Warren Pushes 10% Limit as Banks Warn of Massive Credit Contraction

A potential rate cap on credit cards may have dire consequences for credit access, while advocates see it as a way for consumers with credit card balances to save on interest charges. The debate is heating up again.

Sen. Elizabeth Warren (D-MA) recently wrote to U.S. regulators pressing them to implement a 10% rate cap proposed by President Trump.

And there’s more to consider with credit access. Credit cards can be a bridge during a financial emergency and a ladder into credit for those Americans who are credit invisible. Cash flow underwriting could lead to lending opportunities for subprime consumers and for those with thin credit files. 

Impact of a 10% Rate Cap on Credit Cards

Kelvin Chen, Senior Vice President of Policy at the Consumer Bankers Association (CBA), told us that a yearlong 10% rate cap would lead to a large reduction in the access to credit. 

The Consumer Bankers Association cited a Vanderbilt Policy Accelerator paper advocating for the cap that shows how a 10% rate cap would cause a reduction in the access to everyone with an 800 FICO score or below.

That estimate would lead to 75% of current cardholders and more than 150 million people not having new access to credit, according to the CBA. 

But Brian Shearer, Director of Competition and Regulatory Policy at Vanderbilt Policy Accelerator, said the credit card industry can afford interest rate caps and such a move would not impact access to credit. 

“The credit card industry is so profitable that it could rein in interest rates, save billions for Americans and small businesses, and still make profits. Policymakers should look more seriously at interest caps as a way to help Americans keep more money in their pockets,” Shearer said.

A Ladder to Climb Out of Credit Invisibility

Someone that is credit invisible has no credit history with any of the three major credit bureaus. They get by on cash and debit cards. Chen points that anywhere from 1 in 10 to 1 in 5 Americans are credit invisible. 

“And research shows that if you’re trying to come out of credit invisibility, it’s either student loans that are pulling you out, which is not necessarily the best way to come visible. It’s collection on medical debt or non-financial debt, which is a terrible way to become credit visible. Or it’s credit cards,” Chen told us. 

He said a credit card can be a ladder for climbing out of credit invisibility allowing consumers to build a credit history and eventually qualify for a car loan or a mortgage.

Impact of Cash Flow Underwriting on Credit Access

With cash flow underwriting, lenders use banking transaction data such as consumer income, expenses, and cash balances when underwriting lending rather than only using credit scores. This type of underwriting helps consumers with thin credit files and subprime consumers qualify for credit. 

“The biggest immediate gain is the consumers that don’t have a credit bureau file, or they have a very thin credit file,” Zhiyao Pei, Founding Partner of the consulting firm CreditBots & Partners told us.

“And also for a lot of other customers with low credit scores, basically the subprime population, have also been able to gain a lot of approvals,” he said.

Credit Cards Can Bridge a Savings Gap

The average American household will hit two to three income shocks a year of about $2,000 to $3,000, Chen told us. 

And many consumers may not have savings to fall back on. According to the Federal Reserve, 37% of Americans said they would not be able to afford a $400 emergency expense.

After putting aside money for retirement, the median household only saves $50 a month, according to CBA research. Credit cards can help to bridge that savings gap for many consumers.

“People don’t understand the role that cards play in helping people navigate expense shocks rather than being the cause of the expense shocks,” Chen told us.  

The Bottom Line

The future of credit access has many possible paths. A potential 10% rate cap could lock out millions from obtaining a credit card. Others see it as a welcome relief from high interest rates for consumers.

Cash flow underwriting offers a way into credit building for people with thin credit files and people with subprime credit. Credit cards also are a way for people who are credit invisible to gain credit and start building a credit history.