A surprising team-up is brewing between US Senator Bernie Sanders and President-elect Donald Trump on a long-standing issue that kept millions of Americans in debt for years while hampering their ability to save and grow money.
During his campaign, Trump suggested temporarily imposing a 10% limit on credit card interest rates to allow people to 'catch up' on their existing loans.
He also said that 'we have no choice' but to implement the plan. Referring to the proposal in an X post, Sanders stated he hopes Trump will fulfil 'his promise' of a rate cap.
In a recent Business Insider interview, the senior Senator reiterated his support for Trump's 10% rate cut plan.
However, Wall Street continues to vehemently oppose any threats to its revenue streams, arguing that a rate cap would limit access to credit for borrowers who need it the most, compelling them to try out "less-regulated" and risky alternatives like payday lenders and loan sharks.
Banks also think a 10% rate cap would compel them to limit rewards and stop offering credit cards to people with low incomes and credit scores.
Aside from boosting balance sheets, know that earnings from high interest rates help banks compensate for losses they incur from writing off bad loans when risky borrowers fail to repay or declare bankruptcy.
Bank Profits On Interest Revenue Surge As Credit Card Balances Reach Record Levels
According to LendingTree, the average credit card interest rate for new cards stood at 24.43%, almost 10% higher than a decade ago.
Interest payments have become one of the leading revenue generators for banks in recent times.
The Consumer Financial Protection Bureau (CFPB) projected that credit card issuers raked in an additional revenue of $25 billion (£19.76 billion) last year by hiking rates when inflation reached alarmingly high levels.
Banks continued to leverage the high credit card interest rate environment for profitability when outstanding credit card balances in the US reached a record $1.17 trillion (£925.15 billion) in Q3 of 2024.
These financial dynamics have led to borrowers carrying more debt month to month than ever before as high living costs continue to impact households nationwide.
Meanwhile, banks caution policymakers that a rate cap would negatively impact credit card rewards programs.
Experts believe that while interchange fees have historically funded credit card rewards, banks have begun supporting rewards programs by funding them with interest payments on debt.
Interchange fees are charges paid by merchants when customers swipe their cards.
'Increasingly, the interchange may not be covering the cost of the reward programs or generating profits that justify the rewards,' CFPB's Julie Margetta Morgan recently told Business Insider.
'And then you can see rewards go from a program to entice people to spend more to drive interchange revenue to a program to entice people to spend more so that they end up revolving and paying interest.'
Financial Experts Think Trump Not Serious About The Rate Cut
The politics around the credit card rate-cut proposal could be complicated.
National Consumer Law Center's Chi Chi Wu recently highlighted that the Trump transition team is open to discussing the rate cuts, but it might not be the most pressing issue on their priority list.
Her views have stemmed from instances like tech billionaire Elon Musk recently urging the government on X to 'delete CFPB' because there are 'too many duplicative regulatory agencies.'
CFPB is among the top agencies safeguarding consumers' wallets.
Sanders and Representative Alexandria Ocasio-Cortez also proposed a 15% credit card rate cut through a 2019 bill, which didn't get far.
Consumer advocates think Trump's proposal, which would help millions pay off debt and improve their financial situations, was floated with a lack of sincerity.
'When Trump said that, that was pandering with zero forethought and zero commitment,' said Aaron Klein, a senior fellow at the Brookings Institution.
Overall, surveys revealed that most consumers support a cap on credit card interest rates, even if it means reduced rewards or limited credit access for people with poor credit scores.
Inflation climbed to 2.7% in November after months of cooling.
The US Federal Reserve's monetary tightening campaign over the past two years wreaked havoc on household budgets, the effects of which will likely take longer to fade away.
