Interest-Rate Caps Aren’t the Solution to Our Credit Card Woes

Americans have just set yet another record — but it isn’t one to celebrate.

Personal household debt has reached an unprecedented $18.6 trillion, according to a recent report from the Federal Reserve Bank of New York. Of particular concern is the $1.23 trillion in revolving debt, primarily from credit card balances, which continues to climb.

The rise in credit card debt is a symptom of broader economic strains. Increased reliance on credit has become an unfortunate necessity for many in an environment of thin household savings, stagnant real wages, and stubborn inflation. That reliance will only grow this holiday season.

Americans have turned to credit to compensate for sluggish wage growth for decades. Credit cards and new financial technologies made that easily accessible, and ultra-low interest rates made borrowing cheap.

However, the era of low borrowing costs has come to an abrupt halt under a more aggressive Fed. Interest rates are now at generational highs, and the cost of maintaining revolving balances is becoming increasingly burdensome.

According to Bankrate, the average retail credit card annual percentage rate has surpassed 30%, one of the highest levels since it began tracking the rate 40 years ago. Consequently, the average American household is now paying more to sustain its standard of living.

This situation transcends personal finance. It is a stark warning about the structural weaknesses undermining the U.S. consumer economy — weaknesses that policymakers are grappling with yet may inadvertently exacerbate.

Take, for instance, the proposal from Senators Josh Hawley (R, Mo.) and Bernie Sanders (I, Vt.) this year to cap credit card interest rates at 10% — lower than any rate seen since 1994.

Their rationale is emotionally compelling: If Americans are overwhelmed by credit card debt, surely making that debt cheaper is the solution.

But that isn’t how credit markets function. An arbitrary cap on interest rates wouldn’t magically render lending safer. Instead, it would compel lenders to restrict credit access to only the most credit-worthy individuals.

Millions of Americans with limited credit histories or lower credit scores could find their credit cards canceled, their spending limits slashed, or their credit card applications turned down entirely.

When Illinois implemented a similar interest rate cap in 2021, it led to a 38% reduction in loans to subprime borrowers within six months. That diminished their access to credit and worsened their financial situations.

The World Bank observed similar outcomes in other countries, including Cambodia, Kenya, and the U.K. It found that interest rate caps often produced unintended consequences, such as substantially slowed credit growth and higher usage fees. Congress must heed these lessons and avoid repeating this mistake.

The U.S. economy’s strength heavily hinges on the resilience of the American consumer. For now, consumer spending remains surprisingly robust. However, the record high in household debt signals a cautionary tale: Consumers can prop up the economy until they can’t.

Policymakers must steer clear of legislative proposals that could artificially accelerate a reduction in consumer spending.

The real solution lies in returning to fundamentals: adopting pro-growth tax policies, controlling inflation, exercising regulatory restraint, and enacting initiatives that reward saving and investment rather than punishing them. These are the mechanisms that can bolster household balance sheets.

Instead of limiting Americans’ access to credit, Congress should focus on fostering an economy that reduces the need for excessive borrowing in the first place. Here’s hoping Washington recognizes this imperative.

Agree/Disagree with the author(s)? Let them know in the comments below and be heard by 10’s of thousands of CDN readers each day!