A new analysis finds that a 10% credit card interest rate cap would shrink access to credit, affecting well over 100 million American cardholders in the process.
Some Republican and Democratic lawmakers have expressed support for capping credit card interest rates at 10%, a measure that also received support from the Trump administration. Other proposals have centered on a higher cap of 15% or 20%.
An analysis by Unleash Prosperity warns that credit card interest rate caps would function as price controls on what is currently a highly competitive market, resulting in significant consequences for consumers and the economy.
“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,” Steve Moore, co-founder of Unleash Prosperity and a former Trump administration economist, told FOX Business.
“Obviously, the big issue right now for consumers is affordability, and so the politicians are looking for any way to reduce costs to consumers. But what we found in our study is that the interest rate cap would dramatically reduce the number of Americans who would have access to credit,” he said.
The report by economists at Unleash Prosperity noted there is evidence that the vast majority of cardholders would be affected by a 10% rate cap, based on research from the U.S. and internationally.
It noted a large survey of the credit market published by the American Bankers Association in January, which found that 74% to 85% of open credit card accounts would be closed or have credit lines reduced, affecting between 137 million and 159 million cardholders.
Unleash Prosperity’s analysis found that the adverse impact would be the worst among cardholders with lower credit ratings, with it universally affecting subprime borrowers and below, as financial institutions wouldn’t be able to cover lending costs due to the interest rate cap.
The analysis estimated that between 71% and 84% of prime borrowers would either lose access to credit cards altogether or have credit lines reduced under a 10% cap.
Super-prime borrowers, who have the highest credit ratings with scores above 780, would also be affected by a 10% rate cap or even a 15% rate cap, as they currently face an average interest rate between 13% to 18% for existing accounts and 17% to 21% for new accounts. One such impact would be that credit card rewards programs could be curtailed through less generous incentives, or such rewards programs could be eliminated altogether.
A 20% interest rate cap would affect about 70% to 75% of all borrowers, or roughly 129 million to 140 million cardholders.
“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 said.
Moore noted that an unintended consequence of credit card interest rate cap proposals is that it could force consumers who need funds to seek out payday loans, which have an average interest rate of near 400% APR.
“The kind of do-gooders in Washington say they’re going to do this to help people stay out of debt… They don’t want payday lenders, they want to make it harder for people to use credit cards,” Moore said. “Well, what are people going to do, go to a loan shark to get money in a hurry?”
“The alternative to paying a high interest rate on a credit card can be even worse for people,” he added.
Moore also said that credit cards play a significant role in how consumers engage in economic activity and that policymakers shouldn’t risk disrupting an important tool for consumers.
“Credit cards have become pretty ubiquitous in the U.S. and it’s by far the number one way people pay for transactions. The amount of money that people are spending on credit cards continues to escalate,” Moore said. “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.”
