Bank of America and Citi Explore Offering Credit Cards with 10% Interest Rates

Bank of America and Citigroup are separately considering offering a credit card with a 10% interest rate, according to a recent Bloomberg report. 

The move by the banks comes in response to President Donald Trump’s call for a 10% cap on credit card interest rates for a period of one year. 

Smaller credit card issuers unsure about which way to turn in light of Trump’s push for a cap on interest rates have likely been keeping an eye on bigger players in the credit card arena. 

Bank of America and Citibank — a subsidiary of Citigroup — are two of the bank holding companies with the most significant credit card loan portfolios in the U.S.

The two companies are mulling over whether to offer the new card products at this stage. But should they move forward, some issuers may be wondering whether adding a card with a 10% interest rate to a product lineup that features cards with higher rates will be enough to appease politicians.

Bank of America and Citibank have two of the largest credit card loan portfolios in the U.S.

Lawmakers including Elizabeth Warren (D-MA) also support setting a cap on credit card interest rates.

“I spoke with President Trump last week and told him that Congress could pass legislation to cap credit card rates if he would fight for it,” Warren wrote in a recent letter to Russ Vought, Acting Director of the Consumer Financial Protection Bureau.

Credit card issuers that aren’t excited about politicians joining forces to try to influence changes to card programs may have found a solution to their problems in the plans of Bank of America and Citigroup. 

And that’s especially true if adding a credit card with a 10% rate cap to their offerings will put issuers in a position to continue offering cards with higher rates. 

The average interest rate on credit cards is approximately 22%, according to a new report in The Wall Street Journal. If credit card companies must slash the card rates to less than half of the current average rate, it could lead to an economic crisis for many of them.

Michael Miller, Equity Analyst at financial services firm Morningstar, said a 10% rate cap would erase a substantial amount of earnings in the credit card industry, according to The New York Times.

“The lending model just doesn’t work in terms of mass-market credit cards at a 10% cap on interest rates,” Miller said.

If credit card issuers are required to offer all their cards with a 10% interest rate cap, then issuers will likely have to change other components of the card programs they offer as well.

Currently, issuers can use the revenue they earn from interest rate charges to pay for popular benefits, including introductory offers and rewards programs. But many issuers may reduce the benefits that come with cards if they lose a significant portion of interest revenue they earn today.

As a result, they may see cardholders change their purchasing behavior and reach for other payment options such as BNPL products more frequently.

A 10% cap on credit card interest rates would constitute a drop of more than 50% from where average rates currently sit.

The fact that issuers could face negative effects after implementing a cap on card interest rates likely means they won’t be in a hurry to develop new products with a cap if they don’t have to.

But if Bank of America and Citigroup voluntarily move forward with offering cards with 10% rate caps, they may motivate other issuers to take similar steps with their card programs.

And if enough issuers follow the lead of the two banks, then credit card companies may be able to keep their current card lineup largely intact without amending the rates on those products.

Details regarding Bank of America and Citigroup’s potential new cards aren’t available at this time, but they would likely look very different from what many consumers expect to see from these companies.

“With a 10% interest rate, the new cards from Bank of America and Citigroup would appeal to consumers who tend to carry a balance, although the banks likely wouldn’t be able to offer the extensive rewards or high limits that cards with higher APRs can offer,” the authors of the Bloomberg story wrote.

Trump’s call for a 10% cap on card rates has caused concern among banks over lost revenue and the ability to serve different customer segments. 

But issuers have other levers they can pull in the face of a 10% cap that could protect their businesses from losses. A recent report from PaymentsJournal, written by Brian Riley, Director of Credit Advisory Services and Co-Head of Payments at Javelin Strategy & Research, shines a light on a few of those levers.

One move issuers could opt for involves minimum payments. Minimum payments allow issuers to collect on a fraction of a cardholder’s outstanding balance each month. 

Riley writes that, in the U.S., the minimum payment due for many cardholders each month is roughly equal to 2.7% of their outstanding balance. But in India, the minimum payment due is closer to 5%. All else being equal, cardholders who make larger minimum payments each month will have less of their balances subject to incurring interest charges.

“However, expect a spike in delinquencies as households face less available credit and higher payment rates,” Riley says.

Moving away from lending to people with lower credit scores can allow an issuer to shield itself from risk.

Issuers could also stop lending to individuals who have credit scores under 740 to keep risks in control. Another consideration for card issuers is to add a transaction fee for borrowing, creating another source of income should revenue from interest rate charges decline.

The action items from Riley may seem drastic, and they would require bank lobbying and influence to become a reality, he noted. But his points highlight just how severely a 10% cap could alter the credit card ecosystem.

In the end, voluntarily offering cards with 10% caps — as Bank of America and Citigroup are considering doing — may be the best approach for issuers wanting to preserve as much as the current state of affairs as they can.

“Credit card lenders have a responsibility to ensure lending is safe and sound to protect their investors and balance sheets,” Riley said. “Lending into credit score ranges that will result in losses is bad business, and financial markets will not accept operational losses, even if executive orders cause them.”