Opinion: A Credit Card Rate Cap Could Do More Harm Than Good

My husband is upset about the price of eggs. He eats them for breakfast almost every day and is very aware of the high prices he is paying. At first it was about inflation, but then rates came down. So now there’s a new reason – bird flu – but the reality is the same: Egg prices are too darn high.

Credit card customers are upset about extra sky-high interest rates. They went up as the Fed raised rates to curb inflation, and so shouldn’t they have come down as inflation eased? For the most part, they did not.

And so once again there is conversation about putting a ceiling on credit card interest rates.

There is an economic case for doing so. It could save Americans an astronomical amount of money on credit card debt. According to the Federal Reserve Bank of New York, credit card balances increased by more than 8% year over year and totaled over $1 trillion during 2024’s third quarter.

But consumers who are cheering the news that Senators Josh Hawley (R-MO) and Bernie Sanders (I-VT) recently introduced a bill to install a five-year limit of 10% may not realize the unintended consequences.

Limiting those rates will push credit card issuers to find places to make up that lost revenue. It could hit Americans where it really hurts: those beloved points and perks that often accompany popular cards.

We love our points. Cash back, rewards cards and travel/experience perks are so fun! Who doesn’t love checking out their balance and then getting to decide how to spend their “free” money?

While it is true that many Americans are in debt and paying those sky-high interest rates, millions of Americans use their credit cards responsibly, are able to pay their bills on time and don’t pay any interest or late fees.

Those consumers get the financial and experiential value of perks from credit card companies in the form of miles, points and other valuable perks like airline lounges and luxury “experiences.” Points have real tangible value and are even considered a marital asset in divorces!

We must remember that we have a market-driven economy. If the financial institutions that issue credit cards can no longer charge consumers who carry debt the interest rate that the market will bear, and that mitigates the risk issuers take on them, those perks, along with other services, may be at risk.

And let’s also not forget the reason WHY credit card interest rates are so much higher than, say, a mortgage rate or a car loan.

Credit card debt to subprime consumers carries a high risk for the credit card issuers because they are unsecured loans to riskier buyers. If a borrower defaults on a loan that is tied to their home or other large asset, the lender has something they can seize. While that is never ideal, that collateral matters.

Let’s also consider that in almost every lending situation, borrowers who are riskier pay higher rates to account for the bigger risk the lender is taking. That even applies to the U.S. government when it issues debt.

If there were a cap on how much interest credit card issuers could charge, they would look at their riskier buyers and do the math to figure out which ones still made sense to lend money to, and which ones simply weren’t worth the risk if the return was limited because of the caps on interest rates.

The end result? There is a good chance subprime consumers could have a much harder time getting credit cards, and some may not be able to access mainstream credit cards at all.

A cap on credit card interest could actually backfire, limiting access to credit for subprime customers.

They would potentially have to turn to other financing sources such as buy now pay later products and payday loans that charge even higher rates, putting even more debt pressure on consumers who can least afford it.

We need to protect consumers from unfair practices. But we also need to keep our financial institutions healthy and give them enough latitude to stay profitable so they can continue to finance and support the U.S. economy.