Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez introduced on Thursday a plan to rein in the profit banks can collect from consumers, proposing to cap credit card interest rates at 15%.
“Despite the fact that banks can borrow money today at less than 2.5% from the Federal Reserve, the average credit card interest rate today for consumers is a record-breaking 17.71%,” the Vermont Senator and freshman Queens Congresswoman said in a statement about the plan.
The plan is meant to contain credit card rates that are well above other benchmarks. The average annual percentage rate (APR) on new credit card offers rose to another record high of 17.73%, according to CreditCards.com — a full percentage point higher than it was a year ago despite interest rates that are near historic lows.
Consumers with less-than-perfect credit scores are being offered especially high interest rates, and Bankrate points out that even borrowers with good credit are paying over 17%, on average.
Americans paid banks $113 billion in credit card interest in 2018, according to MagnifyMoney, up 12% from the $101 billion in interest paid in 2017, and up 49% over the last five years, as Fed rate increases have been passed on to consumers.
“At a time when the American people hold a record $1 trillion in credit card debt and desperately need relief, we need to establish a national maximum interest rate of 15 percent on credit cards and other consumer loans,” Sanders and Ocasio-Cortez said in their statement.
They added that credit card companies that charge over 20% interest on credit cards are “involved in extortion and loan sharking.”
Sanders (I-VT) and Ocasio-Cortez (D-NY) decried the big salaries of bank CEOs, accusing them of “rip [ping] off the middle class.”
JPMorgan Chase (JPM) CEO Jamie Dimon “is now worth $1.4 billion after his bank got a taxpayer bailout of more than $400 billion during the financial crisis,” they said. Meanwhile, “former CEO of American Express, Kenneth Chenault, pocketed $370 million in compensation after leading that credit card giant for 17 years.”
Wall Street and the banking industry have long been a target of Democratic lawmakers, Sanders and Sen. Elizabeth Warren in particular.
Warren has been a vocal critic recently of Wells Fargo, which was hit with fines for creating fake accounts for millions of customers. She had called for CEO Tim Sloan’s resignation for his alleged role in the scandal.
In a press conference livestreamed on Sanders’ Facebook and Twitter pages on Thursday, Ocasio-Cortez highlighted the challenges of the banking system for many lower-income Americans.
For those without a regular bank account, check-cashing services can be an alternative. But they charge their own fees, she said. “Even if you try to avoid that charge, you take your check to a check cashing place, very common here in my community... they’re charging you 10% sometimes to cash a check. It is expensive to be poor,” she said.
Chance of passing?
The legislation also proposes allowing the more than 31,000 U.S. Postal Offices to offer banking services to lower-income consumers who don’t use payday lenders or big financial institutions. The lawmakers said people around the world bank with postal services. “The American people should have this option as well, just as they have in the past. From 1911 to 1966, the U.S. Postal Service offered banking services,” they said.
While Sanders and Ocasio-Cortez say their proposals are “not radical,” others might disagree.
"There's a less-than-zero-percent chance of a cap happening under the current administration,” said Matt Schulz, an analyst at LendingTree.
Though as Sanders and Ocasio-Cortez point out, in 1980 Congress passed legislation requiring credit unions to cap interest rates on their loans and credit union credit card APRs can't go above 18%.
“The legislation is very unlikely to pass, but it’s a good reminder for consumers that credit card rates are high,” said Ted Rossman, an analyst at CreditCards.com. “If you have credit card debt – and about 6 in 10 cardholders do – you need to prioritize your interest rate over rewards.”
MasterCard, Visa and American Express did not respond to Yahoo Finance’s request for comment.
–Sibile Marcellus contributed reporting to this article.
Lisa Scherzer is an editor at Yahoo Finance.