Both ends of the ideological spectrum get it wrong with credit card interest rate caps

Reps. Anna Paulina Luna (R-Fla.) and Alexandria Ocasio-Cortez (D-N.Y.) have teamed up as cosponsors on legislation that would “amend the Truth in Lending Act to cap credit card interest rates at 10 percent.” Sens. Josh Hawley (R-Mo.) and Bernie Sanders (I-Vt.) sponsored its companion legislation.

Ocasio-Cortez and Sanders are two of the most outspoken, best-known, self-described democratic socialists in Congress, whereas Luna and Hawley trend toward the populist wing of the Republican Party. The bipartisan legislation is perhaps one of the best examples of horseshoe theory playing out on the national stage.

Fans of the legislation believe that capping credit card interest rates at 10 percent would help consumers, many of whom are struggling to pay off their credit cards. Although the intention may appear noble, the effects would be disastrous.

This bill would harm everyday, hardworking Americans by dismantling the financial tools they have come to rely on. Individuals with low incomes and low credit scores would perhaps be hit hardest if forced to turn to risky or nefarious methods of borrowing. Possible outcomes of the legislation, which are addressed more in-depth here, include the following:

• Reduced access to credit for Americans with low incomes and low credit scores
• Decreased credit card offerings
• Increased costs for individuals who maintain good financial habits
• Potential destruction of the credit card market
• Disincentivizing good financial habits

Of course, interest rates are in part determined relative to the borrower’s risk, commonly referred to as “risk-based pricing.” For credit cards, this is most closely associated with the individual’s credit score. Credit cards often carry higher interest rates than those seen in other financial products because they are an unsecured form of debt and offer a 30-day float. When considering these factors, the legislation appears to be bordering on nonsensical with the arbitrary choice of 10 percent. This rate was likely selected because of President Donald J. Trump’s brief statement on the campaign trail calling for a temporary cap of “around” 10 percent. But selecting a number as a permanent, legislative change to credit card markets, as opposed to tying it to a financial benchmark like the prime rate, or even allowing for consideration of a consumer’s risk, is detached from any serious attempts at reform.

Instead, the legislation is a very unserious attempt at price controls that gives a win to advocates of bureaucracy and big government. It is antithetical to the efforts of limiting government through actions like those taken by Senate Banking Chairman Tim Scott (R-S.C.) and House Financial Services Chairman French Hill (R-Ark.) and their efforts to repeal similar price-control rules that came out of the Consumer Financial Protection Bureau under the Biden administration.

Instead of socialist-style price controls, members of Congress should consider the relationship between liberty and responsibility. To provide Americans with the widest possible variety of financial tools, market forces must be allowed to operate within a reasonable regulatory framework. Attempts at forcing outcomes will instead result in fewer choices and less financial freedom.

Congress would be wise to disregard the legislation.