3 Major Ways in Which Bernie Sanders' and AOC's 15% Credit Card APR Ceiling Can Affect You

Alexandria Ocasio-Cortez and Bernie Sanders are currently considering capping interest rates on all loans and credit cards with 15 percent. You might think that this plan will mainly affect banks, but unfortunately, it will also have major consequences on regular consumers. Some of the most notable negative effects of the 15 percent cap are increased credit-card fees, the elimination of credit card offers and rewards, and reduced access to financing for low-income consumers.

A New York Democratic representative – Ocasio-Cortez and Vermont independent Senator Bernie Sanders want to introduce the legislation that has been dubbed the “Loan Shark Prevention Act”. This controversial bill will supposedly establish a 15 percent cap on all interest rates, be it credit cards or loans, and allow states to introduce lower limits. At the moment, the interest rate for credit-cards has reached a whopping average of 17.73 percent.

In defending his and AOC’s proposal, Bernie Sanders has described the interest-rates imposed by major bank issuers as “grotesque and disgusting”. According to him, we are currently dealing with credit card and Wall Street companies that are charging us ostentatiously high-interest rates whenever they become desperate and realize that they need more money. Furthermore, in support of the cap, Sanders has also brought up the 1980 cap, when the Congress imposed a 15 percent cap on all credit union interest rates.

Although it may sound compelling, lowering the limit on all credit-card and loan interest rates can have negative effects on regular consumers. According to WalletHub chief executive, Odysseas Papadimitriou, not a lot of people will benefit from the disputed cap. Because at the moment the average interest rate is so high, the fifteen percent cap is a major change. Especially since most people are currently paying it, except those who have excellent credit. As a result, for the great majority of consumers, the cap will most likely lead to more costly alternatives.

Here are three major ways in which Sanders’ and AOC’s plan might backfire and affect you:

The fees that cardholders are currently paying might see a substantial increase.

Rewards are an easy way to differentiate between credit cards and to help issuers have an advantage over their competitor’s offers. Therefore, banks will most likely try to maintain their successful rewards programs, which can force them to find other methods to generate revenue. Raising the fees that regular cardholders are currently paying might be one of their main tactics when faced with the 15 percent APR ceiling.

Industry analyst, Ted Rossman, made an interesting comparison between financial institutions and airline companies. According to him, airline companies are very good at nickel-and-diming their passengers when they need more money. Whenever the gas prices or the employee salaries are increased, they find new ways to impose fees on the customers, be it through seat assignment fees, bag fees, etc.

In such a scenario, more and more credit cards will come with additional annual fees. And that is not all. Late-payment fees and other existing ones might go up substantially.

Credit-card rewards might disappear

Back in 2010, when the Durbin Amendment went into effect, almost all debit-card rewards disappeared. The amendment limited the interchange fees that card issuers charged retailers. The revenue from those fees was helping banks finance the rewards programs, so when those fees were capped, the debit rewards disappeared.

A similar fate might be in store for credit-card rewards if the “Loan Shark Prevention Act” will be introduced. Because the bank’s bottom lines will be hit hard by the change, the credit card offers and rewards might become a liability. This is especially true since the high costs associated with the current rewards arms race is making banks feel queasy, so eliminating a portion of their revenue won’t help.

Access to credit might be reduced, especially for low-income consumers

The main reason behind high-interest rates is to reduce the risk taken by banks when they lend money to consumers that have low-income or bad credit history. All card companies do everything in their power to assess the risks correctly through credit scores and other complex methods. Because they are less likely to pay back their loans, credit-card issuers need to implement higher interest rates to the disadvantaged consumers and unlike auto loans or mortgages, no collateral is on the line.

Consequently, a 15% credit-card APR ceiling could force these companies to become penny-pinching when it comes to approving clients for credit cards.

With more than 24 million Americans lacking access to consumer credit and more than 8 million U.S. households lacking a bank account , the bill seems to be a reckless gamble. Sanders’ and AOC’S capping might actually remove the already limited options many low-income Americans have at the moment by making it even more unprofitable to lend them money.

It is important to mention that the 15 percent ceiling will also affect payday loans. These loans are currently the only option for people with very poor credit scores and outstanding debt.

In conclusion, historical evidence and common sense suggest that Ocasio-Cortez and Sanders’ so-called "Loan Shark Prevention Act," will have a huge impact on credit cardholders. Despite being created to eliminate loan sharks, this bill might in fact help them flourish.