Opinion: Proposed APR Cap Is Populist Theater With Dangerous Fallout

When news of President Trump’s proposal to cap credit card interest rates to 10% broke this month, a surprising number of people cheered. Even those who are diametrically opposed to the administration were giddy by this populist decision. If enacted, it would start on Jan. 20 and remain in effect for one year. 

Now subprime lenders will need to take swift but mindful action to convey the truth. A rate ceiling like this may have a devastating impact on the industry and on high-risk consumers. Rather than help people with bad credit achieve their goals and borrow affordably, it may shut them out of the system entirely. 

Consumer advocates and indebted individuals shouldn’t clink champagne glasses just yet. Implementing an APR cap on credit card accounts would require congressional or regulatory action. There’s no guarantee that will happen.

In a CNBC interview, Tobin Marcus, head of U.S. policy at Wolfe Research, noted that the most straightforward approach would be legislation, which would be an impossible feat by the proposed start date. 

Although the Consumer Financial Protection Bureau can attempt to enforce such a change, counting on its cooperation seems unwise given Trump’s history of aggressively trying to weaken the agency. 

Of course, credit card issuers may decide to slash interest rates voluntarily, but so far there haven’t been any major announcements along those lines. 

So, while many of your current and potential cardholders may be thrilled by the prospect of ultra low APRs, it may not happen. And what will result is frustration at unmet expectations. 

That high-risk consumers could have considerably less access to credit cards is a critical point that too few are recognizing. That’s why credit card issuers, especially in the subprime industry, need to show just how significant the retraction would be. 

The fact is, subprime borrowers are charged higher APRs on credit cards for a reason, which is to offset the elevated default risk they pose. Such a low cap would compress or eliminate risk-adjusted returns on these customers.

The consequences: You may be forced to cut credit lines, close accounts, or tighten underwriting in subprime segments, not out of spite but viability. 

Make this your message. It’s true and powerful.  

As a subprime lender, you know that interest drives your ability to grant credit products. Without that income, you can’t do business. Will prime lenders pick up the slack? That’s doubtful because high-risk is high-risk, and at this stage nobody is insisting that banks must issue credit cards to people who have low credit scores. 

Dramatically lowering APRs would make it very hard for you to function. If you can’t issue cards to low-income, low credit score individuals, who will? Consumers who need a bridge to credit repair will be disproportionately affected. 

Case in point: I’m currently reviewing a really good cash back credit card designed for subprime applicants. The APR is 36%. The limit begins at just a couple of hundred dollars, though, which prevents cardholders from getting into overwhelming, expensive debt despite the high rate. 

When well-managed, a card like this is positive for consumers. The option should exist. Again, that’s your message.   

A vital point to emphasize is that people will continue to borrow money. If they can’t get a credit card, they’ll go someplace else. It might be a personal loan through a friend or family member, in which case they don’t get the credit repair benefit.

Or they can go through payday lenders. A two-week loan can cost $15 for every $100 borrowed, though, which equates to a nearly 400% APR. Title loans put borrowers’ vehicles at risk if they have trouble meeting their payments.

As for unregulated (illegal) lenders, they’re not exactly known for low fees — or ethical collection practices. 

Conversely, credit cards that have high APRs also offer valuable consumer protection, report activity to the credit bureaus, include helpful technology, and many come with rewards programs. 

The effective interest rate is zero when the cardholder pays in full. Even a $1,000 debt on an account with a 35% APR can be affordable. The added interest would be just $59 when the debt is paid in three installments.

That’s hardly an egregious amount. And since cardholders don’t have to run the purchases by anyone or apply for a new loan, they have complete autonomy. 

Obviously these are clear advantages. Stress them.

To keep credit flowing, business revenue must come from somewhere. If it’s not from interest, you may have to hike annual fees, maintenance fees, and penalty fees. To cut costs, you may have to slash perks and rewards programs. 

I don’t want credit cards that are designed for the subprime market to disappear or become less attractive. Nor do I like high credit card interest rates. But consumers can avoid excess costs with your support and guidance.

It shouldn’t involve regulation that would upend the entire credit card industry and make life more difficult for people who are trying to get ahead.