Executive Summary

• Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) have joined forces to introduce a bill that aims to cap credit card interest rates.
• The proposed bill, S. 381, seeks to limit credit card interest rates at 10% for a period of five years, which mirrors President Donald Trump’s campaign promise.
• While the bill aims to protect consumers from high-interest rates, critics argue that such a government-imposed cap could restrict the supply of credit and push consumers toward more expensive lenders, and banks might cut back on rewards programs and impose new fees on all credit card users.

Introduction

In a bipartisan effort, Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) have introduced a bill (S. 381) that would require an amendment to the Truth in Lending Act, imposing a five-year cap on credit card interest rates at 10%. Ironically, this proposal echoes President Donald Trump’s long-standing campaign pledge of a 10-percent cap, revealing a rare point of bipartisan agreement on a contentious issue.

The average annual percentage rate (APR) on mortgages currently stands at 21.47% as of the fourth quarter 2024, according to Federal Reserve data. The consumer watchdog, the Consumer Financial Protection Bureau (CFPB), reported in 2022 that only those with excellent credit scores of 800 or above enjoy interest rates below this proposed 10-percent threshold, highlighting the radical impact of such an intervention. Historically, credit card interest rates have never dipped below 10%.

Imposing a mandated price on credit cards for borrowing, particularly one lower than the historical average, would critically restrict credit availability. This scenario would lead to the debanking of millions, thereby pushing consumers to other, often more expensive, credit sources. Banks may respond by reducing rewards programs and other card benefits.

The Credit Card Market and Competition

Credit Card Landscape

Credit cards offer consumers the means to borrow money from financial institutions to purchase now and repay later. Federal Reserve Bank of New York data indicates that as of the fourth quarter of 2024, there were over 617 million credit card accounts in the United States, underlining the immense market reach of the credit card industry. The APR for credit card accounts varies based on the borrower’s risk profile and administrative costs like fraud protection and rewards. State usury laws determine the maximum APR a bank charged, although national banks have leveraged looser state regulations, opting to issue cards from states, such as South Dakota, with more permissive interest laws. Thus, banks frequently provide credit cards from South Dakota.

The prime rate is a benchmark interest rate determined by individual banks, and it’s notoriously volatile, especially in response to macroeconomic events. Since 2022, market conditions such as the pandemic, inflation, and economic recovery measures have driven an increase in the average APR on credit card accounts, reaching 19.6%. It is often the most concerning and conspicuous indicator for policymakers. Debates highlight recent increases in credit card interest rates as potentially harmful economic issues.

Recently, credit card issuers have faced public scrutiny due to significant changes in APR. Figures reflective of these increases have drawn the ire of various politicians, including Senators Hawley and Sanders, as well partisan opinions about President Trump.Many consumers experienced unprecedented financial relief through government assistance programs during the COVID-19 pandemic, leading to a sharp decline in credit card balances in 2020 and early 2021. Several years later, rising consumer balances and increasing delinquencies have compounded the financial risks that card issuers face, causing APRs to rise along with them. Data from the Federal

Recent macroeconomic changes have had a significant impact on the APR of credit card accounts since 2020. After various government-led relief programs during the pandemic, many Americans found themselves with substantial savings. In response, U.S. citizens paid down many of their credit card balances, leading to significant decreases in risk for lenders. Consequently, this triggered a decline in the average annual percentage rates for credit cards.

However, in recent years, credit card usage has surged, culminating in more than $1.2 trillion in credit card debt in the fourth quarter of 2024, as revealed by The Wall Street Journal. Concurrently, delinquency rates, which shine a light on the overall risks in the credit card market, soared once again, reaching 4.69% in the third quarter of 2024, the highest level since before the 2008 financial crisis. These upticks in inflation and economic volatility have pushed the Federal Reserve to intensify monetary policies, putting further strain on the revitalized credit card market.

< figcaption>source:{https://www.newyorkfed.org}Federal Reserve Bank of New York Household Debt and Credit

Infrastructure expansions in digital lending platforms have increasingly influenced competitive advantages from a wide array of payment systems. Given that historical trends have long-time ties with alternative payment solutions historically from Cash and debit cards, emerging credit methods such as buy now, pay later (BNLP) services offer consumers increasingly attractive options, expanding credit market diversity.

“According to an analysis by Ipsos, a leader in market research and public opinion, Credit cards are favored by 68% Americans for the rewards. Consequently, 37% of these may get discouraged from using credit cards if rewards don’t fund lower fees. Decentralized finance continues to be a costly battle given a majority average credit rating cannot consistently participate, implying immaculate alternatives would attract greater footing.

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.

Specifically, the U.S. competitive credit card market renders flexibility to influential myriad strategies credit issuers deploy to extend customer bases and financially tract record. Fees such as reward programs competitively deliver APRs, annual fees, and differing risk-functional costs for cardholders.

Years of research from economics journals pace policy, such as the ‘Durbin Amendment’ which imposes a fee for dignitaries applying debit card transactions. However, a Feld Law Firm study found that constraints placed on financial providers have consistently led to the ‘collapse’ of reward systems from 30 per cent versus debit transactions increases. Conversely, researchers have questioned why would 30% attributes favor debit card transactions purchases over credit card transactions method as outlined in Amendment and Professor Northwestern University Klein’s perspective.

Potential Impacts of a 10-percent Cap

The Federal Reserve’s analysis mirrors quasi-econometric research findings dating over 30 years outlining the supplementary effects of a mandate interest rate cap. Said strangling effects persist for over 60% of Americans in total consumer balances, similarly frothing consumers from the mainstream financial lending system onto other traditional financial systems such as PayDay Charges, Auto Title money lenders, aprchments and credit risk pickups. introduce: