US President Donald Trump has called for a one year cap on credit card interest rate charges at 10% - around half of the average current US rate - starting from January 20.
Author
- Ama Samarasinghe
Lecturer, Financial Planning and Tax, RMIT University
Vanderbilt University analysis from September last year found there were "astronomical profit margins in the [US] credit card market". It concluded a 10% cap could save Americans as much as US$100 billion (A$149 billion) a year. But it also found likely unintended consequences with a cap that low, including reduced lending for people with lower credit scores.
It's unclear how the White House plans to make the president's announcement happen. Bank stocks fell on the news, despite Wall St analysts reportedly expressing scepticism , saying:
it would take an Act of Congress for such rate caps to be in place, given the overwhelming legal challenges an executive order would likely face.
What about here in Australia? Could such a cap be worth considering? And are there any current rules in place capping how high our rates go?
What do we pay for credit card interest?
As of the end of last year, Australians had more than $18 billion in credit card debt accruing interest.
Most Australians typically pay somewhere between 17-21% interest on unpaid monthly bills, compared to the US average of around 21% .
There are low rate cards available as well, with interest as low as 11-15% . But these usually come with a higher fee than a standard card.
Who has to pay more?
A lot depends on your credit history. If you've paid on time and have a good payment history, you'll likely to get a lower interest rate.
If you have a history of late payments or a "thin" credit history - meaning the banks don't have enough information about you - you'll be seen as higher risk and pay higher rates.
Income matters too. When a lender is assessing your credit card application, they usually look at what's called the "debt-to-income ratio". A higher income means you have more income to cover your debt, reducing risk to the bank - so you might get a lower rate.
But someone on a relatively high salary with poor credit habits could still end up paying more than someone on a lower income with a strong credit history. It's all about the risk you pose to the bank.
Why are credit card rates much higher than mortgages?
Unlike a house or car loan, where you have a home or a car as physical collateral , credit cards are unsecured loans.
The lender doesn't have the same security if you end up spending too much and not being able to repay it.
Is there any cap on Australians' credit card interest rates?
No, there is no cap on credit card interest rates in Australia today. That means what we pay is set by the market and competition between lenders.
The Australian Securities and Investment Commission, which regulates consumer credit, does have some caps on the interest and fees charged on some personal loans.
For example, if you take a two-year personal loan between $2,001 and $5,000, the lender can only charge a maximum annual rate of 48%. That's still very high, but there is an upper limit - unlike for credit card interest rates.
Pros and cons of a rate cap
As even some of Trump's own supporters have warned , a temporary 10% cap could see the banks respond by lowering credit limits, making fewer approvals - or even cutting off access entirely for some Americans. It's possible this US proposal could hit the very people the policy is meant to help.
There's also the risk of pushing those borrowers towards more costly alternatives of credit, including less regulated lenders with even higher interest rates.
One of the risks with a cap like this, for any country, is that introducing it suddenly or as a temporary measure without a clear implementation plan creates uncertainty for investors and consumers.
The upside of an ongoing (rather than temporary) cap is that it could significantly cut the total interest paid by households carrying credit card debt, helping people pay down balances faster. That could ease debt stress, improve financial inclusion, and deliver broader economic benefits by making household finances more resilient over time.
In theory, some kind of cap on credit card interest rates could be a good idea. But it would have to be at a reasonable level. What kind of rate might that be?
The Vanderbilt University analysis weighed up the pros and cons of a 10%, 15% and 18% cap on US credit card interest rates. It found that the higher 15-18% caps could deliver meaningful savings to borrowers without significantly reducing access to credit, while a 10% cap was more likely to lead to tighter lending.
That's the sort of analysis we would need to do in Australia too, before any kind of credit card interest rate cap could be properly debated.
After all, cheaper credit only helps if people can still access it.
Ama Samarasinghe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
