Everyone wants lower credit card rates — but price controls come with a cost

Who wouldn’t want lower credit card interest rates?

At a time when many Americans are stretched thin, the idea of capping credit card rates sounds not just reasonable, but compassionate. High APRs are frustrating, often eye-watering, and easy to vilify. Politicians across the ideological spectrum are tapping into that frustration by calling for government-mandated interest-rate caps.

The appeal is obvious: if prices are too high, force them down.

Unfortunately, economics doesn’t work that way — and decades of evidence show that interest-rate caps, however well-intentioned, end up hurting the very people they’re meant to help.

Interest rates are prices. They reflect inflation, the cost of capital, and — most importantly — risk. When government imposes a legal ceiling on what lenders can charge, lenders don’t suddenly lend at a loss. Instead, they change who they lend to.

If risk can’t be priced, it gets rationed.

In practice, that means fewer loans, lower credit limits, tighter underwriting standards, and entire categories of borrowers pushed out of the market. A rate cap doesn’t eliminate risk; it just makes lenders unwilling or unable to serve riskier customers.

This isn’t theory. It’s what actually happens.

Supporters of interest-rate caps often frame them as consumer protection for low-income and financially vulnerable households. But the strongest empirical evidence shows those households are the ones most likely to lose access to credit altogether.

Consider Chile. In 2013, the country sharply lowered its legal maximum interest rate on consumer loans. A peer-reviewed study published in the Journal of Banking & Finance found that the reform significantly reduced access to formal credit. Nearly 10 percent of households were excluded from bank credit entirely, with the largest effects concentrated among younger, poorer, and less-educated borrowers.

In other words, the policy worked — just not in the way its advocates intended.

The same pattern appears in the United States. A recent staff report from the Federal Reserve Bank of New York examined what happens when U.S. states impose tighter usury limits. Using detailed credit-bureau data, the authors found that high-risk borrowers experienced sharp declines in both the number of credit accounts and total borrowing after rate caps were imposed.

Crucially, those borrowers did not become more financially stable. Delinquency rates did not improve. Access to credit fell, but financial distress did not.

When mainstream lenders pull back, demand for credit doesn’t disappear. It moves.

Households shut out of credit cards and traditional loans are pushed toward less regulated, higher-cost alternatives — payday lenders, pawn shops, informal borrowing, or overdraft dependence. These options often come with higher effective costs, worse consumer protections, and fewer paths to financial recovery.

Even borrowers who retain access don’t escape unscathed. When interest revenue is capped, lenders make it up elsewhere — through higher fees, reduced rewards, or fewer no-fee products. Credit card rewards don’t vanish by accident; they’re funded by pricing that reflects risk.

A cap doesn’t eliminate costs. It redistributes and obscures them.

Some policymakers argue that a temporary cap — say, 10 percent — would provide relief without long-term harm. But lenders can’t wait to see how long a cap lasts. They must adjust immediately.

That means credit lines are cut, accounts are closed, and riskier borrowers are screened out the moment a cap takes effect. For many consumers, once access is lost, it isn’t easily restored — even after a cap expires.

Short-term political fixes can create long-term financial scars.

If the goal is to make credit more affordable, blunt price controls are the wrong tool. They treat every borrower the same, regardless of risk or circumstance, and end up rationing access rather than lowering costs sustainably.

A more effective, market-consistent approach would focus on:

• Increasing competition in consumer lending

• Reducing regulatory barriers to entry

• Improving transparency and financial literacy

• Addressing inflation, which pushes nominal interest rates higher across the economy

  
  

These reforms tackle the root causes of high borrowing costs without cutting off access to credit for millions of Americans.

The push to cap credit card interest rates is politically attractive precisely because it sounds so good. Everyone wants lower rates. Everyone wants relief.

But good intentions don’t override economic reality.

The evidence from the United States and abroad is clear: interest-rate caps don’t make credit universally cheaper. They make it scarcer — especially for those with the fewest alternatives.

And for households living paycheck to paycheck, expensive credit is often bad. But no credit at all is worse.