Washington is currently gripped by a fervor to lower the cost of credit. From the President’s proposal to cap credit card interest rates at 10% to the recent legislation introduced in the Senate to cap late fees, the legislative intent is clear: protect consumers from high costs.
On the surface, these measures sound like the ultimate act of consumer protection. For millions of Americans staring down double-digit APRs and penalty fees, they feel like a long-overdue lifeline.
But in the world of consumer finance, the distance between a good intention and a disastrous outcome is often measured in unintended consequences. If implemented without extreme caution, this growing suite of price controls covering both rates and fees will not save struggling borrowers. Instead, it threatens to trigger a catastrophic contraction of credit that will drive millions into a cashflow management crisis they are ill-equipped to handle.
The basic laws of economics are stubborn things. Lenders price their products based on risk. When you artificially cap the return on a product (via interest rate caps) or remove the mechanism to deter default (via late fee caps), lenders do not simply accept the higher risk. They stop lending to anyone deemed "risky".
Industry projections regarding the rate cap suggested that to make the math work, banks would need to restrict lending primarily to consumers with credit scores of 740 or higher. When you add restrictions on late fees to the equation, that credit box shrinks even further. That single shift would effectively lock nearly half of the U.S. population out of the traditional unsecured credit market.
The tragedy is that the people who will be cut off are the exact people these proposals claim to help.
Recent data indicates that approximately 43 million Americans rely on credit cards not for luxury vacations, but as a survival tool to bridge the gap between their paycheck and their expenses. They use credit to buy groceries, keep the lights on, or cover an unexpected car repair. For these "gap fillers," high interest and fees are a burden, but access is a necessity.
If these caps are enacted, that access vanishes. A family relying on a credit card to buy food in the final week of the month won't be celebrating a lower interest rate or a capped fee; they will be facing a declined transaction at the checkout counter.
This will trigger a massive, immediate demand for alternative solutions. The first stop for many will be the nonprofit credit counseling sector.
For 75 years, the National Foundation for Credit Counseling (NFCC) has served as "America’s Financial Coach," often acting as the nation’s financial emergency room. But no emergency room is built to handle a casualty event that involves 115 million Americans simultaneously losing their financial footing. A sudden credit crunch would unleash a historic surge in demand that could overwhelm the capacity of legitimate nonprofit agencies.
When the trusted path is clogged, consumers often turn to options that may not be in their best interest. Desperate borrowers may migrate toward fee-based debt settlement products that often lack a rigorous determination of suitability. Without an objective assessment of their full financial picture, consumers risk enrolling in programs that are not the right fit, potentially leaving them in a worse position than where they started. Others will be pushed prematurely into bankruptcy courts, using a "nuclear option" for financial problems that could have been managed with counseling and a simple plan, rather than a sledgehammer.
We all agree that credit should be affordable. But affordability cannot come at the cost of accessibility.
The solution to America’s debt crisis isn't to destroy the credit ladder; it’s to help people climb it. That means supporting proven mechanisms like Debt Management Plans (DMPs), which already lower interest rates to 10% or less for those in hardship, but do so in a way that preserves the lending ecosystem.
We must be careful not to mistake a slogan for a solution. A 10% cap or a ban on fees looks good on a bumper sticker, but if it leaves millions of families without a way to buy groceries, it will be a failure of historic proportions.
