Many of the worst policies have bipartisan support.
On January 9, President Trump announced on Truth Social that he was “calling for a one year cap on credit card interest rates of 10 percent” starting January 20.
When asked what the consequences would be if credit card companies didn’t comply, the president replied: “Then they are in violation of the law. Very severe things.” There is, in fact, no such law, but there are moves to change that.
A bill was introduced in the Senate last April by Sen. Bernie Sanders which “temporarily caps credit card interest rates at 10 percent.” On January 13, Rep. Maxine Waters threw her support behind President Trump’s proposal: “Let’s do it,” she said during a House Financial Services Committee hearing, “Let’s cap interest rates.”
Let’s not.
Prices are Not the Problem
All price controls are based on the idea that the price is the problem to be solved. It is not. It is merely the symptom of some underlying issue in supply and demand for whatever good, service, or asset is under discussion. This is the same for minimum wages – which are price floors – or caps on credit card fees, which are price ceilings, just like rent controls.
An interest rate is a price like any other. Specifically, it is the rental price of capital, and it is set by the supply of and demand for capital: where demand is high relative to supply, the price will be high, and where it is low, the price will be low, ceteris paribus.
If a market interest rate is high, reflecting high demand for capital relative to the supply of it, setting a legal maximum rate below it will neither expand the supply of nor reduce the demand for credit. Quite the opposite. If demand was high relative to supply at a rate of, say, 10 percent, it is only likely to increase if a legal maximum of 5 percent is introduced. On the other side, those supplying credit at 10 percent are likely to supply less of it at 5 percent.
Price controls, whether they are caps on credit card interest rates, rent controls, or minimum wages, only exacerbate the problems they are intended to solve because they treat the symptoms rather than the causes.
The Consequences of Credit Card Price Controls
If we know what a cap on credit card interest rates wouldn’t do, do we know what it would do?
A cap on credit card interest rates would, like any price ceiling, increase demand and reduce supply. It would prevent people who have to pay above the legal maximum rate to access credit from doing so.
Interest rates differ from most other prices — of shoes or haircuts — in that different people pay different amounts for the same thing: a $10,000 loan. One borrower might pay 8 percent interest, while another pays 14 percent or 20 percent, even though all receive the same $10,000 upfront.
These differences reflect, among other things, the riskiness of the loan. Someone with a good credit history or a decent amount of collateral will pay less to borrow a given amount over a given period than someone without these. The consequences of an interest rate cap will, then, be different for different people.
Someone whose credit history or collateral means that it makes sense to lend to them at a rate of, say, four percent, will still be able to borrow if the legal cap is set above that, at, say, 10 percent. But someone without this credit history or collateral and who it only makes sense to lend to at a rate of, say, 15 percent, will be excluded from the market for credit. These folks will not get access to cheaper credit by legislative fiat; they just won’t get access to credit at all.
If credit will dry up for riskier borrowers, it doesn’t follow that their demand for it will: they may still need it to meet unexpected costs, for example. And, frozen out of legitimate credit markets, they may turn to illegitimate ones. As economist Paul Samuelson wrote in 1989, interest rate caps “result in drying up legitimate funds to the poor who need it most and will send them into the hands of the illegal loan sharks.” It is precisely the lower-income borrowers these caps are intended to help who will be hit hardest by them.
The only alternative is that the cost of providing credit to these borrowers is recouped elsewhere through higher fees. As Iain Murray notes, this will be “either to merchants who will pass on their higher fees to consumers…or to the consumers in the cost of card fees. If consumers have to pay more in fees, that will almost certainly price some people out of the market.”
Once again, it is precisely the lower-income borrowers this measure is intended to help who will be hit hardest by it.
Several studies of similar state policies support this. “One study looked at the effect of the 36 percent interest rate cap in Illinois and found, as economic theory predicts, that both the availability of small-dollar loans and the status of consumers’ financial well-being had decreased in the two years after the enactment of the restriction,” Nicholas Anthony writes. “Most notably, the number of loans that were issued to the financially vulnerable fell by 44 percent in the six months after the rate cap was enacted.”
Another study in South Dakota found that the enactment of a 36 percent interest rate cap drove payday lenders out of business. A study by the Mercatus Center found that “Arkansas’s binding 17 percent interest rate cap imposes a substantial cost on the state’s residents, who drive to neighboring states to take out small-dollar installment loans.” Another study found, similarly, that “many small loans made to residents of border counties in North Carolina actually originate in South Carolina” as residents of the former travel to the latter to circumvent their home state’s interest rate cap. Indeed, in Georgia and North Carolina, where payday loans have been banned since 2004 and 2005 respectively, researchers found that “Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same.”
The Real Problems
This is not to deny that there are problems.
As Thomas Savidge noted in December 2024, “A recent survey of Americans shows that the average household’s credit card balance is $9,706, just $1,416 below the record high in 2008. In addition, 40 percent of households now rely on credit cards to pay bills.” With a 40-year high spike in inflation only slightly behind us, this isn’t surprising.
But the problems, in that case, are supply side ones of energy and housing, for example, which force prices up with excessive taxes, fees, and regulations, or of lax monetary policy. Once again, credit card interest rate caps are treating the symptom, not the problem. On the campaign trail, candidate Trump blasted Kamala Harris’ “Soviet-style” plans for price controls. He was right then, and is, like Bernie Sanders and Maxine Waters, wrong now.
