Affordability is currently a top concern among Americans, particularly among women, who shoulder the financial decisions in the majority of homes. In response, lawmakers are floating various proposals to ease financial strain.
The Federal Reserve Bank of New York’s recent report of a “record-high” $1.8 trillion total credit card burden stoked enthusiasm for interest rate caps as one ostensible solution.
Interest rates have long been an enticing target for legislators. Absent context, forcing them down might seem a painless way to slash household bills. A look at the complete picture, however, shows this to be not only misguided, but harmful to the most financially vulnerable.
Inflation Fact-Check First
When adjusted for inflation, card balances have dipped slightly over the past decade. An analysis performed by the Consumer Bankers Association shows the non-inflation adjusted average credit card balance per cardholder increased by $1,215 between 2014 and 2024, but the real value decreased by $73.
Furthermore, the U.S. population increased by 21 million over the last decade, and credit cards increasingly replaced outdated means of financing debt. More cardholders creates a higher total debt number, not a higher balance per person.
Address The Real Issue
Almost three-fourths of credit card spending is on everyday essentials, so the costs of necessities must come down to significantly lessen debt spending. The real crisis is that card holders are going into debt to buy food and repair their cars.
A New York Times poll found women were most concerned about housing costs, followed by health care, utilities, food, education, retirement, and transportation. Credit card interest was not even listed, possibly because the average interest on the typical $6,000 balance is $107 per month (compared to $2,186 for housing, $517 for healthcare). Lowering interest rates would have less impact on household spending compared to bigger-ticket items.
Cutting overall expenditures requires cutting prices of unavoidable purchases. Unfortunately, although measures intended to do just that become law on a regular basis, they tend to exacerbate the problem. Rent control, for example, leaves more people unhoused and raises prices in nearby areas.
The very necessities listed above are commonly regulated in ways that stifle competition, increase costs, and remove less-expensive options. Policymakers of all stripes have been promising to cut costly regulations for 50 years, but little real progress has been made. Regulators must finally get out of the way of healthy competition and innovation.
Recognize Economic Reality
Legally restricting credit card interest rates has one guaranteed effect: lessening the credit available to those who need it most. As Urban Institute notes, capping rates at the 10% figure suggested by multiple lawmakers puts credit access for 164 million Americans at risk.
This is backed not only by theory and common sense, but by history. Despite persistent hopes to the contrary, interest restrictions consistently produce the same negative outcome.
Credit is a commodity like any other. Card companies offer it at the price they deem ideal for business, and the decision is made after exhaustive analysis of risk, benefit, and competitive pricing. The most vulnerable are at highest risk of default, so companies charge them the highest interest to cover the increased risk.
A business will not sell its product for a price its analysts find too low. Although the government can mandate price ceilings, it cannot force a company to sell a product or even to remain in the market. A credit card company simply stops offering high-risk loans or leaves the industry entirely.
Address Real Problems, With Real Solutions
Despite their futility, interest rate cap bills continue to pop up whenever prices do. Contrary to real experience and economic principles, the idea never dies.
Once again, legislators must decide if they will choose a comforting lie or a difficult truth to guide their votes on this issue.