Housing News

Will Cutting Interest Rates on Credit Cards Help More Americans Buy Homes—Or Make It Even Harder?

With housing affordability taking center stage ahead of the midterm elections, President Donald Trump’s administration has released about half a dozen proposals aimed at bringing housing costs down.

The president recently called on Congress to cap interest rates on credit cards at 10% for a year. The average rate currently hovers near 20%, according to Bankrate.

Trump said the cap could help homebuyers save for a down payment as lower rates would result in lower monthly credit card payments. But housing experts were quick to point out it could make it harder for many homebuyers to qualify for mortgages.

“One of the biggest barriers to saving for a down payment has been surging credit card debt,” Trump said at the World Economic Forum in Davos last week. “This will help millions of Americans save for home.”

However, the plan could be a double-edged sword for homebuyers.

“It could be helpful if structured in a well thought out way,” said Mosi Gatling, senior vice president of strategic growth and expansion at New American Funding. “But homebuyers need to take into account the pros and cons.”

Homebuyers with debt would be able to save money if interest rates were capped on their cards.

And lower monthly payments could also boost their debt-to-income (DTI) ratios. (Lenders look at how much debt borrowers have compared to how much they earn when deciding whether to give someone a loan.)

“It could positively affect your ability to qualify for a mortgage,” said Gatling.

However, Gatling pointed out this may not always be a good thing. Someone who bought a home while their credit card interest rates were lower may have trouble affording their mortgage payments once the rate on their credit card rises again.

“It could put them in a major bind,” Gatling said.

The American Banking Association estimates that 74% to 85% of open credit cards would either be closed or have the credit limits reduced if interest rates were capped at 10%.

The association, which represents the banking industry, also estimates that up to 159 million cardholders would not be able to use their accounts.

Borrowers who have an account closed or their credit limit reduced would likely see their credit scores go down. This would impact their ability to get a mortgage and would likely impact how low of a rate they could secure for their home loan.

That’s because when borrowers have less credit, their usage goes up. This affects credit scores.

“Closing credit cards would drop your credit score,” said Gatling. “People may not qualify for a mortgage.”

Additionally, if it becomes harder to get credit cards, it will be harder for people to build credit. This could make it more challenging for them to qualify for a mortgage when they’re ready to buy a home.

Currently, there are no laws requiring credit card companies to lower interest rates.

The president’s administration has also floated other housing proposals to make housing more affordable.

He has called for 50-year home loans and portable mortgages, banning Wall Street investors from buying single-family homes, allowing homebuyers to tap into their 401(k) accounts to fund their down payments, and directing Fannie Mae and Freddie Mac to buy $200 billion of mortgage bonds to bring down mortgage interest rates.

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