Could Capping Credit Card Interest Rates at 15% Affect Rewards?

Kat Tretina

July 17, 2019  •  3 Minute Read

Credit Cards

It’s no secret that credit card debt is out of control. According to Experian, the national average for credit card debt is at an all-time high, reaching $807 billion in the first quarter of 2019. That’s a 29% increase over the course of just five years.

Sky-high interest rates — which have also reached record highs — play a big role in the increasing amount of credit card debt. With such high APRs, many people can’t afford to pay down their balances.

To combat this issue, Senator Bernie Sanders and Democratic representative Alexandria Ocasio-Cortez introduced new legislation that would cap credit card interest rates at just 15%. But what would that change mean for credit card rewards?

New credit card legislation

Credit card APRs are the highest they’ve ever been. According to the Federal Reserve the national average APR is 20.68%. However, those with poor credit can expect to pay a much higher rate; the average APR for those with bad credit is a staggering 25.33%. Such high interest rates can cause cardholders to pay thousands more than they originally charged for their purchases over time and can take them years to pay off their debt.

Sanders and Ocasio-Cortez aim to address this problem by making changes. Dubbed the Loan Shark Prevention Act, their proposed legislation would impose a 15% federal cap on interest rates and would allow states to set even lower caps.

“There is no justifiable reason that a person — no matter their background — should be charged an interest rate higher than 15 percent,” said Representative Ocasio-Cortez in a press release. “Rates higher than 15 percent are predatory debt traps, designed to keep working families underwater and allow predatory companies to enrich themselves off the misfortune of others.”

The change would affect the major credit card companies, including Visa, Mastercard, Discover, and American Express, as well as the banks that issue them.

Impact on credit card rewards programs

The proposed legislation would reduce how much people have to pay in interest. However, there could be significant unintended consequences, especially when it comes to credit card rewards.

High interest rates are how credit card companies can afford to offer robust reward programs and signup bonuses. Reducing how much interest credit card companies could charge consumers — and by such a large percentage — would severely impact their bottom lines, making reward programs more costly to maintain.

If a 15% APR cap goes into effect, many credit card companies will likely cut back their rewards, or even eliminate those programs completely.

Other consequences of a 15% interest rate cap

Because rewards are the best ways to attract customers and stand out from competitors, credit card companies will try to keep reward programs in place in some form. While you’ll likely see a significant change to the rewards you can earn, there are other consequences of a 15% cap.

1. Fees could go up

Many credit cards offer no annual fees but significant rewards. For example, the Capital One Quicksilver Cash Rewards Card has no annual fee, but it allows cardholders to earn unlimited 1.5% cash back on every purchase. Plus, you can get $200 if you spend $500 on purchases within the first 3 months of opening an account. That’s a great deal for cardholders, but offerings like that could change going forward.

Rate & Fees *Information for this card not reviewed by or provided by Capital One

2. It’ll be harder to qualify for a credit card

Credit cards offer a range of interest rates; the lower rates are reserved for those with excellent credit. Those with just good or fair credit can often still qualify for a card; they’ll just get a higher APR.

But with a cap in place, credit card companies will have to change their approach. Unable to charge a higher rate to offset the risk of lending to a borrower with worse credit, they may stop issuing cards to anyone with less than excellent credit altogether.

3. Store cards may be eliminated

For those with no credit history, store cards can be a smart way to establish credit and build good credit habits. However, store cards have notoriously high rates. With the cap in place, many store cards will have to change how they’re structured and how they work, limiting people’s access to these tools.

Managing your credit cards

While intended to help consumers, the proposed legislation from Sanders and Ocasio-Cortez would significantly impact the credit card industry, especially when it comes to valuable rewards programs. The legislation would have many unintended consequences that could negatively affect people over the long-term.