There are several reasons for owning a credit card. Credit cards can impact your credit score

which can affect your ability to be approved for a mortgage.

Maybe having a credit card is your safety net. If you were to experience a financial emergency, you fall back on borrowed money. Or maybe you just really like free airline miles as a result of using your card.

Credit cards, while useful tools, are known to have high interest rates. The average APR for all cards ranges between 16.99% to 23.91% according to US News & World Report. Recently, Senator Bernie Sanders and U.S. Representative Alexandria Ocasio-Cortez announced new legislation that would cap credit card interest at 15%.

The bill raises some questions and concerns. More than $1 trillion is owed in credit card debt in the U.S. A cap on credit card interest sounds pretty good on the surface., but how does this impact credit card debt? Would it reduce debt or incentivize individuals to add to it?

What credit card debt looks like in the U.S.

Credit cards are becoming more normalized as a method of payment for goods and services. What’s crazy is that credit card debt is becoming more normalized, too. The average credit card debt balance is $6,354 and 43% of credit card users resolve income shortfalls by using their card.

So, to get this straight: we have normalized using credit card debt as a method to pay for goods and services we can’t afford. In short, financial literacy is lacking. Instead of creating programs and tools that help educate consumers on responsible money management, we look for ways to minimize credit card interest.

Putting a limit on credit card interest rates doesn’t help borrowers who lack financial literacy. The problem that we are trying to solve is getting people out of credit card debt and using credit responsibly.

Plus, for low-income consumers and high earners alike, we have become impatient. When we want it, we want it right then and there. This mentality is causing some Americans to pay into credit card interest. Americans paid $113 billion in credit card interest in 2018, according to Yahoo Finance. The number will increase to $122 billion this year.

How capping interest could backfire

Banks may charge more in fees

Banks make money off of charging you interest. If the bill were to pass, banks might find alternative ways to charge you fees. They could make up the difference by capping borrowing limits.

You could suddenly see fees for:

  • online account maintenance
  • paper billing
  • and calling customer service

The implications could get hairy and come with a price tag. This could further increase credit card debt, not reduce it.

And because banks can’t set interest rates higher for risky borrowers, they might offer credit to fewer people.

Poor credit users could turn to awful payday loans

Currently, alternative methods for obtaining credit include payday loans, unsecured loans, and personal loans. The worst of these being payday loans. Can we all agree that these just need to go away?

People with poor credit typically fall victim to payday loans. If banks decide to be pickier in who they approve credit to with a 15% interest cap, more poor-credit users may choose to dabble in payday loans.

Payday loans typically involve supplying direct access to your bank account and charge an astronomical amount in interest. It’s not a good deal for anyone in financial straits.

15% might encourage consumers to spend more

Let’s look at that average credit card debt of $6,354 again. Suppose you have an interest rate of 24% and with the new bill, your interest rate drops to 15%.

You might feel inclined to put more on your credit card and carry a balance. Why? Because you’re not paying as much in interest. This could be a bad incentive.

How to avoid high-interest credit cards

The best thing you can do to avoid paying credit card interest is to pay it off every month. Choose cards that have low or zero fees. The Discover it® Cash Back, for example, offers an introductory  APR on purchases and balance transfers for  (then the regular interest rate of applies).

If you have credit card debt, you could look into transferring to a zero interest card for a short-term fix. Remember that you’ll still need a plan to pay off debt before the interest kicks in.

Credit cards can be a useful financial tool when we know how to use them responsibly. Pay them off every month and take advantage of built-in reward systems. When you use credit cards correctly, you won’t have to worry about interest rates.

Other ways to stay out of credit card debt

Credit card debt wreaks havoc on our lives. If you’re ready to clean up your credit card mess, here are a few things you can do:

Track your monthly income and expenses

A great way to start attacking credit card debt is to look at your monthly income and expenses. If you have credit card debt, chances are you are spending more than you make. Look at areas you can cut in your budget.

You can also get creative by getting a side hustle or selling items to bring in more income.

Get back to contentment and change your spending habits

Some people can mistake happiness with material possessions. Start feeling contentment again by incorporating weekly activities that are fun and free. Get back into bike riding or pick up that novel you’ve been meaning to read. It can fuel you in ways that swiping plastic just can’t.

Summary

Credit card debt is an ongoing issue in America, and unfortunately, capping credit cards at 15% APR isn’t going to change our habits. But, with that being said, those who learn to use credit cards responsibly will benefit hugely from the lower APR if they have to spread one or two purchases out over a small period of time.

Read more

  • How To Consolidate Credit Card Debt
  • How To Get Out Of Debt On A Low Income