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Amid surging credit card interest rates and rising delinquencies, a bill with bipartisan support would cap rates at 10%, about half the current average, for five years.
The legislation would dramatically lower card rates, which average 21.5%. Even so, industry experts say the legislation could both help and hinder consumers.
The bill’s sponsors, Sens. Bernie Sanders, I-Vt., and Josh Hawley, R-Mo., chose the 10% target for a reason: On the 2024 campaign trail, President Donald Trump vowed to cap card rates at “around 10%,” at least temporarily, “while working Americans catch up.”
Trump pledged a 10% cap on card rates. Will he follow through?
Now, the two senators want to hold the president to his pledge.
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“Working Americans are drowning in record credit card debt while the biggest credit card issuers get richer and richer by hiking their interest rates to the moon,” Hawley said in a statement. “Capping credit card interest rates at 10%, just like President Trump campaigned on, is a simple way to provide meaningful relief to working people.”
History suggests the bill isn’t likely to pass. Hawley proposed a more modest cap on card rates, 18%, in 2023. That measure died. Bank industry leaders predict Congress will not warm to this one.
“I know that they understand how problematic this is, and we think there would be strong resistance to it,” said Lindsey Johnson, CEO of the Consumer Bankers Association.
Industry leaders sent a letter to the two senators in opposition to the legislation.
“This bill would eliminate access to credit cards for millions of consumers and drive them to sources of credit which are far more costly and less regulated,” they wrote.
If Congress capped interest rates, would credit cards go away?
Credit card companies take a risk when they extend credit to a consumer with shaky credit. Those customers often pay the highest rates. Card companies make money on the interest. The revenue also protects them against losses to consumers who don’t pay the money back.
Default rates on credit cards top 3%, the highest level since 2011, when the nation was emerging from the Great Recession. Defaults spell losses for card companies.
If Congress capped rates at 10%, according to some industry observers, card companies would probably stop approving credit cards for anyone whose credit history is spotty or short. That might mean millions of lower-income, financially fragile Americans could no longer use credit cards, the analysts said. Young consumers, entering the workforce and trying to establish a credit history, might not have access to credit.
“The truth is, a 10% cap would be really, really restrictive,” said Ted Rossman, senior industry analyst at Bankrate, the personal finance site. “Frankly, it just wouldn’t be profitable for card issuers.”
High card rates and rising delinquencies operate in a sort of vicious cycle, Rossman and others say. Rising rates drive some customers to stop making payments. Card companies cut their losses by raising rates.
If the card companies could not charge high rates, analysts say, they would stop issuing cards to risky customers.
“Folks that are on the higher side of the risk spectrum, they’re going to be denied outright. And that’s where you get into a big problem,” said Nicholas Anthony, a policy analyst at Cato Institute, the libertarian think tank. “The people who need it most are effectively cut out of the system.”
If the 10% cap became law, “there may be fewer opportunities for consumers across the credit spectrum to get credit cards,” said John Cabell, managing director, payments intelligence at J.D. Power, the consumer analytics firm.
Without credit cards, borrowers might seek worse options
With credit cards off the table, consumers might seek other forms of credit, some of them potentially worse.
“I think a lot of people would gravitate to ‘buy now, pay later,’” Rossman said, referring to a kind of short-term borrowing that allows consumers to pay over time. The product has surged in popularity, but it can lead fragile borrowers to take on more debt than they can afford.
Other consumers could turn to payday loans. A payday loan is typically a short-term, high-interest loan that comes due on your next payday. Interest and fees can push the effective cost past the borrowed amount.
Critics point out that the card industry has made these worst-case arguments before. The industry predicted unintended consequences from the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which limited punitive fees and required card issuers to alert customers before hiking rates, among other reforms.
Subsequent analysis found the 2009 law saved consumers money, and access to credit expanded.
“You just have to be extremely skeptical about any industry lobbyist or apologist who says that any regulation leads to a loss of access to credit,” said Carter Dougherty, communications director at Americans for Financial Reform, a progressive advocacy group.
While a 10% cap might not be realistic, many industry observers decry spiraling interest rates, which now routinely top 30% on store cards. Meanwhile, card companies charge record-high margins, effectively boosting their profits.
What about an interest rate cap of 20% or 30%?
The 10% cap proposal could serve as an opening salvo, seeding debate on whether Congress would consider capping card rates at a higher figure.
Federal credit unions cannot charge more than 18% interest on a credit card. The Military Lending Act caps card rates at 36% for active-duty service members and covered dependents.
“You could probably imagine an upward cap of, let’s say, no more than 30%” for the commercial card industry, said Cabell of J.D. Power.
But any cap, he said, could have negative consequences for consumers.
“It has to be noted that these are riskier financial products,” he said. “There’s no collateral. There’s a loan being extended to a consumer on good faith, which comes with a cost.”
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