Credit Card Rate Cap Could Limit Access to Credit

A new analysis from Unleash Prosperity warns that capping credit card interest rates at 10% could significantly reduce access to credit for more than 100 million American cardholders. The proposal, supported by some lawmakers from both parties and previously by the Trump administration, is intended to improve affordability for consumers.

How a Rate Cap Functions as Price Control

Economists at Unleash Prosperity argue that imposing interest rate caps would function as price controls in a competitive market. Steve Moore, co-founder of Unleash Prosperity and a former Trump administration economist, explained, “What’s going to happen if you put these interest rate caps on is you’re going to have fewer Americans with either lower incomes or lower credit scores who will have access to credit cards and that will make them worse off, not better off.”

Impact on Consumers and Affordability

Moore further stated that while affordability is a key concern, a rate cap could ironically decrease the number of Americans with access to credit. The report highlights that a 10% cap would disproportionately affect those with lower credit scores, potentially eliminating access for subprime borrowers.

Widespread Impact Across Credit Ratings

The analysis indicates that the majority of cardholders would be affected. A survey by the American Bankers Association in January found that 74% to 85% of open credit card accounts – between 137 million and 159 million cardholders – could be closed or have credit lines reduced under a 10% cap.

Impact on Prime and Super-Prime Borrowers

Even borrowers with high credit ratings would feel the effects. Between 71% and 84% of prime borrowers could lose access or see reduced credit lines. Super-prime borrowers, with scores above 780, currently face average rates of 13% to 21% and would also be impacted.

Potential Consequences: Rewards and Alternative Loans

A 10% cap could lead to the curtailment or elimination of credit card rewards programs. Furthermore, Moore warned that the cap could push consumers towards more expensive alternatives like payday loans, which often carry APRs near 400%. He stated, “The alternative to paying a high interest rate on a credit card can be even worse for people.”

The Role of Financial Literacy

“We need maybe more financial literacy in this country because you are going to pay a very hefty interest rate if you don’t pay your credit card on time and the rates are high, but that’s because you’re not supposed to borrow on your credit card, and a lot of people do that and that’s how they get into financial trouble,” Moore added.

Credit Cards and the Economy

Moore emphasized the importance of credit cards in the U.S. economy, noting their widespread use and increasing transaction volume. He cautioned against disrupting a system that currently benefits consumers, merchants, and banks alike. “It’s a very convenient way for people to pay for things, it’s good for merchants, it’s good for customers, it’s good for banks – let’s not interfere with a system that’s working.”

Impact of Different Cap Levels

The analysis also examined other proposed cap levels. A 20% cap would affect approximately 70% to 75% of all borrowers, or around 129 million to 140 million cardholders.