There's an effort in Congress aimed at saving consumers money by placing a limit of 10% on credit card interest rates, but the idea shows a lack of understanding of how credit works, according to one expert.
The proposed law has bipartisan support, but the latest effort is backed by Sens. Josh Hawley, R-Mo., and Bernie Sanders, I-Vt., with hope it will save credit card consumers an estimated $10 billion.
Overall US credit card debt has reached $1.23 trillion, with the average household owing more than $9,000.
Credit card interest rates average about 22% for those with good credit but can range up to about 30% for those with poor credit.
Credit scores rate people on their ability to pay back the money they borrow when they use their credit card, because credit is based on risk, MBT Bank Market President Janice Spooner says.
It's Economics 101: The higher the risk taken, the more an institution has to charge to make up for the possibility that the money loaned won't be repaid.
But if Congress were to slap a 10% limit on credit card interest rates, it would make it harder overall to get a credit card.
"Particularly for the higher risk borrowers because, whether people know or not, banks and financial institutions and credit card companies price to risk," Ms. Spooner points out.
And while it's estimated that, as some politicians such as Democrat Sen. Bernie Sanders and US. Rep. Alexandria Ocasio-Cortez have said, capping credit card interest rates at 10% could save consumers money, it would close off some avenues for credit.
"It's very likely that it would reduce credit availability for a lot of people," she says.
Like reducing the minimum wage, it's an idea that sounds good but in the long term works against those in the lowest economic strata.
Spooner says the would-be interest-cut plan has been around a while, and "honestly, while it's generating attention, it's not advancing to becoming law and it certainly faces significant hurdles."