I do not think President Trump will be able to get a 10% cap on interest for a year, but I expect there will be some compromise. But who knows what’ll happen.
Full disclosure: I am fortunate enough to carry balances only when I have 0% promotions and enjoy gaming the system to get lots of rewards and points, so I would prefer things be left alone.
What do you expect to happen if a one-year limit is imposed?
I expect credit card companies will reduce limits to right above current balances, close accounts, reduce rewards, and limit new accounts. I also think people will overspend, thinking "it is only 10%. And I think some banks will go out of business.
I also predict that whatever is done will be revisited in a year, with demands to continue it longer, so it won’t be a temporary thing.
The credit card interest rate is contained in the contract between the credit card issuer and the credit card user. Generally speaking, the government does not have the right to modify the terms of an existing private contract. I’m not aware of any legal authority for the executive branch, on its own, to modify contract terms. MAYBE if Congress passed legislation signed by the President.
The government may impair contracts when acting to protect:
Public health
Public safety
Public welfare
Morals
Requirements (from Supreme Court doctrine):
There is a significant and legitimate public purpose
The law is reasonable and necessary
The impairment is not excessive
Landmark case:Home Building & Loan v. Blaisdell (1934)
Minnesota temporarily delayed mortgage foreclosures during the Great Depression — upheld as constitutional."
This response is not an endorsement of the idea that the government should in this instance force a reduction in the interest rate to 10%. I am just pointing out that the government can modify contracts between private parties when there is a public interest involved.
This proposal is an election year ploy…he wants them to lower the rates for a year. What happens at the end of that year? This only “benefits” people who carry a balance. So they will continue to use their cards. At the end of that year, will the entire balance revert to 30% interest? Will new purchases be frozen at 10%.
Agreed. The case you cite has been pointed out for generations in Constitutional law. Happened during the height of the Depression when millions were unable to make mortgage payments. The exception to the rule regarding modification of contracts. I think Congress passed a law rather than unilateral action by FDR.
There is no indication that the president has that kind of power and it probably would be difficult for Congress to pull it off. No one is mandated to get and use a credit card. There are way too many card companies gor them to collude and if it were profitable to issue cards at 10% there would be companies competing for that market. Even the elite cards do not have rates much below 10%. There is a reason that rates need to be that high. If CC rates are capped at 10% few people will have access to them. My son owns a small commercial lender. His primary customers are businesses that the banks won’t lend to. If he were capped at 10% many small businesses would either not be established or they would go out of business. It’s risky what he does, but he had rehabbed a number of businesses and wound up owning a few of them. He doesn’t want to own them, but it happens. He would be a casualty if a cap was put in. The real problem, as someone already pointed out, is that CC debt is a lifestyle choice. Credit cards are not a second income. When the government starts capping prices, they will also cap wages. And, we learned in the 70’s that can be a disaster! It’s always good to put pressure on all lenders to be fair, but we do not want the government become our bank, or our parents.
I read a couple of things that made me think. First, it does not impact service fees, and second, it may result in banks lowering the credit limits for many borrowers. Which made me wonder - if a cardholder owes $7,000 and their credit limit is lowered to $5,000, will they now be facing over limit fees, that could add up faster than interest?
If a 10% limit was put in place for an entire year, most likely card issuers will respond immediately by making it more difficult to get approved (less limit, less reward, less 0pct offers). All those with bad credit histories will be negatively impacted first. And if rates are lowered, that could lead to people spending over their means, while at the same time fees and restrictions slowly begin to increase again. Once a cap is created it will always remain in place and lenders will conduct themselves as if the cap is permanent.
It may seem to be beneficial, but ultimately would lead to reduced access to credit and fewer benefits offered to borrowers than they currently receive today.
Generally, banks use “balance chasing,” lowering limits just above what you owe. That is, if you owe $7000, they’ll lower your limit to $7100. Then they’ll keep lowering your limit dynamically as you pay it off, so you never have any available credit again.
They won’t lower your balance below what you currently owe, but don’t expect to make payments and still be able to use the card again.
I doubt he will get 10%, it’ll probably be a compromise at a higher rate. And I expect the headline will be that compromise and interest after the year would be the payoffs for the banks.
The large print giveth and the small print taketh away.
But my thought is - if they owe $7000 and their limit is lowered to $7,100, if the make one purchase and it goes over the limit…will they be charged an over limit fee every month until they get below $7100. That would be worse than 25+% interest.
Ive never had a credit limit lowered, only raised. I usually get an email from the issuer with the changes and the date that it takes place. I would assume a similar communication would be required if limit is being lowered, no ? I hear people call into the CH show sometimes that are receiving such a letter….
Historically, banks have lowered limits with little communication and mostly after the fact. People find out that their limit is lowered when they can’t use their card.
And if they lower your limit, they will probably deny charges that exceed your new limit. But, banks are banks.
Yes, they could absolutely do that. And then if you call customer service in Malaria, they will tell you they will “help you with this one” and do nothing.
I would expect significant disruption from an interest rate limit so low that it forced banks to make major changes.
My expectation is that they’ll probably wind up getting Congress to approve around a 25% cap, and that probably won’t impact most customers.
Landmark case: Home Building & Loan v. Blaisdell (1934)