Hawley and Sanders’s credit card caps will hurt the poor.
According to a new report from the New York Federal Reserve, Americans have accumulated over one trillion in credit card debt, an all-time high. It’s a record that would make financial advisor Dave Ramsey lose the remaining hair on his head, but even worse, the share of balances in serious delinquency climbed to a nearly financial-crash level of 7.1%. In other words, Americans are borrowing more and paying back less.
This alarming trend has naturally drawn the attention of politicians eager to offer a quick fix.
Unfortunately, the solution gaining bipartisan traction is a blanket cap on credit card interest rates. Like most political quick fixes, it is an economic prescription guaranteed to harm the very individuals it claims to protect.
The impulse to cap rates is rooted in a fundamental economic misunderstanding. It treats the interest rate as an arbitrary fee levied by greedy banks rather than the essential economic mechanism it is: the price of risk. This misguided philosophy is embodied in the legislation introduced by the populist duo of Senators Josh Hawley (R-MO) and Bernie Sanders (I-VT), which seeks to impose a nationwide cap on Annual Percentage Rates (APRs), sometimes as low as 10%.
Make no mistake: two politicians don’t know better than the marketplace and the law of supply and demand that governs it. The consequences of imposing a price ceiling on credit are not debatable. They are historically certain. Interest rates on credit cards are higher than on mortgages, for instance, because credit cards are unsecured debt. If a borrower defaults, the bank cannot seize collateral to cover the loss. The interest rate must therefore be high enough to reflect the expected default rate across the entire high-risk pool.
It’s wrongheaded. Faced with the possibility of a government-imposed price cap, credit card companies would of course respond as any company would. They will stop extending credit to those who will possibly not pay them back. Studies show that even a cap as high as 18% would put nearly 80% of subprime borrowers at risk of losing access to credit. In other words, the 10% cap proposed by the Hawley–Sanders alliance would have truly devastating effects for credit access, potentially eliminating millions of accounts.
The victims of this policy will not be the wealthy, who already qualify for prime rates; nor will they be the financially literate, who pay their balances in full. The victims will be the economically vulnerable, the working-class single mother needing a short-term buffer, the recent immigrant attempting to build a credit score, or the young person trying to establish his or her financial footing. For these individuals, the Hawley–Sanders policy will deliver not cheap credit, but no credit at all.
By cutting off access to mainstream credit cards, millions of consumers—especially those with lower incomes or less-than-perfect credit scores—will be forced toward the shadow banking sector. This includes unregulated online lenders and payday lenders, which typically charge fees and short-term rates that far exceed the 25% APR the current market offers. In other words, the policymakers’ good intentions turn into a disastrous push toward outright loan sharking and financial ruin.
And that’s not all. Even after restricting credit to the highest-risk borrowers, lenders would still need to cover the high operational costs of maintaining accounts and combating fraud. With their primary source of revenue capped, banks would have to offset losses by introducing or raising annual fees, late payment fees, and over-limit fees—costs that would hit all cardholders, regardless of their credit profile.
For most, access to even costly credit is far better than having no credit at all. It offers an essential lifeline for emergency repairs, medical bills, or short-term income shocks. By setting a cap, Congress is removing the thermometer rather than addressing the actual problem of financial distress, leaving the most vulnerable Americans without the only regulated, mainstream financial tool they rely on.
The key to reducing debt is through increasing accountability and free-market policies that deliver economic prosperity, not heavy-handed economic planning.
