Executive Summary

• Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) teamed up to introduce a bill that would cap credit card interest rates at 10 percent for five years.
• The proposed legislation mirrors President Donald Trump’s campaign promise of a 10-percent interest rate cap.
• A government-dictated price for credit card borrowing would restrict the supply of credit and effectively “debank” millions of customers, pushing them to other, often far costlier, credit providers outside of the traditional banking system; banks in turn would likely reduce rewards programs and impose fees on all credit card holders to replace lost interest revenue.

Introduction

Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) teamed up to introduce a bill (S. 381) that would amend the Truth in Lending Act to cap credit card interest rates at 10 percent for five years. The proposal mirrors President Donald Trump’s campaign promise of a 10-percent interest rate cap.

The average credit card interest rate was 21.47 percent in the fourth quarter (Q4) of 2024, according to data from the Federal Reserve, well above the 10-percent cap proposal. Moreover, the Fed data – dating back to 1994 – showed that credit card interest rates have never dipped below 10 percent. According to the Consumer Financial Protection Bureau (CFPB), only super-prime borrowers, those with credit scores above 800, had credit card interest rates below the proposed 10-percent cap as of 2022.

A government-dictated price for credit card borrowing, specifically one below any historical market-determined price, would significantly reduce the supply of credit and effectively “debank” millions of customers. The supply reduction would push consumers – often the most financially vulnerable – to other, and often far costlier, credit providers outside the traditional banking system. Moreover, banks would likely respond to a credit card cap by reducing rewards programs and other card benefits, including fraud protection, while replacing lost interest revenue with fees to be paid by all credit card users.

The Credit Card Market and Competition

Credit Card Landscape

Credit cards enable users to borrow money from banks, finance companies, credit unions, and nonfinancial institutions to buy things today and pay back the borrowed funds later. Data from the Federal Reserve Bank of New York showed that there were more than 617 million credit card accounts in the United States in Q4 2024. The credit is provided at a price to consumers – the interest rate, known as the annual percentage rate (APR) – for lent funds not repaid by a specified date. The APR varies according to the risk profile of the individual: A lower APR is offered to those most likely to repay borrowed funds while those who pose a great risk of non-payment are afforded credit at a higher APR. An APR also reflects the costs related to compliance, fraud protection, other administrative costs, and rewards programs.

The maximum APR that a bank can charge is determined by state usury laws. National banks, meanwhile, can charge the highest interest rate allowed in the bank’s home state – not the cardholder’s. This means that national banks will use branches in the least-restrictive states. This has led to many banks issuing credit cards from South Dakota, which does not have a usury law. A federal cap on interest rates would effectively end this strategy.

In recent years, APRs on all credit card plans increased from an average of 13.7 percent between 1994 and 2021 to 19.6 percent between 2022 and 2024. The most recent data from the Federal Reserve showed that the current commercial bank interest rate on all credit card plans was 21.47 percent in Q4 2024. Furthermore, the margin between the prime rate – which is an interest rate determined by individual banks and used as a reference rate for different types of loans – and the average APR on credit card accounts assessed interest also widened in recent years, reaching 15.3 percentage points at the end of 2024, as shown in Figure 1. The jump in APR drew the ire of several policymakers, including Senators Hawley and Sanders, as well as President Trump.

Figure 1

Source: Federal Reserve Board of Governors G.19, FRED

Several data sets indicated that recent changes in APRs largely tracked the macroeconomic environment and the risks to banks. Shortly after the onset of the COVID-19 pandemic, Americans were flush with cash amid various government relief programs and used a share of the windfall to pay down credit card balances. The decrease in risk was reflected in lower interest rates in 2020 and 2021 compared to 2019, as shown in Figure 1. Yet by 2022, the credit card risk profile changed: Credit card balances rose, the share of delinquent accounts spiked, and the charge-off rate increased, indicating an increased risk of lending. Moreover, inflation had spiked – peaking at 9.1 percent in June 2022 – prompting the Federal Reserve to increase the federal funds rate by 525 basis points between March 2022 and July 2023. This monetary policy adjustment put upward pressure on the prime rate. Collectively, interest rate hikes and an increase in the general price level – including the cost of services and rewards programs offered through credit cards – pushed up APRs.

Data from the New York Federal Reserve’s Quarterly Report on Household Debt and Credit showed that credit card balances dipped from $930 billion in Q4 2019 to $770 billion in Q1 2021. The drop in credit card balances was short-lived, however, ballooning to over $1.2 trillion in Q4 2024 (Figure 2).

Figure 2

Source: Federal Reserve Bank of New York Household Debt and Credit

Credit card accounts that were 90 or more days delinquent moved in a similar pattern, albeit with a lag. The share of accounts 90+ days delinquent dipped from 9.98 percent in Q1 2021 to 7.59 percent in Q3 2022 before rising to 11.4 percent in Q4 2024 (Figure 3).

Figure 3

Source: Federal Reserve Bank of New York Household Debt and Credit

Commercial bank charge-off rates, which is the percentage of borrowed funds unlikely to be paid back, fell to a post-pandemic low of 1.63 percent in 2021 before jumping to 4.69 percent in Q3 2024, the highest since Q3 2011. (Figure 4).

Figure 4

Source: FRED

Payments Competition

The market for payments is dynamic. Credit cards compete with other forms of payment and with other credit cards directly.

Historically, credit cards competed with debit cards and cash to pay for goods and services. More recently, innovative products such as buy-now-pay-later (BNPL) services have provided consumers with more choices. According to a report from the Federal Reserve, 14 percent of adults used BNPL in 2023, up from 12 percent in 2022, and 10 percent from 2021.

Credit cards also compete directly with other credit cards. To gain customers, credit card issuers compete on terms of service including annual fees, cash advance fees, foreign exchange fees, late payment fees, and APRs. These issuers also compete by offering rewards programs, including cash back and travel perks. Ipsos, a market research and public opinion company, found that 68 percent of survey respondents prefer using credit cards because of the rewards they earn, and that 37 percent would use credit cards less if the rewards were not offered. These reward programs are a valuable form of competition among credit cards and are, in part, paid for by increased APRs.

Impact of a 10-percent Cap

Based on data from the Federal Reserve dating back to 1994, credit card interest rates have never dipped below 10 percent. Capping credit card interest rates would restrict the supply of credit and effectively debank millions of customers, most of whom are already among the most financially constrained. Data from the CFPB found that only super-prime credit card borrowers had APRs below the proposed 10-percent cap. The credit crunch would likely push customers to riskier, and often more expensive, forms of credit outside the traditional banking system.

In a letter submitted to Senators Sanders and Hawley, a coalition representing credit unions, community banks, and large and small financial institutions warned that an interest rate cap would likely restrict the supply of credit and drive consumers to less regulated credit providers, including pawn shops, auto title lenders, loan sharks, and payday loan companies. They noted, for example, that “payday lenders in Missouri charge annual interest rates of more than 300 percent,” far above the 22.8-percent APR for credit card accounts assessed interest. The letter cited Federal Reserve Board research that measured the effects of an all-in interest rate cap, which includes the APR and any associated fees, of 36 percent imposed by the state of Illinois and found that the “cap decreased the number of loans to subprime borrowers by 38 percent.” Furthermore, the same study found that the cap led to an increase of loans to prime borrowers by 16 percent. This study illustrates that the most financially vulnerable would bear the most harm.

Rewards programs would also likely be affected by an interest rate cap. These programs are, in part, paid for by increased APRs, and a cap could put these perks at risk. Previous efforts to restrict revenue sources from payment providers caused rewards programs to disappear. In 2011, Congress passed the Durbin Amendment to the Dodd-Frank Act which capped interchange fees on debit card transactions. In response, rewards programs for debit card usage collapsed. Analysis from the Kellogg School of Management at Northwestern University found that the “loss of debit-card rewards led to a 30 percent decline in debit-card payment volumes and a corresponding increase in credit-card payment volumes.” In other words, according to the report, it was more difficult for debit cards to compete with credit cards on rewards. It is possible that a rate cap of 10 percent would lead to a similar outcome. Rewards programs would likely be limited, or even eliminated, if a key source of revenue funding them is restricted. Conversely, if an interest rate cap becomes law, it is likely that the lost revenue would be replaced with higher fees. This would burden all credit card users rather than just those assessed interest on unpaid balances.

The probable credit crunch and subsequent debanking of millions could lead to a negative macroeconomic shock. The reduction in the supply of credit could hamper consumer spending, which is more than two-thirds of gross domestic product.

Conclusion

A government-dictated price for credit card borrowing, specifically one below any historical market-determined price, would significantly reduce the supply of credit and likely debank millions of customers. The credit crunch would push consumers – often the most financially vulnerable – to other, and often far costlier, credit providers outside the traditional banking system. In turn, banks would likely reduce rewards programs and other card benefits, including fraud protection, while replacing lost interest revenue with more fees to be paid by all credit card users.