Bipartisan legislation to cap credit card interest rates at 10 percent was recently introduced into the U.S. Senate.[1] This blogpost briefly summarizes the content of a paired research note on the potential effects of the proposed cap on consumers’ access to card credit, based on analysis of data from the Federal Reserve Board’s triennial Survey of Consumer Finances (SCF).
Simply put, it generally will not be feasible for banks to reduce interest rates to meet the cap for all current customers with rates above the cap, nor for similarly situated future customers. The cap would hinder access to credit for over 14 million American households and would force those households to turn to costlier and less-regulated alternatives. The credit card market in the U.S. is competitive, with multiple banks seeking to attract and retain customers by offering favorable terms. Moreover, the 2009 Credit Card Act has made credit card pricing more transparent and equitable.[2] Therefore, a credit card interest rate is closely tied to the cost of providing the line of credit, including the risk that the borrower may default.
The loss of interest income due to a cap will make it less profitable for banks to provide credit to borrowers with interest rates that a priori exceed the cap, without a corresponding reduction in the cost of providing the credit lines or an increase in annual or other fees. Hence, most consumers with rates above the proposed cap would be excluded on being subject to the cap; either entirely, or by having their credit line greatly reduced.
However, the cap may induce banks to reduce interest rates for some qualified consumers or may compel some consumers to ramp up their search efforts for the card that best meets their needs. Therefore, our analysis of the effects of the proposed cap allows for some flexibility in how the market might adapt to the cap. In particular, we allow that banks would marginally reduce interest rates to comply with the cap, such that consumers who currently have rates up to and including 12 percent would be granted rate reductions without any effect on their existing credit limits.
The analysis relies primarily on the SCF sample from 2019, a more stable macroeconomic environment compared to 2022 which was distinguished by sharply rising interest rates, although both samples tell a similar story. The 2019 data indicate that 22 percent of bankcard users in the United States, corresponding to about 21 million single-person households or families, rarely paid their bankcard balances in full—they regularly carried a revolving bankcard balance on which they pay interest. By our assessment, a 10 percent cap would have adversely affected at least two thirds of these borrowers, or about 14 million single-person households or families, resulting in their credit lines being eliminated or significantly reduced.[3]
The interest rate cap would have a relatively severe effect on consumers with riskier credit profiles, for whom access to card credit can be particularly important. Nearly three-fourths of the consumers in the identifiably riskier bankcard users would be excluded on being subject to the cap. Reduced access to card credit among consumers with weaknesses in their credit record will make it more difficult for them to reestablish a favorable credit record and improve their credit scores.[4]
Thus, while the proposed cap is a well-intentioned effort to reduce the high debt burden some households are facing, it would harm consumers’ access to card credit. Yet bankcards, because of their relatively low minimum required monthly payments, are a vital and affordable source of backup liquidity for many households, particularly for those with volatile incomes and limited savings. Those customers could be forced to turn to costlier and less-regulated alternatives for obtaining access to credit, such as payday lenders.
For example, according to a recent Federal Reserve study, 37 percent of respondents to a nationwide survey said they would have difficulty covering an unexpected, $400 expense out of their income or savings. More than 40 percent of those households indicated they would cover such an expense by borrowing on their credit card.[5]
The analysis is based on data from 2019 and 2022, the most recent survey years for the SCF. Market interest rates then were substantially lower than today. In today’s higher interest rate context, a significantly larger proportion of consumers would see their access to card debt curtailed as a result of a rate cap.
The Empirical Sample: 2019 Survey of Consumer Finances
Our analysis uses the 2019 and 2022 SCF, a triennial interview survey of U.S. families, sponsored by the Board of Governors of the Federal Reserve System with the cooperation of the U.S. Department of the Treasury. The SCF collects detailed information about family financial circumstances.[6] The 2019 sample, which is our primary focus, includes 4,560 families who have at least one bankcard, corresponding to about 96 million families in the total U.S. population.
Among these consumers, 58 percent report that they always pay their balances in full, 20 percent sometimes do, and 22 percent rarely pay in full. The SCF records the interest rate on the account with the largest balance or (for those that pay their balances in full) the card acquired most recently.
Consumers who rarely pay in full are the most relevant population for evaluating the effects of an interest rate cap, since they consistently pay interest on their revolving balances. We emphasize, however, that an interest rate cap could also adversely affect many of the nearly 19 million families (as of 2019) who report that they sometimes revolve their credit card balances.
Effects of a Rate Cap: Summary of the Findings
Under our assumption that allows that a 10 percent cap would be binding on consumers with interest rates exceeding 12 percent, about two-thirds of consumers that rarely pay their balances, corresponding to 14.3 million U.S. families as of 2019, would be affected. The consumers for which the cap would be binding stand to lose all or part of their credit lines.
The effect of the cap would vary by risk segment, as summarized in Figure 1. It would have a relatively severe effect on consumers with comparatively high risk of default, close to three-fourths of whom would be excluded. Losing access to card credit would be especially harmful for those households, for whom alternative financing options are more limited. Moreover, reduced access to card credit among consumers with weaknesses in their credit record will make it more difficult for them to reestablish a favorable credit record and improve their credit scores.
Figure 1: Percent excluded by a 10 percent rate cap, by risk cohort
Concluding Summary
We have highlighted the findings from a companion research note which explores the potential effects of a 10 percent interest rate cap on consumer access to card credit, using data from the Federal Reserve Board’s 2019 and 2022 SCF. Among the 21 million U.S. families (as of 2019) that rarely pay their credit card balances in full, at least 14 million would have their access credit curtailed as a result of the cap. The 2022 sample yields a similar assessment.
An interest rate cap would disproportionately curtail access to credit cards among consumers with riskier credit profiles. They may then lose an opportunity to boost their credit scores by demonstrating reliable repayment performance.
These estimates represent a “best case scenario” that reflects a context in which interest rates are lower than they are today and conservative assumptions that assume banks are positioned to grant marginal rate reductions. Also, the estimates pertain to the population of consumers who rarely pay their card balances in full. However, among the additional, 19 million U.S. families who sometimes pay in full, many may revolve a balance over much of the year and could also experience curtailed access to credit consequent to the cap.
To read the paired research note, click here.
[1] See https://www.sanders.senate.gov/press-releases/news-sanders-hawley-introduce-bill-capping-credit-card-interest-rates-at-10/
[2] See https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-card-act-helped-consumers-avoid-more-than-16-billion-in-gotcha-credit-card-fees/
[3] A relatively small percentage of borrowers (those with rates above 10 and less than or equal to 12 percent) potentially might benefit from a 10 percent cap, under the assumption that banks would grant interest rate reductions of up to 2 percentage points.
[4] Many banks offer targeted credit products designed, including secured credit cards and so-called “credit-builder” products, designed to help consumers responsibly build or repair a credit record. A recent study from the Federal Reserve Bank of Philadelphia finds that such products have been effective in achieving this goal. See Top of the Class: Assessing the Credit Performance of Graduates from Secured Credit Card Programs Peter Psathas, “Top of the Class: Assessing the Credit Performance of Graduates from Secured Credit Card Programs.” Consumer Finance Institute Discussion Paper no. 24-2, Federal Reserve Bank of Philadelphia, November 2024.
[5] The other 40 percent indicated they would have to borrow from a friend or family member, sell an asset, use a payday loan, or simply not pay the expense. See “Report on the Economic Well-Being of U.S, Households in 2023,” Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/publications/files/2023-report-economic-well-being-us-households-202405.pdf
[6] The term families in the context of the SCF connotes single-person households as well as families.
