This Country Just Capped Credit Card APRs: Should We?

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Some people think the United States should cap the interest rates credit card companies are allowed to charge, but the prospect of maximum APRs doesn’t sit well with some lawmakers, not to mention the financial services industry. But banks here might want to take note: The United Arab Emirates, a place infamous for its sky-high interest rates that could hit 50% on an annualized basis, finally took action to curb its runaway APRs by capping them.

The U.A.E.’s Central Bank will set a limit of an 18% APR on credit card interest and prohibit banks from unilateral fee hikes on existing customers, English-language Emirates 24|7 reported. (Arabic-language newspaper Al Khaleej originally published this news, citing an unnamed source connected to the central bank.)

Currently, “typical” interest rates can climb as high as 36% in the U.A.E., considerably higher than the roughly 15% U.S. consumers are charged on average. The cap and limits on fee increases are supposed to kick in this month, according to sources.

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Interest rates in neighboring countries aren’t anywhere near this high; the U.A.E’.s banking industry blames the lack of a comprehensive credit bureau for the high APRs, saying that issuers have to charge everyone high interest as a risk premium.

The financial sector in many Middle Eastern countries follows Islamic Sharia principles, which prohibits lending with interest. Despite this, there is a fast-growing market of Sharia-compliant financial products, including credit cards. They’re structured differently than their Western counterparts, but cardholders still wind up paying more for the purchase price of an item if they choose to revolve a balance.

Emirates 24|7 also details other sketchy practices that have led to consumer complaints, such as insuring a credit account against default — and then charging the cardholder for the insurance. It also said at least one issuer implemented an “early repayment fee” that was the equivalent of the interest the cardholder would have to pay over the life of the loan if they kept paying it off in installments.

The central bank was prompted to act after growing complaints from customers about arbitrary fee increases and punishingly high interest rates. Many of the consumers who become trapped in a cycle of debt are immigrants who don’t understand how complicated — and draconian — these contracts can be, an investigation by the New York Times found. When these customers get in over their heads, they can be thrown in jail as punishment, although this doesn’t erase their debt.

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Obviously, American consumers don’t have it this tough, but many people still feel victimized by credit card companies. The CARD Act was created in 2009, but it deliberately left out a rate cap. Should the U.S. follow the U.A.E.’s lead and cap credit card APRs, too?