Originally published at realclearmarkets.com on February 11, 2025.
Price controls have a long and well-documented history of failure, yet policymakers continue to impose them with predictable results. President Donald Trump, Senators Bernie Sanders, and Josh Hawley propose a national cap on credit card interest rates, setting a hard limit at 10 percent. This policy, which appears on the surface to be a populist win for consumers, will ultimately harm the very people it claims to protect. Restricting the ability of financial institutions to price credit appropriately does not make borrowing cheaper. It makes credit more challenging to access, shifting costs and forcing consumers into worse financial situations.
State-level experiments with interest rate caps have already proven the consequences of this kind of interference. New Mexico passed a 36 percent cap on small-dollar loans in 2022, which was widely promoted as a way to protect borrowers from predatory lenders. Instead, it led to fewer loans being issued, higher costs for those who could still borrow, and an exodus of lenders from the state. The supply of credit shrank, forcing borrowers to seek alternatives such as “borrowing money from a friend,” loan sharks, or overdraft fees at banks. These alternatives often carried costs higher than the loans the legislation was intended to replace. The aftermath was worsened by the “solution.”
Credit cards are an essential financial tool for millions of Americans, particularly those who use them to smooth out expenses, access emergency funds, and build credit. The risk of default is a significant factor in how lenders set interest rates, and banks manage that risk by offering different products to different borrowers. Banks and credit card issuers do not simply accept the loss when a universal cap is imposed. They adjust by restricting credit to riskier borrowers, eliminating rewards programs, raising annual fees, and tightening qualification requirements. The result is fewer people with access to credit and higher costs across all consumers.
The populist rhetoric behind the rate cap proposal ignores these consequences. Sanders and Hawley frame the issue as one of fairness, claiming that banks profited unfairly at the expense of struggling Americans. The reality is more complicated. Interest rates reflect market forces and financial institutions already operate under strict regulations that limit abusive practices. If the government artificially restricts rates, banks will have no choice but to reduce their risk exposure, denying credit to those needing it most.
Trump’s embrace of this policy is particularly troubling. His first term saw a broad commitment to deregulation, removing barriers that allowed businesses to compete and innovate. This proposal runs counter to those principles. Capping interest rates at 10 percent is not a free-market reform; it is an interventionist policy that will lead to unintended consequences, much like the economic restrictions seen in progressive strongholds.
Some supporters of the proposal argue that credit unions already function under an 18 percent cap and continue to issue credit, so a 10 percent cap should be feasible for traditional banks. This comparison ignores the unique structure of credit unions, which are member-owned cooperatives with different incentives than for-profit banks. Credit unions also have more flexibility to impose fees and limit access to credit in ways that traditional banks cannot. Credit availability under a 10 percent cap would not resemble credit unions, as banks would be forced to reduce credit lines, close accounts, and eliminate many of the benefits consumers currently take for granted.
The effects of a national rate cap would mirror those seen in states like New Mexico and Illinois, where similar policies have already restricted the availability of small-dollar loans. A 10 percent ceiling would not only make traditional credit cards unprofitable for banks but also eliminate the financial flexibility many consumers rely on. Those who can no longer qualify for credit cards will face limited choices, including expensive alternatives with hidden fees and fewer consumer protections.
Instead of imposing arbitrary restrictions, policymakers should focus on fostering competition in the financial sector. Increased competition among lenders naturally drives rates down and expands access to credit for more consumers. Regulatory reforms that promote transparency and responsible lending would achieve far more than price controls ever could. The free market has consistently proven the best mechanism for delivering financial products that serve consumers effectively.
If this policy becomes law, consumers will feel its effects immediately. Rewards programs will disappear, fees will increase, and millions of Americans will find themselves unable to obtain credit. This is not speculation. It is a lesson already learned in states that have pursued similar policies. A national cap on credit card interest rates would amplify these failures on a much larger scale. Those who support this proposal, whether on the left or the right, should look at the real-world outcomes before forcing the same disastrous policies onto the entire country.
Originally published at realclearmarkets.com on February 11, 2025.