Credit cards are the sharpest double-edged sword in America’s personal finance arsenal.
They can be an indispensable tool for coping with financial hardship, a great way to finance a family vacation, or a free pass to a luxury airport lounge. But for many consumers, they can also become debt traps from which there is no escape.
Like Robin Hood in reverse, credit card companies take interest from those with balances and redistribute it as rewards to benefit those without balances.
The extremely high annual percentage rates (APR) on U.S. credit cards are exacerbating the debt trap for those with balances. Four years ago, the average annual interest rate was less than 15%. By 2024, this proportion will exceed 21%, and more and more Americans find themselves facing Interest rate exceeds 30%.
on Friday, President Donald Trump calls for one-year cap Credit card interest rates are 10% effective January 20th.
Following Sens. Bernie Sanders (I-VT) and Josh Hawley (R-Mo.) introduced a bill Last year, credit card interest rates were capped at 10% for five years. On the campaign trail, Trump supported the idea — despite Strongly opposed From banks and credit unions that issue credit cards.
“When large financial institutions charge more than 25 percent interest on credit cards, they are not in the business of extending credit. They are in the business of extortion and loan sharking,” Sanders said in a press release.
The bill seeks to limit profits from credit card lending and provide financial relief to working families. However, if the measure passes, it could reduce ease of access to credit and weaken the credit card rewards that power the industry.
The unintended consequences of credit card interest rate caps
Experts and industry groups say second- and third-order effects often have unintended consequences whenever Congress imposes new regulations on the economy wealth last year. By solving the problem of high APRs on credit cards, an interest rate cap would likely end up hurting the very people it was intended to help.
Credit card interest rates vary widely based on each cardholder’s unique risk profile. Limit the ability of banks to charge interest rates commensurate with historical default levels It could send shock waves throughout the industry.
Credit cards with higher APRs give banks the option of extending credit to people who wouldn’t otherwise qualify, explains Jennifer Doss, executive editor of Card ratings.com. “Credit card companies typically charge higher interest rates to mitigate the higher perceived risk,” she said. “As a result, individuals with lower credit scores often face higher interest rates.”
John Cabell, managing director of payment intelligence at JD Power, added that rate caps could make it financially unviable for issuers to extend credit to those struggling with delinquency issues.
“If you’re forced to cap the APR of the people with the highest interest rates, it no longer makes sense for issuers to offer products to them because it might not even be a net positive from a revenue perspective,” he said.
Consumers who can’t use credit cards because of interest rate caps still need to get credit. They may end up choosing payday loans or similar options, which have interest rates that are even more expensive than high-interest credit cards.
“Research clearly shows that when politicians, rather than the free market, determine prices, consumers ultimately pay the price through limited options outside of a well-regulated banking system,” said Lindsay Johnson, president and CEO of the Consumer Bankers Association.
Interest rate caps may reduce credit card rewards
Capping credit card interest rates may also dampen credit card rewards. If you’ve ever redeemed points or miles for flights or hotel stays, you’re in a position to enjoy high credit card interest rates. That’s because the revenue generated from interest payments on card balances helps fuel an ecosystem of points, miles and cash back rewards.
Cabell said cardholders who never carry a balance need to understand that their expectation of “something for nothing” comes at a high cost to other consumers. “High-net-worth individuals are consuming all these benefits, while lower-end consumers are not benefiting,” he said.
Customers who earn the most rewards from their credit cards pay no interest. Federal Reserve Research Research has found that up to $15 billion is transferred each year from those holding balances and reallocated to those earning rewards.
Credit card payment fees on retail transactions (some of which are as high as 4%) are another source of support for card rewards, and some experts believe swipe fees may have a more direct financial connection to the rewards system. However, another bill in Congress is targeting high swipe fees.
proposed Credit Card Competition Actis a bipartisan bill introduced in 2024 by Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) that targets payment processor dominance visa and MasterCard – credit card swipe fees will total $93 billion in 2022.
The bill would require large financial institutions to allow at least two credit card payment processing networks on their cards, one of which cannot be Visa or MasterCard. This will provide merchants with greater flexibility in their choice of payment network and hopefully reduce card swipe fees.
If both bills pass, reduced revenue from interest payments and swipe fees could be the final straw for credit card rewards programs.
A version of this article was originally published on February 6, 2025.