NASHVILLE — Americans would save about $100 billion annually in interest costs if a proposal to cap credit card interest rates at 10% were enacted, according to a paper published by Vanderbilt University.
The researchers said they found banks and credit card companies could withstand such a cap and remain profitable. While limited in scope, the analysis provides academic support for a campaign pledge made by President Trump that has also been echoed in Congress.
Researchers concluded that banks could continue to earn profits on most customers even with a 15% cap while still offering perks such as points and airport lounge access.
Scaling Back Rewards
“A 10% ceiling would challenge the business model, but banks could still generate earnings by scaling back rewards,” according to the researchers.
As the CU Daily has previously reported, lawmakers in both parties have also embraced the idea. Sen. Josh Hawley (R-MO) and Sen. Bernie Sanders (I-VT) introduced legislation to impose a 10% cap, and Rep. Alexandria Ocasio-Cortez (D-NY) introduced a similar House measure.
Analysts have also noted that some caps already exist, including the Military Lending Act, which bars lenders from charging active-duty service members more than 36% on any financial product. In addition, NCUA currently sets an 18% ceiling on credit union card rates.
Both credit union and bank trade groups have expressed opposition to any caps, warning that limits would undermine the credit card business model and jeopardize the rewards programs millions of Americans rely on for perks such as free flights, hotel stays and cash back.
What Motivated Study
Brian Shearer, the report’s author and director of Competition and Regulatory Policy at the Vanderbilt Policy Accelerator, said it was the opposition to a cap that motivated him to study the issue. Shearer also previously served as assistant director of policy planning and strategy at the Consumer Financial Protection Bureau under both Republican and Democratic administrations.
“I wanted to see if President Trump’s proposed cap could be taken seriously, and the idea appears that it could be seriously considered and it would not have the amount of downside that often the pundits assume there will be,” Shearer said in a statement.
Record Debt
As the CU Daily has also previously reported, Americans now hold a record $1.21 trillion in credit card debt, or roughly $6,400 per person. The average card interest rate stands at about 21%, compared with 12% a decade ago, according to Federal Reserve data.
Shearer’s analysis estimated that a 15% cap would save consumers $48 billion a year, while a 10% cap would increase that figure to $100 billion. The research assumes issuers would charge rates close to the maximum allowed.
‘Sky is Not Falling’
The study also suggests issuers likely would not eliminate rewards programs, though customers with lower credit scores would likely see reductions. Shearer argued those cardholders would still benefit overall, since they are more likely to carry balances and thus stand to save on interest costs.
“It is true that there would need to be some reward reduction, but it’s not the kind of sky-is-falling story that you often hear,” Shearer said in a statement.
