Credit Cards by Nick Youngson is licensed under CC BY-SA 3.0
On February 4th, 2025, Senator Bernie Sanders (I-Vt.), along with Senator Josh Hawley (R-Mo.), introduced legislation to cap credit card interest rates at 10%.
Both Senators criticized card issuers, denouncing card companies as “exploitative” and “engaged in extortion and loan sharking” while Americans faced a cost-of-living crisis. Senator Sanders’ press release statement cited the profits of major card issuers and the compensation received by their respective CEOs in an effort to scapegoat the private sector, avoiding any mention of the fiscally irresponsible actions that created the current high-interest rate environment.
ATR noted in January that a number of high-profile legislators expressed interest in policies tantamount to imposing price controls within the financial services sector and urged members of Congress to oppose such efforts.
Under the Biden administration, cumulative inflation rose by over 20% due to inflationary policies ranging from excessive deficit spending to burdensome rules issued by regulatory agencies.
Excessive spending on stimulus payments and other forms of pandemic-related assistance in 2020 and 2021 kicked off one of the most severe inflation episodes since the 1980s. This spending occurred under the backdrop of a lax monetary policy regime with near-zero interest rates for financial institutions and borrowers, making credit cheap and plentiful in addition to the influx of stimulus money directed at households.
While Federal Reserve Chairman Jerome Powell dismissed early inflation reports in 2021 as transitory, inflation became entrenched and caused the Fed to raise rates to levels not seen since the 2000s. Rates peaked around 5.25-5.5% and were lowered, albeit slowly, once the Fed saw data confirming inflation was declining due to slowed borrowing and spending from consumers facing higher rates.
Credit card issuers, like other companies in the private sector, adapt to changing economic headwinds in order to maximize their profits. As these companies saw their own borrowing costs increase, so did the rates they charged consumers using credit cards. Credit cards with variable rates often stipulate that rates depend on interest rates influenced by the Fed and thus are prone to change in a rising rate environment.
Interest rate caps are a price control tool that will only serve to limit the availability of credit to consumers. Interest rates signify the borrower’s risk of default or failure to pay back their debt, explaining why large corporations and financial institutions receive more favorable rates than small borrowers. By lowering rates to 10%, far fewer individuals and businesses will be eligible for credit as companies will be less willing to run the risk of lending to less creditworthy borrowers.
Empirical evidence collected by the Federal Reserve recognizes the distortive effects of interest rate caps. The Federal Reserve’s Regulation Q imposed interest rate caps on bank deposit accounts before 1980 but was phased out. A document published by the Federal Reserve Bank of St. Louis assessed findings on the effects of Regulation Q noted that “Congress concluded that interest rate ceilings created problems for depository institutions, discriminated against small savers, and did not increase the supply of residential mortgage credit.”
On a broader level, the federal government should not impose limits on what prices a private entity can charge its consumers. The legislation proposed by Hawley and Sanders challenges conventional free-market principles and would backfire by reducing the supply of available credit for middle-class and low-income consumers.
Consumer welfare would be further reduced as credit card companies will seek to offset lost revenue elsewhere by reducing rewards programs and other services. After the enactment of the Durbin Amendment as part of the Dodd-Frank Act, interchange fees set by debit card companies came under the jurisdiction of the Federal Reserve. Soon after, media reports highlighted how debit card rewards programs were eliminated. Similar consequences would follow for credit card reward programs if Congress passes the Sanders bill.
Legislators should be wary of the corporate greed narrative that seeks to portray private sector companies in a negative light. If policymakers are serious about making credit more affordable for consumers, they should begin by cutting excessive spending to reduce pressure on the Fed to keep rates high. While seemingly well-intentioned, a cap on interest rates would only harm consumers and create more problems than it solves.
