Last week, Senator Bernie Sanders and Josh Hawley introduced legislation that would cap the interest rate on credit card debt at just ten percent, a far cry from the 24 percent that is the norm for most credit cards.
The reason they give for this is that working class households are disproportionately burdened by high credit card interest rates, as they are more likely to incur debt. However, such a cap would likely result in millions of middle- and working-class households finding it impossible to obtain a credit card, and they will pay a price in finding it more difficult to buy goods and services or paying more up front just to have a card.
Credit card providers incur a variety of costs: They spend billions of dollars to reduce fraud each year and despite that they still are left with enormous fraud costs that will exceed $12 billion in 2025. Credit card issuers also have to deal with customers defaulting on their debt, which in 2024 was in excess of $60 billion. Low- and middle-income households are both more likely to be victims of fraud and default on credit card debt, making them more costly for banks to service.
While credit card issuers receive other fees, they essentially make all of their money on interest (roughly 83%): Not only do most people--especially low-income households--pay almost nothing for their credit cards but they also get valuable benefits via their credit card rewards points for using their cards. Interest rate fees also cross-subsidize other bank offerings, such as free checking accounts.
If the government caps interest rates on credit cards two things will happen: First, millions of low-income households who are marginally profitable for issuers will find it impossible to obtain a credit card. Of course, today it is vastly more difficult to function without a credit card than it was even a decade ago: Buying almost anything online would become much more complicated--if not impossible--and travel would be more difficult as well. Even day-to-day transactions will be problematic as retail establishments increasingly eschew cash.
And moving from a credit card to a debit card may not be an option for many of these households: When Congress passed legislation that capped the interchange fee for debit cards in 2010, millions of debit card holders lost their cards because it was no longer cost-effective for banks to keep them as customers.
The other response to lower interest rates would be the diminution of other services that typically accompany credit cards. Free checking would almost invariably disappear, as would all rewards programs. While Sanders and Hawley are probably indifferent to the latter development--seeing these as mainly being a perk for wealthy households--research suggests that middle-class households are often more astute when it comes to obtaining and using credit cards that give them the most bang for the buck when it comes to collecting these rewards. Passing legislation that ends a widely popular program like credit card rewards and excusing it by insisting--falsely--that it only benefits the rich is not going to win over many allies.
There is no free lunch. The main outcome of a cap on the interest rates charged by credit card companies will be greatly reduced access to credit cards by working-class households. Given that previous legislation made it impossible for millions of families to have a debit card, it is as if the Democrats have forgotten their previous efforts to increase access to credit for all in their determination to reduce the profits of banks and credit card issuers.
