Recent reports indicate that new legislation has been introduced to cap credit card interest rates at 10%. While I commend this initiative, it’s important to highlight potential unintended consequences, particularly regarding credit scores.
At the close of 2024, the average annual percentage rate (APR) stood at approximately 21.5%, up from 14.7% in 2020, according to the Federal Reserve. While those who pay their balances in full each month avoid interest charges altogether, nearly half of Americans carry a balance—and many make only minimum payments—according to the CFPB.
If this legislation passes, credit card issuers are likely to tighten lending standards, especially for consumers with less-than-perfect credit. That outcome is predictable. However, what isn’t being discussed is the potential fallout for current cardholders with high-interest credit cards. These individuals could face abrupt credit score declines, through no fault of their own.
Credit card terms can change at the issuer's discretion. Lenders regularly conduct soft credit inquiries and may alter terms mid-contract. For example, a cardholder with a $3,000 limit and a $1,000 balance has a 33% credit utilization ratio. If the issuer lowers the limit to $1,000, that same $1,000 balance now reflects 100% utilization—significantly damaging the person’s credit score.
We’ve seen this scenario before, notably during the credit crisis. Home equity lines of credit (HELOCs) were heavily affected. Suppose a homeowner had a HELOC limit of $100,000 and used $10,000, putting their utilization at 10%. Lenders often slashed limits to match current balances, instantly driving utilization to 100% and triggering credit score drops of up to 100 points in some cases.
The problem isn’t just the system—it’s the lack of understanding about how it operates. Education is key. The more you know, the more you can protect your financial health.
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