Lawmakers must reject credit card interest rates that threaten working families

Americans are rightly concerned about affordability. From health care and housing to grocery shopping and utility costs, Americans have been finding these everyday necessities difficult to afford for far too many years.

In response, President Donald Trump and Republicans in Congress are pursuing a number of policies designed to lower costs for Americans.

Although the President and his former Republican congressional colleagues often have good economic and regulatory sentiments, there are certain policies that should be reconsidered, as they may exacerbate the problem of unaffordability.

For example, as Congress examines the 10 percent credit limit, Republicans should follow their instincts in recognizing price controls like these have a long history of producing harmful unintended consequences for working families and small businesses.

When governments mandate an artificially low price for a product or service in a competitive market, the result is always the same: reduced supply. This is not just a belief. It is a historical fact.

In 1971, President Nixon placed price controls on gasoline sales. Because drivers pay less at the pump than the actual cost of gas, demand has increased. But since fuel producers and sellers cannot recover their full costs from artificially low prices, they contribute less to the market. The result was the predictable fuel shortage and Americans waiting in long lines at the gas pumps.

In several large American cities, including New York City, San Francisco and Los Angeles, rent increases are limited to various amounts, preventing landlords from being able to recoup investments in maintenance and improvements, resulting in neglected maintenance, reduced development and a lack of new housing.

CONSERVATIVE INFLUENCER DESCRIBES TRUMP’S CREDIT CARD AS A ‘MILITARY’ PROPOSAL.

Price controls on credit cards can have a similar effect. They will reduce the availability of credit.

Banks charge interest on credit cards because there are costs and risks associated with issuing and managing them. For example, banks must cover the costs of credit card infrastructure, including administration, maintaining security, implementing chargebacks and offering credit card rewards programs. A credit card balance is an unsecured loan with high default rates, which creates high costs for banks.

By setting rates at an arbitrary and artificially low level, such as 10 percent, banks will have to pay for lost revenue elsewhere with higher fees and charges, or stop offering credit cards to high-risk and low-income customers.

Consumers who lose access to credit cards entirely will be forced to turn to more expensive, risky alternatives, such as loan sharks and payday lenders. The Cato Institute insists, “History has shown that these [price] control causes shortages, black markets, and suffering. In any case, consumers lose out.”

For those consumers who can keep their credit cards, banks “are likely to respond to the credit card cap by reducing rewards programs and other card benefits, including fraud protection, while replacing lost interest income with fees that must be paid by all credit card users,” the American Action Forum explains.

A credit card rate cap can also bring government interference where free market competition is already working to benefit consumers. In fact, there are already many credit cards with 0 percent APR introductory rates for the duration. Economist Stephen Moore wrote a report last year outlining the potential harm rate limits could have on consumers, concluding that “The system is not broken. Credit cards are more popular than ever… But rules that make cards less profitable and more vulnerable to defaults threaten this efficient and economically important market.”

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For decades, Americans have willingly used credit cards to build businesses, borrow money—and make everyday purchases easier. The free market has enabled these activities and should not be stopped by the government. The government’s role in regulating the financial services industry is to ensure proper disclosure, competitive markets and regulatory stability – not to set prices. Rationing can undermine market performance and competition and return us to the failed policy of price controls.

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Sen. Elizabeth Warren, Sen. Bernie Sanders and US Rep. Maxine Waters have long supported caps on credit card interest rates. Fortunately, most Republicans know better. Leaders including Seni. Mike Rounds, Sen. Pete Ricketts, Speaker of the House Mike Johnson and Senate Majority Leader John Thune, expressed great concern about this price control, when Sen. Thune clearly recognizes that this proposal “will probably take away a lot of people from access to credit across the country.”

Free markets bring consumers better products, services and choices than the price setters in Washington. Congress should let the market continue to give consumers, working families and Main Street businesses, of all incomes, access to the credit they need.

Kevin Brady served as a US representative from Texas from 1997 to 2023. He works as a consultant for Americans for Free Markets.