With the cost of living remaining stubbornly high, and credit card interest rates adding to the monthly debt burden for working families, politicians on both the right and the left have touted proposals to cap credit card interest rates to keep more money in Americans’ pockets. A first-of-its-kind analysis from the Vanderbilt Policy Accelerator’s (VPA) Brian Shearer finds that proposals to cap credit card interest rates could save Americans and small businesses billions of dollars without reducing access to credit or cutting into rewards programs. In particular, every type of consumer – from the deepest subprime customers to customers with perfect FICO scores – generates high enough bank profits that even a substantial rate cut would only eat into the excessive profit margin.
“Steep credit card interest rates are hitting Americans already facing higher prices across the economy. Proposals to cap credit interest rates enjoy support on both sides of the aisle, and contrary to industry claims, could return tens of billions of dollars to Americans without significantly impeding access to credit cards or popular rewards programs,” said Brian Shearer, director of competition and regulatory policy at VPA. “The credit card industry is so profitable that it could rein in interest rates, save billions for Americans and small businesses, and still make profits. Policymakers should look more seriously at interest caps as a way to help Americans keep more money in their pockets.”
High credit card interest rates have added to Americans’ financial challenges, given the rising price of essential goods and services. A February 2024 analysis from the Consumer Financial Protection Bureau (CFPB) found that the average annual percentage rate (APR) margin, or the difference between the average APR and the prime rate, reached an all-time high, and that major credit card companies earned an estimated $25 billion in additional interest revenue by raising the APR margin. The CFPB has also found that the credit card market is remarkably concentrated, with the top ten issuers responsible for more than 80 percent of credit card loans, while the next 20 issuers are responsible for another 12 percent of loans.
Policymakers ranging from President Donald Trump to Senators Josh Hawley (R-MO) and Bernie Sanders (I-VT), as well as Alexandria Ocasio-Cortez (D-NY), have focused on credit card interest rates as a mechanism to save Americans money, and have either campaigned on or introduced legislation to cap credit card interest rates at 10, 15, or 18 percent. Already, credit unions are restricted to charging no more than 18 percent interest on credit cards.
Shearer’s analysis uses new data to show that the profit margins of the credit card market at every FICO credit score tier are thick enough to absorb a very significant reduction in interest caused by a new federal usury rate, due to the hefty profits that credit card issuers make on interchange fees charged to merchants and the healthy profitability of credit cards issued to customers at all FICO tiers–not just superprime borrowers. Examining the impact of usury caps of 18, 15, and 10 percent, the analysis shows that an 18 percent or 15 percent cap would save Americans $16 billion and $48 billion annually, respectively, with no impact to rewards or lending volumes. A 10 percent cap would save Americans $100 billion, but would lead to a $27 billion reduction in rewards for customers with FICO credit scores of 760 or lower. However, as the analysis points out, credit card borrowers at these levels would save more than triple in interest than the reduction in rewards, and borrowers with higher credit scores would keep their rewards.
The report also outlines recommendations for Congress when considering a credit card usury cap, such as setting a cap over the federal funds rate, giving regulators emergency authority to raise the cap during recessions, and ensuring the rate cap reaches business credit cards–a primary source of capital for small business owners.
Read Shearer’s paper on Capping Credit Card Rates.
The Vanderbilt Policy Accelerator for Political Economy and Regulation (VPA) focuses on cutting-edge topics in political economy and regulation to swiftly bring research, education, and policy proposals from infancy to maturity. To learn more about our work, visit vu.edu/vpa
