Washington’s bipartisan populist duo of Sen. Bernie Sanders and Sen. Josh Hawley have a plan on credit card debt— promising to “help” consumers by quietly cutting them off from access to credit.
Their proposal, to cap credit-card interest rates at 10 percent, is getting some new momentum and is pitched as a mercy to struggling Americans. Who wouldn’t want lower interest rates? Beneath the shiny wrapping is an old, discredited idea: government price controls. As history repeatedly shows, price controls don’t protect consumers — they shrink the market, reduce access, and hurt the very people they claim to help.
For tens of millions of Americans, credit cards are a financial bridge to cover emergency expenses, smooth income volatility, and build credit histories that unlock future opportunity. And fact is, the interest rates on those cards reflect risk, not moustache-twisting corporate villainy. When lawmakers artificially suppress that price, lenders don’t absorb the loss out of goodwill — they respond rationally by lending less.
That’s the inconvenient truth Sanders and Hawley ignore. A 10 percent cap would make it economically impossible to offer credit cards to borrowers with imperfect credit. Our financial institutions would ratchet down their standards, do away from popular rewards programs, and be forced to raise fees for everyone else. Those who can easily get and use credit will be fine. But many others won’t be.
Approximately 84 percent of consumers this Christmas season are reported to have bought items on credit. Financial advisors don’t tend to like that, but these are tradeoffs that individuals have a right to make based on their priorities on any holiday. Those same advisors also implore consumers to use rewards programs to get the most mileage. Interest rate caps take rewards off the table.
We’ve seen this movie before. States and countries that impose aggressive interest-rate caps don’t eliminate high-cost borrowing — they drive it underground or offshore, where fewer protections exist. We have plentiful evidence from recent failed experiments in interest caps in Illinois and even the nation of Chile.
It’s basic economics. When the government mandates prices below market reality, supply dries up. In housing, that means shortages. In energy, it means blackouts. In credit, it means a perilous squeeze — and consumers feel it first when they can’t get any.
While both Sanders and Hawley posit themselves as heroes of the working class from opposite sides of the ideological spectrum, their proposal is a shipwreck. Modest-income Americans would be cut off from credit access they depend on, and consumers who use their credit strategically would pay the price in higher fees and fewer perks. The 2009 CARD Act limits the kinds of fees creditors can even charge, which makes not offering any credit at all the most likely outcome.
Of course, no one wants Americans going into debt and paying exorbitant fees for it.
Rather than demanding an interventionist federal solution to restrict available credit, this demonstrates a need to address why people go into debt in the first place, and how they can best manage it with available education and tools. Enacting new laws or restrictive limits to reduce credit access to all Americans is not a reasonable solution.
Policymakers should focus on credit transparency and financial literacy as much more effective measures to tackle the debt problem. Encouraging personalized payback plans, for one, would actually help real people struggling with debt spirals.
Social media influencers and educators like Dave Ramsey and Caleb Hammer teaching Americans about how to better budget and eliminate debt are doing wonders for their audiences. Debt can be a real problem for people, but debt also solves short term problems, freeing you to make better long term moves.
Congress is flirting with a feel-good policy that sounds compassionate yet functions like a financial freeze. That would be disastrous for consumers who depend on cheap credit. And that’s exactly what a credit cap threatens to do — turn a complex consumer marketplace into a government run monstrosity.
Yaël Ossowski is deputy director at the Consumer Choice Center and author of “The Perilous Credit Squeeze: Why the Sanders-Hawley Interest Rate Cap Harms Consumers”
