02/25/2025
Impact of a 10-percent Cap
Based on data from the Federal Reserve dating back to 1994, credit card interest rates have never dipped below 10 percent. Capping credit card interest rates would restrict the supply of credit and effectively debank millions of customers, most of whom are already among the most financially constrained. Data from the CFPB found that only super-prime credit card borrowers had APRs below the proposed 10-percent cap. The credit crunch would likely push customers to riskier, and often more expensive, forms of credit outside the traditional banking system.
In a letter submitted to Senators Sanders and Hawley, a coalition representing credit unions, community banks, and large and small financial institutions warned that an interest rate cap would likely restrict the supply of credit and drive consumers to less regulated credit providers, including pawn shops, auto title lenders, loan sharks, and payday loan companies. They noted, for example, that “payday lenders in Missouri charge annual interest rates of more than 300 percent,” far above the 22.8-percent APR for credit card accounts assessed interest. The letter cited Federal Reserve Board research that measured the effects of an all-in interest rate cap, which includes the APR and any associated fees, of 36 percent imposed by the state of Illinois and found that the “cap decreased the number of loans to subprime borrowers by 38 percent.” Furthermore, the same study found that the cap led to an increase of loans to prime borrowers by 16 percent. This study illustrates that the most financially vulnerable would bear the most harm.
Rewards programs would also likely be affected by an interest rate cap. These programs are, in part, paid for by increased APRs, and a cap could put these perks at risk. Previous efforts to restrict revenue sources from payment providers caused rewards programs to disappear. In 2011, Congress passed the Durbin Amendment to the Dodd-Frank Act which capped interchange fees on debit card transactions. In response, rewards programs for debit card usage collapsed. Analysis from the Kellogg School of Management at Northwestern University found that the “loss of debit-card rewards led to a 30 percent decline in debit-card payment volumes and a corresponding increase in credit-card payment volumes.” In other words, according to the report, it was more difficult for debit cards to compete with credit cards on rewards. It is possible that a rate cap of 10 percent would lead to a similar outcome. Rewards programs would likely be limited, or even eliminated, if a key source of revenue funding them is restricted. Conversely, if an interest rate cap becomes law, it is likely that the lost revenue would be replaced with higher fees. This would burden all credit card users rather than just those assessed interest on unpaid balances.
The probable credit crunch and subsequent debanking of millions could lead to a negative macroeconomic shock. The reduction in the supply of credit could hamper consumer spending, which is more than two-thirds of gross domestic product.
Conclusion
A government-dictated price for credit card borrowing, specifically one below any historical market-determined price, would significantly reduce the supply of credit and likely debank millions of customers. The credit crunch would push consumers – often the most financially vulnerable – to other, and often far costlier, credit providers outside the traditional banking system. In turn, banks would likely reduce rewards programs and other card benefits, including fraud protection, while replacing lost interest revenue with more fees to be paid by all credit card users.
