Last month, President Donald Trump proposed capping the interest rate on credit cards at 10 percent as a way to help Americans save more. Members of Congress from both parties immediately rallied to the idea. Senators Bernie Sanders and Josh Hawley have already introduced a bill to carry out the plan.
A 10 percent credit-card cap would be the single worst thing the president and Congress could do to the U.S. economy. It would end Americans’ most-preferred method of payment, cut off the flow of tens of billions of dollars in credit-card rewards, stall trillions of dollars in transactions, and likely cause a recession.
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The proposed cap does not consider the actual state of the credit-card industry. The average annual percentage rate for new credit cards is about 24 percent. Only a tiny fraction of the richest and most secure people, known as superprime borrowers, come anywhere near a 10 percent annual rate. The rest of Americans would lose their cards under the proposed cap.
Today, credit cards are much more important as a payment method than as a means of borrowing. Credit cards are only the fourth-largest source of consumer debt—behind home mortgages, automobile debt, and student loans. Yet over the last five years, credit cards have become, for the first time, the most common way to make purchases in the United States, outpacing debit cards or cash. Over 10 percent of the American economy now flows through credit-card purchases.
Consumers appreciate the ability to make purchases with credit cards. When surveyed by the Federal Reserve, 82 percent of respondents said that credit cards were their preferred payment method. No other type of payment came close. Most cash payments today are made by people who say they would have preferred to pay with credit.
Reward programs are one reason people like paying with credit. In total, Americans get more than $40 billion in credit-card rewards a year, including everything from airline miles to store discounts to plain cash. These perks are no longer a minor consideration for consumers.
Though credit cards are used more for payment than for loans, borrowing on credit cards is not so terrible as many commentators make it out to be. Whether borrowing for a medical emergency, for transportation when a car breaks down, or for the purchase of basic necessities when a part-time job ends, families often depend on access to credit for their well-being.
The alternative to credit cards isn’t thriftiness. It’s doing without essentials or going to more expensive sources of borrowing, such as payday lenders and loan sharks.
We’ve already seen what happens when the government tries to cap the income that banks or other lenders get from cards. Senator Dick Durbin added a provision to the Dodd–Frank Act of 2010 that capped the amount of fees debit cards could charge merchants. These fees, although often amounting to a few cents per purchase, were one of the main ways banks supported customers’ checking accounts.
Banks responded to the so-called Durbin Amendment by charging bank depositors more monthly fees, increasing minimum balances, and ending reward programs. Before the law, about 75 percent of checking accounts were free for consumers. Just two years later, that figure dropped below 40 percent. Research showed that these changes mainly owed to the Durbin amendment.
The clearest lesson we have as to the effects of credit-card controls comes from President Jimmy Carter. In March 1980, Carter announced controls on credit cards and other consumer loans. In the two months following, the unemployment rate shot up over 1.5 percentage points, the largest two-month increase in American history except for the Covid-19 spike. The administration reversed course on the credit controls almost immediately, but it was too late. The scale of the subsequent recession most likely cost Carter the November election.
Credit cards are a much bigger part of the economy today than in 1980. If Trump and Congress don’t want to get themselves in a predicament worse than Carter’s, they should end all talk of a credit-card cap.
Photo by Mandel NGAN / AFP via Getty Images