Credit Card Interest Rates and Fees Could Drop Dramatically if Certain Lawmakers Get Their Way

As of October 2023, the average credit card interest rate in the United States is 24.45%, according to LendingTree. To put this into perspective, this means that someone with the average credit card debt of $7,951 is paying credit card interest at a rate of nearly $1,950 per year.

Unlike most consumer interest rates like mortgages and auto loans, credit card interest rates are directly tied to the federal funds rate (when you hear that the "Fed raised rates," this is what it refers to). With the Fed raising that benchmark rate by more than five percentage points over the past couple of years, it has pushed credit card interest rates higher as well.

With credit card debt in the U.S. exceeding $1 trillion in 2023 for the first time ever, Americans are set to be on the hook for about $245 billion in credit card interest. This is clearly a problem, both from a personal finance perspective as people could find it more difficult to keep up with their credit card bills, and from an economic perspective, as this is billions of dollars that people are handing over to credit card companies instead of spending on goods and services.

New proposals could lower interest rates and fees for everyone

Some lawmakers think credit card interest rates have become too high and are setting working families up for trouble.

For example, Sen. Josh Hawley (R-Missouri) introduced the appropriately named Capping Credit Card Interest Rates Act in September, which would set a maximum credit card APR of 18%, and this would be inclusive of any fees charged to the customer. With many cards charging as much as 30% or more these days, and with no official cap on rates in most cases, this could be welcome relief for borrowers.

Other proposals are targeted at fees, including one from the Consumer Financial Protection Bureau (CFPB), which would cap missed and late payment fees at just $8 or 25% of the minimum payment owed, whichever is lower. Currently, some credit card issuers charge $40 or more for this. And there's another (bipartisan) bill making its way through the Senate that intends to encourage competition between payment networks like Visa, Mastercard, and others, and reduce the merchant fees that typically get passed to the consumer.

Limiting credit card interest might not be as great as it sounds

To be sure, Hawley's bill is going to face an uphill battle in both the House and Senate, and quite frankly, it's unlikely that a proposal to limit credit card interest will pass, at least in the current political landscape.

And while providing consumer relief can be a good idea, it's also worth noting that a broad cap on credit card interest rates could have unintended consequences.

It's important to realize that credit card interest rates aren't higher than other types of debt simply because the banks that issue credit cards are greedy. It is because credit cards are unsecured forms of debt, and historically have higher default rates than other types of consumer debt. It isn't uncommon for credit card issuers to experience default rates of 5% or more on credit card debt. After accounting for administrative costs and other expenses, you might be surprised that profit margins aren't as wide as you might think in most cases.

So, a limit on credit card APRs could cause lenders to pump the brakes on approving new credit cards and reduce existing credit lines or close them altogether, especially for customers who don't have top-tier credit scores. In other words, a rate cap could have the unintended consequence of reducing access to credit for consumers who need it.

Ways you can lower your interest rate now

Credit card interest is certainly a financial burden for millions of Americans, but one key takeaway is that you shouldn't necessarily count on Congress to lower your credit card interest rates for you.

In fact, there could be some ways you can lower your own credit card interest expense and pay your debt off faster. For one thing, although credit card interest rates have soared, it's still rather easy to find a 0% intro APR balance transfer offer. Alternatively, many consumers can significantly lower their interest rates by obtaining a personal loan and using that to pay off their credit card debt. Keep in mind that the less interest you pay, the more of your debt repayment is applied toward the principal, and not toward putting money in your bank's pocket.