Capping Credit Card Interest Rates Hurts the People They Aim to Help

By Gavin Nicholson

WASHINGTON, D.C. (Texas Insider Report) — At first glance, capping credit card interest rates sounds like a simple solution to a real concern as households face rising costs and mounting consumer debt. Families are feeling stretched and policymakers are right to look for ways to provide relief, but good intentions do not always lead to good outcomes. And, over the past several decades the U.S. financial system has made meaningful progress in expanding access to credit across income levels and communities.

Policies that overlook that progress risk doing more harm than good.

Effective policy should be grounded in evidence – informed by stakeholders across the private and public sectors, and evaluated by its real-world impacts. From that perspective, credit card interest rate caps raise serious concerns.

For example, Senator Bernie Sanders and Senator Josh Hawley have introduced legislation for a federal 10% interest rate cap, a proposal that could restrict access to credit for most consumers and produce unintended economic consequences.

None of this denies the reality that many families feel gouged. When rates sit in the double-digits and penalties pile up, even a small emergency can turn into a long-term debt spiral. Texans deserve relief but the tool we choose matters because “cheaper credit on paper” can quickly become “no credit in practice.”

Credit card interest rates serve an important purpose – they reflect a combination of borrower risk, operating costs, fraud losses, and broader economic conditions. Unlike mortgages or auto loans, credit cards are typically unsecured, meaning there is no collateral if a borrower defaults.
Risk-based pricing allows lenders to extend credit to a wide range of consumers, including those with limited or imperfect credit histories.

This approach has helped bring tens of millions of households into the regulated financial system, replacing less transparent, dangerous or informal alternatives such as payday lenders.
When policymakers impose a hard cap on interest rates, lenders lose the ability to price for higher risk. The result is not cheaper credit for everyone, but less credit for many.

New research published by the American Bankers Association (based on a survey of issuers covering roughly three-fourths of the market) estimates that 74%–85% of open credit-card accounts would be closed or have credit lines sharply reduced under a 10% effective APR cap.

In Texas, more than 11 million Texans could be affected, including people with credit scores over 600. These are industry estimates, but they illustrate the basic economics of a strict price ceiling on unsecured credit.

Credit cards play a role beyond everyday convenience. For many households, they function as a short-term liquidity tool to manage cash-flow gaps or unexpected expenses, such as medical bills or car repairs. Broad access to credit cards today represents a significant improvement from earlier decades, when families had fewer safe options during financial emergencies.

In fact, the average American now has instant access to nearly $30,000 in credit to finance their needs.

Restricting access can force households to delay essential purchases or turn to less regulated alternatives with fewer consumer protections. Small businesses also feel the squeeze: research summarized by the National Bureau of Economic Research found 55% of surveyed small businesses used a corporate credit card in the past 12 months.

And evidence from markets with strict lending caps shows a consistent pattern: fewer approvals, lower credit limits, and more closed accounts. These outcomes risk reversing progress in financial inclusion and can reduce local economic activity.

Well-designed consumer protection should promote transparency, responsible borrowing, and access to fair credit. Policies that encourage competition and clear disclosure have historically done more to expand opportunity than blunt price controls.

Similarly, interest rate caps can undermine those goals.

There is also a broader economic impact to consider. Credit availability supports consumer spending, which in turn affects local businesses, employment, and tax revenues. During periods of economic uncertainty, access to flexible credit becomes even more important.

Credit card interest rate caps may be well-intentioned, but evidence suggests they will limit access to credit and harm the consumers they aim to help.

Policymakers should carefully weigh these unintended consequences and focus on solutions that protect consumers while preserving the progress made in expanding access to safe, regulated credit.

Gavin Nicholson is the Founder and CEO of the TexCap Policy Institute, a nonpartisan think tank dedicated to shaping a smarter, more resilient Texas.