By Thomas Rosenkoetter
ABA Viewpoint
In 2023, 82 percent of Americans held at least one credit card, making credit cards one of the most reliable and popular financial tools used by consumers. It’s not hard to see why: credit cards provide a seamless way for consumers to complete transactions, access affordable credit on demand virtually anywhere in the world, and reap the benefits of rewards programs.
Despite the popularity and accessibility of credit cards, a small group of policymakers continue to pursue misguided proposals to cap interest rates. The most recent example is S. 381, co-sponsored by Senators Bernie Sanders (I-Vt.) and Josh Hawley (R-Mo.), which would cap credit card annual percentage rates at 10%.
While populist lawmakers have long favored price controls, academic research and actual experience leave little doubt about the consequences of these policies: an interest rate cap would fundamentally alter the credit card ecosystem and leave consumers worse off — including the very population this policy claims to benefit.
Rate caps mean customers lose their cards
As the Wall Street Journal editorial board recently argued, a cap on credit card interest rates is a price control. Price controls lead to market shortages and raise other costs to compensate for the losses they create. According to the Washington Post editorial board, a cap on interest rates would reduce access to credit, particularly among borrowers whom card issuers consider to be higher-risk based on their payment history. Although a small share of cardholders with good credit scores who revolve a monthly balance may benefit from a lower interest rate, these same cardholders are likely to see those benefits partially, if not entirely offset, by other changes to their credit card accounts, including higher fees, lower credit lines and the loss of rewards or other card benefits. Other cardholders would lose credit access entirely, including those who depend on credit cards for short-term financing. Meanwhile, card issuers would likely tighten credit standards for new accounts, thereby depriving many would-be cardholders of the chance to build credit.
The negative effects of rate caps are well known. For example:
- After a rate cap was imposed in Illinois, credit access for unsecured installment loans fell and the financial well-being of higher-risk borrowers worsened. (Source)
- A similar rate cap in Oregon was responsible for harming, not helping, consumers on average, and caused deterioration in the overall financial condition of Oregon households. (Source)
- In the United Kingdom, a rate cap on high-cost, short-term loans caused many families to lose access to loans, with those affected likely to be young, unemployed and poor. (Source)
- And in Chile, a rate cap resulted in more than 80 percent of consumers being made worse off, including 200,000 families that were cut out of the credit market entirely, with young, poor and less-educated families bearing the brunt of the burden. (Source, source)
The American Bankers Association has long maintained that credit card interest rate caps are harmful to consumers. An ABA analysis conducted in 2020 found that if a 15 percent rate cap were enacted, nearly 95 percent of subprime borrowers would be at risk of losing access to credit cards — equivalent to 65 million accounts. The harm for credit access would be even more pronounced today given that monetary policy has driven interest rates significantly higher than they were five years ago. A 10 percent cap would have truly devastating effects on the U.S. credit card market and decimate credit access across the country.
Rate caps hurt everyone
No one will be immune from a rate cap’s distortionary effects. In response to a rate cap, issuers may be forced to increase annual fees and introduce or raise monthly maintenance fees to ensure their loan portfolios are financially sound. These fees are likely to apply to all cardholders, irrespective of income, risk, or whether they revolve a balance or pay their bill in full each month. Credit lines may also be reduced — in some cases, leaving little if any available credit for new purchase activity.
In addition to these effects, credit card rewards and other cardholder benefits would be scaled back significantly. This will prove to be extraordinarily unpopular among consumers. According to a recent ABA survey, 88% of cardholders say they value their credit card rewards program, and by a more than 2-to-1 margin (63% vs. 24%), consumers say they would be disappointed to lose credit card rewards such as cash back, points, travel miles, and discounts due to government regulatory changes.
Notably, some rate cap proposals (including S. 381) also limit issuers’ ability to adjust fees or other pricing strategies. Hamstringing banks’ ability to price their products competitively will make it even more difficult, if not impossible, for banks to issue credit to consumers who need it most. If bills like S.381 become law, the unfortunate reality is that tens of millions of consumers will no longer have access to credit cards and the convenience and security benefits they provide.
Reduced credit access hurts vulnerable borrowers the most
So, what happens to current cardholders who would no longer have access to credit cards? A credit card can be a critical source of emergency funds in times of need, such as when faced with an unexpected healthcare bill or an expensive car or home appliance repair. Without a credit card, consumers would be forced to turn to alternative sources of funding to handle these financial disruptions, such as payday lenders or other less-regulated providers of short-term credit. Not only would consumers receive inferior service, but many would also end up paying more for credit as these non-bank entities typically charge much higher fees and interest rates than traditional credit card issuers. While the lucky few might have a rich relative who can lend a helping hand, most will be faced with a difficult choice — and may find themselves at a pawnshop (or worse) to come up with the necessary money.
The research is clear: interest rate caps are harmful to consumers. Laws that prevent lenders from charging a sustainable rate of return will lead to less lending, plain and simple. Studies of previously failed rate caps demonstrate the tangible, damaging effects these policies have on consumers, particularly those already in vulnerable financial positions. Many existing cardholders will lose access to credit, and those that don’t will likely face higher fees, lower credit lines and reduced rewards. Capping interest rates is a step backward for the American economy and consumers. To protect affordable and reliable access to credit, we must let market forces, not politics, determine interest rates.
Thomas Rosenkoetter is the executive director of ABA’s Card Policy Council.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
