Lawmakers should reject credit card interest rate caps that threaten working families

Americans are rightfully concerned about affordability. For many years, Americans have found it difficult to meet these daily needs, from healthcare to housing to food and utility bills.

In response, President Donald Trump and Republicans in Congress are pursuing numerous policies aimed at reducing costs for the American people.

While the president and our former Republican congressmen generally have good economic and regulatory instincts, there are some policies worth rethinking because they could worsen the affordability crisis.

For example, as Congress considers a proposed 10 percent price cap on credit, Republicans should follow their instincts by recognizing that price controls like these have a long history of producing harmful unintended consequences for working families and small businesses.

When governments set an artificially low price for a product or service in a competitive market, the result is always the same: reduced supply. This isn’t just a theory. This is a historical fact.

In 1971, President Nixon imposed price controls on retail gasoline sales. Demand has increased as drivers pay less at the pump than the actual cost of gasoline. However, manufacturers and gasoline retailers were unable to cover their full costs at artificially low prices, thus supplying the market with less. The result was a predictable gasoline shortage and Americans waiting in long lines outside gas pumps.

Rent increases are capped at varying rates in many major American cities, including New York City, San Francisco, and Los Angeles, preventing landlords from recouping investments in maintenance and improvements, resulting in neglected maintenance, declining improvements, and a shortage of new housing.

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Price controls on credit cards would have a similar effect. They will reduce credit availability.

Banks charge interest on credit cards because there are costs and risks involved in issuing and managing the cards. For example, banks must cover the cost of credit card infrastructure, including administration, maintaining security, enforcing chargebacks, and offering credit card rewards programs. Credit card balances are unsecured loans with high default rates and pose a significant cost for banks.

By capping rates at an arbitrarily and artificially low level like 10 percent, banks will either have to make up for lost revenue elsewhere with higher fees and charges or stop issuing credit cards to high-risk and low-income customers.

Consumers who lose access to credit cards altogether will be forced to turn to more expensive, riskier alternatives such as loan sharks and payday lenders. The Cato Institute emphasizes: “History has shown that these [price] controls cause famine, black markets, and suffering. Either way, consumers lose out.”

For consumers who can keep their credit cards, banks “will likely respond to the credit card cap by reducing rewards programs and other card benefits, including fraud protection, while also replacing the lost interest income with fees payable by all credit card users,” the American Action Forum said.

A credit card interest rate cap would also bring about government intervention in cases where free market competition is already working to the benefit of customers. In fact, dozens of credit cards are already available with 0 percent APR introductory rates for a significant period of time. Economist Stephen Moore wrote a report last year detailing the harm an interest rate cap would have on consumers, concluding: “The system is not broken. Credit cards are more popular than ever… But rules that make cards less profitable and more vulnerable to the risk of loss from non-payment threaten this well-functioning and economically vital market.”

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For decades, Americans have voluntarily used credit cards to start businesses, borrow money, and facilitate everyday purchases. The free market has made these activities possible and should not be subverted by government. The government’s role in regulating the financial services industry is not to set prices but to ensure appropriate disclosures, competitive markets and systemic stability. Interest rate ceilings would weaken market functioning and competition, returning us to the badly failed policy of price controls.

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Sen. Elizabeth Warren, Sen. Bernie Sanders and U.S. Rep. Maxine Waters have long supported caps on credit card interest rates. Fortunately, most Republicans know better. While leaders such as Senator Mike Rounds, Senator Pete Ricketts, House Speaker Mike Johnson, and Senate Majority Leader John Thune have expressed strong concerns about these price controls, Senator Thune correctly observed that the proposal “will likely leave large numbers of people across the country without access to credit.”

Free markets provide consumers with better products, services, and choices than price setters in Washington. Congress must allow the marketplace to continue offering consumers of all incomes, working-class families, and Main Street businesses access to the credit they need.

Kevin Brady served as the U.S. representative from Texas from 1997 to 2023. He advises Americans on Free Markets.