The president’s recent demand that credit card companies reduce their interest rates to ten percent for 2026, as well as his endorsement of the Credit Card Competition Act, legislation that would indirectly cap the interchange fees on credit cards, has been hailed by activists as a victory for millions of Americans struggling with consumer debt and frustrated by high prices.
However, there is little reason to think that either of these actions will benefit middle-class consumers. The most significant outcome of these actions would be a steep reduction in the number of people in this cohort to obtain credit cards and compromise card security for those who might still retain them. The rationale for these steps is that the status quo results in working and middle class households paying a lot of interest.
Indraneel Chakraborty, an economist at the University of Miami, found that it costs to provide a credit card than people assume: The cost of running a payment network, investing in fraud prevention and data security, and indemnifying people for any losses due to theft or fraud comes close to the 1.5 percent that constitutes the typical interchange fee. The bulk of the profits earned by credit card issuers come from interest payments. If these are capped at 10 percent, the credit card users who are only marginally profitable today--namely, people with relatively poor credit--become an albatross for banks, costing much more to service than the revenue they generate. Consequently, banks will cease providing them credit cards. Estimates indicate this could mean more than 100 million Americans losing access to basic credit, which could approach 80 percent in some states.
This cohort will be forced to obtain costlier credit such as payday loans or pawn shops, an alternative no one would consider to be optimal.
Similarly, an interchange fee cap via routing mandates would also limit access to credit for many middle and working class households. A study by Chris Richardson, a former FDIC economist, found that when the Dodd-Frank Act capped the interchange fee for debit cards, millions of Americans had their banks stop providing them with them. This move was somewhat assuaged because many of these people were able to obtain credit cards in lieu of debit cards, but this time around many won’t have any alternative.
Richardson also found no evidence that retail prices fell by any significant amount when the debit card fee cap went into effect, which belies the notion that credit card fees increase retail prices. The Federal Reserve recently reported that the fraud rate on debit cards has increased by 125 percent since these regulations were enacted. A similar spike in credit fraud would be catastrophic for the system.
It is becoming increasingly difficult to function in society without having a credit card: Purchasing goods and services online is almost impossible without a card, travel becomes logistically complex, and an increasing number of brick-and-mortar stores are eschewing cash.
Capping interest rates and interchange fees will result in millions of Americans becoming unable to get a credit card, and these would be the very people who are supposed to benefit from these actions.
