Proposed legislation to cap credit card interest rates at 10% would restrict credit to all borrowers – particularly high-risk and lower-income borrowers – and increase consumer costs through fees and loss of rewards, according to a policy analysis by the nonpartisan Consumer Choice Center, or CCC.
Sens. Josh Hawley (R-Mo.) and Bernie Sanders (I-Vt.) are the sponsors of the 10 Percent Credit Card Interest Rate Cap Act, which would impose an all-in annual percentage rate cap of 10% on credit cards. The American Bankers Association is among the many groups that have raised concerns about the bill, noting it would push consumers to far more costly and less regulated lenders.
In its analysis of the legislation, the CCC pointed to the experience of Illinois, which capped all borrowing and financing at 36% APR. That policy led to a dramatic decrease in loans to subprime borrowers. It also pointed to a Bank Policy Institute study that found at least 14 million U.S. families who carry revolving card balances would be directly harmed by having their access to credit reduced. In addition, CCC noted that many consumers take advantage of credit card rewards and benefits only made possible because lenders can cross-subsidize them with regulated, risk-based interest pricing.
“Both political and academic supporters of caps on interest rates claim to be looking out for the most vulnerable consumers,” according to the analysis. “However, they ignore solid evidence that interest rate ceilings lead to the denial of credit in the first place and harm those with modest incomes by curtailing the credit options available to them.”
Instead of capping credit card interest rates, the CCC’s paper recommends different solutions for policymakers to consider. For example, the paper states that promoting personalized repayment plans and expanding financial literacy programs in schools are better alternatives than government-mandated rate caps.
