Paul Kupiec assesses the likely negative impact for consumers of a government-imposed cap on credit card interest rates.
A federal-government-imposed cap on credit card annual percentage rates (APRs) as severe as 10 percent would likely upend the credit card industry’s current business model. It would require the industry to make drastic changes in account underwriting standards, promotional programs, account fees, purchase reward programs, and other account services to ensure card issuance remained profitable.
Issuers would cancel most existing near-prime and subprime accounts. While some issuers might offer current cardholders new account terms with high fees and collateral requirements, many issuers would just outright cancel accounts with weak credit scores. Many cardholders who would face account cancellation under a 10 percent APR cap likely have limited access to alternative sources of credit. And for those who do have access, these sources may charge interest rates as high or higher than the rates currently charged on their revolving credit card balances.
Rewards programs would be drastically curtailed. Should zero-balance promotional rates and purchase rewards continue to be offered, they would be rationed among consumers with high-prime and super-prime credit scores. Most credit card accounts would likely see an increase in annual fees, cash transfer fees, foreign exchange transaction fees, and late payment fees. In the case of some fees—particularly late payment fees—increases could be substantial to compensate for lost interest revenue.
Many consumers would likely welcome congressional legislation that promises a reduction in their credit card APRs. However, such a cap would almost surely limit many of these consumers’ access to the credit and card services upon which they currently depend. Congressional intent notwithstanding, the unanticipated but inevitable changes necessitated by a legislated 10 percent APR cap are unlikely to be popular with many voters once they see the effects.
