Credit card interest rate caps sound good as an immediate way to increase affordability. However, history has shown that price controls increase the cost and decrease the availability of affordable credit for those who need it the most.
Until the late 1970’s, many usury laws capped interest rates at 10%. Only those with the highest credit qualified for credit cards. Many low and moderate-income (LMI) households and small business were excluded entirely or relied upon on riskier—and higher priced alternatives (i.e., trade credit, layaway, payday lending, etc.). When caps lifted and banks could price risk into the interest rates, credit cards became widely available and financing more affordable.
Credit Cards are an Integral Form of Finance for Many Small Businesses
The small business credit card market is roughly $2 trillion, of which fifty percent is for small business underwritten as personal cards on the back of the owner.
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When a restaurant’s freezer dies, when a contractor needs materials upfront, or when a boutique buys inventory, credit cards are often the only fast, frictionless, and affordable source of funding.
With a Hard Cap, Affordable, Reliable Credit Would Dry Up—Fast
A 10% cap ignores the real cost of lending. Banks evaluate risk, and small businesses—especially new ones—have higher risk profiles. If lenders cannot price risk, they simply stop lending.
Translation: Current small businesses credit card lines will shrink or disappear, and new card approvals will plummet.
Furthermore, many small businesses use credit cards to launch new products, test new markets, and upgrad tech. Pull away reliable credit, and the result will either be less investment or costlier financing.
Finally, banks will either reduce or eliminate credit offerings to lower and more moderate-income borrowers, or those with little or no established credit file.
This could lead to more expensive, riskier, and less transparent finance options for small businesses and LMI households (i.e., buy now, pay later; cash advances; trade credit; payroll-linked credit; wholesale finance; etc.).
The U.S. Chamber has Consistently Oppsed Price Controls
In 2023, when President Joe Biden proposed capping card late fees, we successfully fought back as government intervention would force banks to reduce the availability of credit, especially to small businesses and Americans in need.
Bottom line: A government-mandated interest rate cap would punish households and small businesses by limiting credit options and reducing access to affordable credit.
