Analysis: Credit Card Rate Caps Could Cut Access for Millions

A proposal to cap credit card interest rates might sound like a welcome relief for millions of households, but a new analysis warns it could have the opposite effect. According to a report by Unleash Prosperity Now, placing a legal limit on interest rates could unintentionally cut off access to credit for more than 100 million Americans, potentially harming the very consumers the policy aims to protect. This move, which functions as a price control, could reshape the credit landscape and disproportionately affect those with lower incomes or less-than-perfect credit.

The Wide-Reaching Impact of Proposed Rate Caps

Lawmakers have floated various proposals to limit how much interest credit card issuers can charge, with some suggesting a cap as low as 10%, while others aim for 15% or 20%. While lower rates seem beneficial on the surface, the economic reality is more complex.

According to a survey by the American Bankers Association cited in the analysis, a strict 10% interest rate cap would force banks to close or reduce the credit lines on a staggering 74% to 85% of all open credit card accounts. This would impact an estimated 137 million to 159 million cardholders. Even a more moderate 20% cap isn't without significant consequences, as it would still affect 70% to 75% of borrowers, or roughly 129 million to 140 million people.

Steve Moore, co-founder of Unleash Prosperity Now and a former Trump administration economist, cautioned that such a policy would ultimately make consumers "worse off, not better off" by severely limiting their financial options.

How Different Credit Tiers Would Be Affected

The impact of interest rate caps wouldn't be felt equally across all consumers. Instead, it would create the biggest hurdles for those who rely on credit the most.

• Subprime Borrowers: Consumers with lower credit scores would likely be the first to lose access. Lenders use higher interest rates to offset the increased risk of lending to this group. Under a strict cap, it would no longer be profitable for banks to serve these customers, effectively shutting them out of the mainstream credit system entirely.
• Prime Borrowers: The disruption would extend far beyond the subprime market. The analysis estimates that under a 10% cap, between 71% and 84% of prime borrowers—those with good credit—would either lose their cards or see their credit limits drastically reduced.
• Super-Prime Borrowers: Even consumers with the highest credit scores (above 780) would not be immune. Currently, average interest rates for this group range from 13% to 21%. A 10% cap would make many of these accounts unprofitable for issuers, threatening their availability.

A significant side effect could also be the end of an era for a popular consumer perk: credit card rewards. The revenue banks generate from interest helps fund valuable points, miles, and cash-back programs. With that income stream sharply curtailed, many of these programs could be significantly scaled back or eliminated altogether.

The Unintended Consequences for Consumers

When consumers lose access to a reliable financial tool like a credit card, they don't stop needing money for emergencies. Instead, they are often forced to turn to far riskier and more expensive options.

The report warns that without access to credit cards for an unexpected car repair or medical bill, many people could be pushed toward payday loans. These short-term loans are notorious for their predatory costs, with an average interest rate climbing to near 400% APR. As Steve Moore notes, the alternative to a relatively high credit card rate "can be even worse for people," pointing to the extreme risk of unregulated lenders or loan sharks.

Ultimately, the analysis suggests that credit cards are not designed for long-term borrowing but serve as a crucial tool for short-term liquidity and payment convenience. Improving financial literacy, rather than imposing price controls, may be a more effective way to help consumers manage their debt.

What This Means for Your Wallet

The debate over interest rate caps highlights a fundamental challenge: making credit affordable without restricting access. The Unleash Prosperity Now analysis argues that credit cards are a vital part of the modern economy, creating a system that is "good for merchants, it's good for customers, it's good for banks."

For consumers, the key takeaway is that well-intentioned policies can have complex and sometimes negative ripple effects. While high interest rates are a genuine concern, solutions that limit the availability of credit could force millions into even more precarious financial situations. As policymakers consider these changes, it's crucial to weigh the potential for harm against the intended benefits. To learn more about the economic arguments, you can find additional coverage from FOX Business.