Following up on a pledge made by President Donald J. Trump during his campaign, the unlikely team of Josh Hawley and Bernie Sanders has proposed a law capping credit card interest rates at 10%. The two senators have proposed similar legislation in the past, but both senators’ previous proposals would have capped rates at a much higher and more realistic level.
Hawley, a conservative Republican from Missouri, introduced legislation last year that would have prohibited card companies from charging more than 18% annual percentage rates. In 2019, Sanders, a liberal independent from Vermont who caucuses with the Democrats in the chamber, proposed a cap of 15%.
During last year’s presidential campaign, Trump upped the ante by saying he would “put a temporary cap on credit card interest rates” of 10%. The Sanders-Hawley bill would immediately cap those rates at 10% and remain in effect for five years. According to the latest numbers from the Federal Reserve, the average credit card interest rate is currently 22.8%.
Turning the Industry Upside Down
Industry experts warn that capping rates at such a low level would severely limit the number of households that have access to credit cards. According to estimates from Javelin Strategy & Research, the cost of lending, as defined by expenses in interest and non-interest costs, will be about 13% in 2025.
A 10% interest cap would require lenders to stop investing in consumers whose FICO scores were less than 800. In the U.S. market, that would limit credit access to around 200 million people, or about 80 million households.
“The 10% cap would be unserviceable and not cover revenue requirements, let alone profitability,” said Brian Riley, Director of Credit at Javelin. “Issuers would need to offer cards to only super-prime cardholders and leave middle America without a channel to support their household budgets.”
Riley expects the legislation to provoke challenges from merchants, hospitality providers, and retailers who rely on the benefits of credit for their customers. A higher cap, such as those suggested earlier by Hawley and Sanders, would be more tolerable for the credit card industry.
Alternatively, Riley pointed out that a simpler way to benefit borrowers would be to restore the tax deductibility of credit card interest. The Tax Reform Act of 1986 eliminated deductions for interest paid on all consumer loans, with the exception of mortgage interest. “Revitalizing that benefit would temper the impact to consumers,” Riley said.
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