A proposal to cap credit card interest rates at 10% has recently entered the US Senate with bipartisan backing – but its clear that the outcome will have ramifications in other credit card heavy markets.
Cap on credit cards could backfire
While the measure is ostensibly aimed at easing the financial burden on indebted households, a deeper analysis of the Federal Reserve’s Survey of Consumer Finances (SCF) suggests that such a cap could have unintended and adverse consequences – especially for the very consumers it seeks to help.
Source of Revolving Credit
Credit cards are a vital source of revolving credit for millions of Americans.
According to the 2019 SCF data, approximately 21 million families regularly carry balances on their credit cards, paying interest month after month.
These consumers are particularly vulnerable to changes in credit availability, and under a 10% cap, roughly two-thirds of them – about 14 million families – would likely see their credit lines significantly curtailed or eliminated altogether.
Why would this happen?
Quite simply, the economics of unsecured lending do not allow banks to offer credit at such low interest rates to higher-risk borrowers.
Interest rates on credit cards are tightly linked to the cost of extending credit, which includes operational costs, funding costs, and – crucially – default risk.
A blanket 10% cap would make it unprofitable for banks to serve many customers unless offset by higher fees or drastically reduced access.
In a competitive market already governed by transparency regulations, including the Credit CARD Act of 2009, banks have limited leeway to cross-subsidise or absorb such losses.
While the cap could lead to modest rate reductions for a small segment of customers with existing rates just above 10%, the overwhelming majority – particularly those with lower credit scores – would lose access entirely.
These individuals often rely on credit cards for emergency expenses and cash flow management.
In fact, a recent Federal Reserve report found that 37% of Americans would struggle to cover a £320 ($400) unexpected expense, with more than 40% of them turning to credit cards as a stopgap.
Restricted access
Restricting access to mainstream credit could push these households towards alternative lenders, such as payday providers, which are typically far more expensive and less regulated.
In essence, the cap could inadvertently drive vulnerable borrowers from relatively safe credit products into financial environments where consumer protections are weaker – see what has happened in the BNPL market for clues.
Moreover, reduced access to credit cards could stifle efforts to rebuild credit scores.
Many consumers with weaker credit histories use credit cards, including secured or “credit-builder” products, to demonstrate repayment reliability.
Curtailing this avenue makes upward financial mobility more difficult.
The analysis is based on SCF data from 2019 and 2022 – both collected in markedly different interest rate environments but showing consistent results.
Given the recent increases in market interest rates, it is likely that the effects of a 10% cap would be even more pronounced today.
More consumers would fall above the threshold, widening the circle of those adversely affected.
Although well-intentioned, a cap on credit card interest rates risks doing more harm than good.
Policymakers must weigh the benefits of lower nominal rates against the real-world consequences of credit exclusion.
Alternative reforms – such as improving financial literacy, enhancing credit product innovation, and expanding access to regulated credit-building tools – may ultimately offer more targeted and effective support for financially vulnerable households.
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