Writer: Lucy Lazarony
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
- A study finds as many as 159 million Americans would lose access to credit if a proposed 10% rate cap on credit cards were to pass.
- People who manage to keep their credit card accounts open can expect higher fees, lower credit lines, and fewer rewards and benefits.
- Shut out from the credit card market, subprime consumers may be forced to turn to predatory lenders for credit.
A new study from the American Bankers Association predicts severe consequences for the credit card industry if a 10% rate cap should pass.
The study found that an estimated 159 million people will no longer be able to use their credit cards, and between 74% and 85% of credit card accounts would be shut down or have credit lines greatly reduced.
Subprime credit card customers will be adversely affected by the rate cap with many losing their access to credit. Even super-prime borrowers with credit scores of more than 780 will likely be negatively affected, the study found.
The ABA study examined new data from credit card issuers that make up about 75% of the credit card market and considered what would happen if a rate cap proposed by Independent U.S. Sen. Bernie Sanders, of Vermont, and Republican Sen. Josh Hawley, of Missouri, were to pass.
Tighter Underwriting and Higher Fees on Open Card Accounts
Credit card accounts that stay open will have very different terms and conditions. Customers can expect reduced benefits and rewards, higher card fees, lower credit limits, reduced low-rate promotional card offers, and tighter credit standards, according to the ABA.
“This new data is clear: interest rate caps lead to fewer options, higher costs and reduced access — especially for those who can least afford to lose their credit card.” said Rob Nichols, ABA President and Chief Executive Officer.
“We urge the administration and Congress to carefully consider the significant harm a rate cap would have on U.S. households and the broader economy. This is not the solution to the affordability challenge.”
10% Rate Cap Impact on Subprime Market
Subprime customers cut off from the credit card market may be forced to do business with predatory lenders.
Having a blunt interest rate ceiling such as a 10% cap would push subprime borrowers out of the credit card market and toward predatory options such as payday loans, high installment loans, and subprime mortgages, according to a statement by the Progressive Policy Institute.
Banks Speak Out Against a 10% Rate Cap
Jamie Dimon, Chief Executive Officer of JPMorgan Chase, said a 10% rate cap would result in an economic disaster.
“It would remove credit from 80% of Americans, and that is their back-up credit,” Dimon said at the World Economic Forum in Davos.
Citigroup Chief Executive Officer Jane Fraser, also speaking from Davos, said a 10% rate would have a negative economic impact.
“The president is right in focusing on affordability,” Fraser said. “But capping rates would not be good for the U.S. economy.”
President Trump Renews Call for 10% Rate Cap
President Trump again called for credit card issuers to cap interest rates on credit cards for a year, Reuters reports.
“I am asking Congress to cap credit card interest rates at 10% for one year,” President Trump said. “One of the biggest barriers to saving for a down payment has been surging credit card debt. The profit margin for credit card companies now exceeds 50%, one of the biggest.”
The Bottom Line
A new study analyzes the way a proposed 10% cap on interest rates would affect credit card customers. Millions of people would lose access to credit and those able to keep their credit cards open would have to make due with lower credit lines, higher fees, and fewer rewards and benefits, according to the study.
Subprime customers cut off from credit cards may be forced to use predatory lenders such as payday loans for their credit needs.
