How Would Capping Credit Card Interest Rates Affect the ARM Industry?

On May 9, 2019, Senator Bernie Sanders (I-VT) and freshman Representative Alexandria Ocasio-Cortez (D-NY) introduced legislation that would levy restrictions on the interest rate credit card grantors could charge consumers. Specifically, the bill would establish a blanket limit on credit card interest rates at 15.0%, in addition to allowing post offices to offer financial services, such as checking or savings accounts, debit cards, low-interest loans, and check cashing. The proposed cap on credit card rates is of interest to the accounts receivable management (ARM) industry, as it could reduce the overall volume of credit card debt as well as the number of card originations – thereby lessening opportunities for collectors.

Credit Cards and ARM

As it stands, credit cards present significant business opportunities for the ARM industry. Aside from seasonal dips occurring in the first quarter of every year – which may be the result of borrowers repaying their debts using end-of-the-year bonuses and tax returns – total credit card debt has grown steadily since it hit a post-recession trough of $659.0 billion in 2014. As shown in the above graph, in Q1 2019, credit card debt amounted to $848.0 billion, a 4.1% increase year-over-year. The previous quarter’s total (i.e., Q4 2018), $870.0 billion, surpassed the former peak of $866.0 billion in Q4 2008 – during the Great Recession. The percentage of debt that is severely delinquent (i.e., 90 or more days past due) has been rising in the past few quarters as well, rising 1.2 percentage points from 7.1% in Q3 2016 to 8.3% by Q1 2019.

Charged-off credit card debt, which can directly lead to opportunities for both collection agencies and debt buyers, also rebounded after a post-recession trough. Since 2015, credit card net charge-offs at commercial banks and credit unions grew at an average annual rate of 15.7% – totaling $33.8 billion in 2018, per the above illustration. Net charge-off rates (i.e., the proportion of gross charge-offs that go uncollected) are greater than prior years as well. Overall, current conditions, in which total debt, bad debt, and charge-offs are all rising, are favorable for ARM companies that service or buy credit card debt.

What the Bill Would Change

Credit card interest rates are often much higher than 15.0% ceiling proposed by Sen. Sanders and Rep. Ocasio-Cortez. According to, the average annual percentage rate (APR) on a new card (17.7%) is the highest the company has recorded since it first began tracking data in 2007. That is 1.0 percentage points higher than a year ago (16.7%) and 2.5 percentage points greater than in May 2016. Borrowers with a poor credit score face even stiffer rates; the APR for consumers with sub-prime credit scores is a whopping 25.3%.

The 15.0% cap would affect the ARM industry in multiple pertinent ways. First, it would cause overall credit card debt balances to fall. Credit grantors charge interest to card holders who carry a balance from month-to-month. The higher the APR, the greater the amount of interest to be paid, leading to a growing total balance. If interest rates are limited to no more than 15.0%, borrowers may pay less interest than they would otherwise, thereby diminishing their potential debt burden. Not only would this improve these borrowers’ chances of avoiding severely derogatory delinquencies, but it would also decrease the dollar value per credit card account serviced by ARM companies, since there would be less debt to collect.

Second, the suggested rate ceiling may depress loan originations. Currently, banks and other credit card grantors use high interest rates to account for the risk of lending to borrowers who are less likely to repay compared to more financially stable borrowers. If interest rates were capped, credit grantors would have to either account for that risk in other ways, such as raising fees, or cease lending to high-risk applicants altogether. Since the former would anger the public and may invite regulatory intervention, credit grantors may simply choose the latter. As a result, the number of risky consumers with credit card accounts could dramatically decline.

This would pose potentially significant issues for ARM companies servicing credit card debt. As shown by the graph above, titled Transition into Serious Delinquency Rate, by Credit Score, card holders with credit scores lower than 620 (i.e., sub-prime scores) are much more likely to enter serious delinquency than those with super-prime – or even a bit below average (620-659) – scores. If risky applicants are unable to obtain credit cards, the total number of severely delinquent accounts may fall, leading to lower net charge-off levels and limiting opportunities for collectors.

Broader Implications

While the legislation has virtually zero chance of passing this Congressional session, on account of Republicans controlling both the White House and Senate, it does provide a peek at a potential direction the Democratic party could take if it were to control the three major Federal Government bodies. Sen. Sanders waged a prominent – albeit unsuccessful – presidential primary campaign against eventual Democratic nominee, Hillary Clinton, in 2016 and is running for president in 2020. Rep. Ocasio-Cortez, meanwhile, is a rising star among progressives, thanks to her ability to connect with Millennials, Generation Zs, and minority constituents. In a recent survey of potential Democratic primary voters, Emerson Polling found that 18-29 year-olds favored Sen. Sanders over the front-runner, Joe Biden, by 30 percentage points. In this sense, the Sen. Sanders’ and Rep. Ocasio-Cortez’s platforms may represent the future of the Democratic party and U.S.

In addition, Sen. Sanders and Rep. Ocasio-Cortez may find unlikely allies in the populist wing of the Republican party. Notable Fox News host Tucker Carlson, for example, praised the duo as “absolutely, indisputably right” in their attempt to cap card rates. Though Mr. Carlson may not have any legislative power, he does have the ability to shape the national conversation. His show, Tucker Carlson Tonight, drew 3.03 million total viewers per showing in March 2019, second only to Sean Hannity in all of cable news. Additionally, Mr. Carlson seems to have the ear of President Trump, judging by his twitter account.

This signals trouble for credit grantors and ARM companies alike, as it means they may face hostility from both sides of the aisle when it comes to interest rates. For example, if President Trump decided to tweet his support for capping rates after watching a Tucker Carlson Tonight segment, then the proposed bill may see a significantly greater chance of passing than it does today. Even if President Trump does not weigh in, Republican (and Democratic) Congresspeople may face pressure from constituents who regularly view Mr. Carlson’s show.

While the ARM industry and its credit-granting clients should not necessarily panic about interest-rate ceilings any time soon, they should start to contemplate regaining control of the public debate. Once a bill like this passes, it may be too late.