Credit cards are the sharpest double-edged sword in Americans’ personal finance arsenal.
They can be an indispensable tool for coping with financial hardship, a great way to finance your family vacation, or a free pass granting access to luxury lounges at the airport. But for many consumers, they can also be a debt trap with no escape.
Like Robin Hood in reverse, credit card companies take the interest payments from those who carry a balance and redistribute them as rewards that benefit people who don’t.
Sky-high annual percentage rates (APRs) on U.S. credit cards are worsening the debt trap for those who carry a balance. Four years ago, the average APR was less than 15%. By 2024, it was over 21%, and a growing number of Americans are finding themselves with interest rates over 30%.
Concern over high APRs has built an unlikely alliance in Congress. This week, Sens. Bernie Sanders (I-VT) and Josh Hawley (R-MO) introduced a bill that would cap credit card interest rates at 10% for five years. On the campaign trail, President Donald Trump supported the idea—despite stark opposition from the banks and credit unions that issue credit cards.
“When large financial institutions charge over 25 percent interest on credit cards, they are not engaged in the business of making credit available. They are engaged in extortion and loan sharking,” stated Sanders in a press release.
The bill aims to curb the profits that flow from credit card lending and provide financial relief for working families. However, if passed the measure would likely reduce easy access to credit and also undercut the credit card rewards that power the industry.
The unintended consequences of a credit card interest rate cap
Whenever the Congress imposes new regulations on the economy, second- and third-order effects often create unintended consequences. By solving the problem of high credit card APRs, a rate cap could very well end up hurting those it was intended to help.
Credit card interest rates vary widely depending on the unique risk profile of each cardholder. Limiting banks’ ability to charge rates commensurate with historic default levels would likely send shock-waves through the industry.
Jennifer Doss, executive editor at Cardratings.com, explains that cards with high APRs give banks the option to offer credit to people who might not otherwise qualify. “Credit card companies typically charge higher interest rates to mitigate higher perceived risk,” she says. “Consequently, individuals with lower credit scores generally face higher interest rates.“
John Cabell, managing director of payments intelligence at J.D. Power, adds that rate caps could make it economically unviable for issuers to provide credit to people who struggle with delinquency.
“If you are forced to cap [APRs for] those with the highest interest rates, it would no longer make sense for the issuer to even offer them a product because it might not even be net positive from a revenue perspective,” he says.
Consumers denied access to credit cards by interest rate caps would still need access to credit. They could end up opting for payday loans or similar options that carry even more expensive rates than high-interest credit cards.
“Research clearly shows that when politicians, rather than the free market, dictate prices, consumers ultimately pay the price through limited choices outside the well-regulated banking system,” says Consumer Bankers Association President and CEO Lindsey Johnson.
A cap on interest rates could diminish credit card rewards
Capping card rates would also likely dampen credit card rewards. If you’ve ever redeemed points or miles for a flight or hotel stay, you’ve benefited from high credit card interest rates. That’s because the revenue generated by interest payments on card balances helps to power the ecosystem of points, miles, and cashback rewards.
According to Cabell, cardholders who never carry a balance need to understand that their expectations of getting “something for nothing” carries a steep cost for other consumers. “Higher net worth individuals are consuming all of those perks, at the cost of the lower-end consumers who don’t benefit,” he says.
Customers who reap the most rewards from credit cards don’t pay interest. Federal Reserve research has found that every year a whopping $15 billion is transferred from those who carry a balance and redistributed to those who earn rewards.
Credit card payment fees on retail transactions—some of which are as high as 4%—are another source of support for card rewards, and some experts believe swipe fees could have a more direct financial connection to the rewards system. However, a separate bill in Congress is taking aim at high swipe fees.
The proposed Credit Card Competition Act, a bipartisan bill introduced last year by Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS), targets the dominance of payments processors Visa and Mastercard—which together took in $93 billion in credit card swipe fees in 2022.
The bill would require large financial institutions to allow at least two credit card payment processing networks to be used on their card cards—and one of them cannot be Visa or Mastercard. This would give merchants greater flexibility to choose payment networks and, it’s hoped, reduce the swipe fees.
If both bills were to pass, the reduction in revenue from interest payments and swipe fees would likely be the final straw for credit card rewards programs.
More on credit cards:
- Upset about your credit card interest rate? The CFPB wants to hear from you
- Get ready, the Discover-Capital One merger could transform the credit card market
- Sick of high credit card interest rates? Time to learn how the Federal Reserve impacts your credit card APR
