders say they don’t know what their interest rate is, and 48% of cardholders who have paid interest in the past 12 months don’t know their interest rate.
So, while the idea of a rate cap resonates with customers in the abstract, it may not garner the goodwill — from either a political or customer service perspective — that some stakeholders may anticipate.
Why Not Try a Holistic Approach to Credit Card Debt?
It’s hard not to champion the spirit of capping late fees or interest rates, but these concepts need to be evaluated as pieces of a much larger debt puzzle when it comes to improving overall customer financial health.
As banks and card issuers commit resources to help their customers dig out of the hole caused by the economic challenges of the past several years, they should consider providing debt consolidation, offering card features and tools that support better budgeting decisions, and requiring higher minimum payments.
Customers are looking for a partner to help them to better finances, and if each issuer can find a more tailored approach to helping their customers out of debt, it may result in more meaningful changes and higher customer satisfaction levels than broad legislative or regulatory initiatives.
By John Cabell of J.D. Power/The Financial Brand
About the author:
John Cabell is managing director of payments intelligence at J.D. Power.