The Economic Consequences of Credit Card Interest Rate Caps

On March 7, Representatives Alexandria Ocasio-Cortez and Anna Paulina Luna introduced a bill to cap credit card interest rates at 10 percent. Bernie Sanders and Josh Hawley are backing a Senate version. Strange bedfellows, same bad idea.

This is a classic price control — and a radical one. The national average interest rate on credit cards is around 22 percent. Slashing that to 10 percent by government diktat means one thing: credit dries up for those with bad credit scores or low incomes. If lenders can’t charge enough to cover the risk of lending, they’ll stop lending. That means millions could lose access — not because they’re irresponsible, but because the economics no longer works for card companies.

Proponents argue that a credit card interest cap would protect consumers from predatory lending practices and prevent individuals prone to irrational financial mismanagement from accumulating unmanageable debt. Yet such paternalism not only creates collateral damage by restricting credit for more responsible, yet higher-risk borrowers, but can cause big problems for households relying on flexible, short-term borrowing to smooth income shocks or cover emergencies.

With a low cap, the very safest borrowers might still get credit, but riskier borrowers are excluded since lenders cannot charge commensurate rates with the risks and margins that make it worthwhile. Similarly, there is a moral hazard aspect: if borrowers face lower interest costs due to a cap, they might take debts they otherwise wouldn’t. The result? Less credit overall, but a bigger average credit balance.

And don’t expect lenders to sit still. They’ll explore other ways to recoup losses: higher annual fees, junk add-ons, credit insurance, or pushing people into alternative, less-regulated lending products. The bill tries to block much of this by capping APRs that include fees, but enforcement is a game of whack-a-mole. Financial institutions innovate faster than regulators write rules.

You don’t need to take my word for the downsides. The financial economic experts of Chicago Booth’s Kent Clark Finance Panel were recently asked whether the proposed credit card cap would make most users “measurably better off.” Just 3 percent agreed; 70 percent disagreed. Similarly, when asked whether there would be “a substantial reduction in access to credit for low-income borrowers,” 82 percent agreed while only 3 percent disagreed. Credit card interest caps are the route to credit exclusion, not inclusion.

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The empirical evidence from other interest rate caps backs this up:

  • In Oregon, after payday loan interest caps were introduced, low-income borrowers bounced more checks and struggled to pay bills — Zinman (2010).
  • In Illinois, a 36 percent rate cap led to the collapse of small-dollar lending and worse outcomes for subprime borrowers, relative to Missouri — Bolen, Elliehausen, and Miller (2023).
  • A comprehensive cross-country review concluded that strict interest rate caps typically lead to reduced credit volumes, especially in underserved segments, and increased risk of informal lending — World Bank (2018).
  • States that capped payday lending rates saw more bounced checks and credit card delinquencies — Morgan & Strain (2008).

Usury laws, of course, stretch back thousands of years. The Code of Hammurabi capped interest on grain and silver loans in Babylon nearly 4,000 years ago. Ancient Rome permitted moderate interest, with criminal penalties for exceeding caps. In medieval Europe, Christian doctrine condemned all interest as immoral, and lending was tightly constrained.

But with the rise of commerce, caps again replaced outright bans. England legalized interest in 1545, first at 10 percent, then reduced it to 5 percent by 1713 – a cap that persisted for over a century. The modern industrial era saw the repeal of such laws in places like Britain in the mid-19th century and much of the U.S. by the 1980s.

Yet now the pendulum swings again. Caps are coming back — despite the harmful consequences. It’s what the Marginal Revolution crowd calls “The Great Forgetting.” And it’s just one more battle in the growing war on prices.

Better News on Overdraft Price Controls

Not all of Congress is on board with price controls for financial services. Both the Senate Banking Committee and House Financial Services Committee have taken steps to overturn a midnight ruling from the Consumer Financial Protection Bureau (CFPB). This rule would force banks offering overdraft protection to choose between reducing prices by more than 80 percent, pricing at cost, or changing overdraft services to a loan program. However, by using the Congressional Review Act, Congress seems like it may be willing to overturn this rule. Here’s hoping this proposed price control won’t stand.

The Definition of Insanity in Hungary

Hungary is again implementing price controls, this time by capping grocers’ profit margins at 10 percent above wholesale food prices on 30 products, effective mid-March through May.

When Hungary imposed simpler price controls on foodstuffs in 2022, we explained that they would create shortages and fail to curb inflation. These effects were duly reported, as retailers struggled to meet regulations for minimum stock, sellers offset restrictions by raising prices on other products, and Hungary ultimately recorded the highest inflation rate in the European Union in 2023.

This was unsurprising. Tweaking the prices of a few grocery items does nothing to address the broader forces driving the overall price level — like supply shocks or excessive macroeconomic stimulus. At best, artificially holding down a few prices distorts the consumer price index, complicating the central bank’s efforts to control inflation.​

Now, with Hungary’s inflation rate still the highest in the EU (5.6 percent), Prime Minister Orban has embraced a different flavor of the same failed strategy: capping profit margins on goods like chicken breasts, milk, flour, potatoes, butter, and pork. Retailers can’t charge more than 10 percent above the wholesale cost of these items.

The problem is that retailers don’t just face wholesale costs for individual items — they also have to recoup the cost of staff, refrigeration, rent, and lost inventory. If those operating costs rise faster than the wholesale price of the goods, a markup cap makes it increasingly unprofitable to stock the capped item. One obvious response is to stock less. That’s how product shortages emerge: because it no longer makes sense for grocers to sell them.

Meanwhile, stores will again look to recoup lost profits by raising other prices. Uncapped items — whether other food categories, cleaning supplies, or household staples — are already becoming margin lifeboats. This kind of cross-subsidization shifts inflationary pressure rather than removing it. So even if headline measured inflation ticks down temporarily (thanks to a few artificially cheap products), the underlying dynamics worsen: distorted relative prices, misallocated supply, and rising costs pushed onto everything not under direct control. Instead of fighting inflation, Hungary’s policy risks rearranging it — from one aisle of the grocery store to the next.

War on Prices Round Up:

  • Sellers’ Inflation From Tariffs? Economist Isabella Weber says tariffs could trigger another round of “sellers’ inflation” – with companies taking advantage to charge higher post-tariff prices for inventory they imported at pre-tariff costs. But that’s not a bug. It’s how markets work. Firms that stocked up early took a risk and used their capital to prepare. Now they’re sitting on goods that just became more valuable because of the tariff. That’s not profiteering — it’s foresight. And competition still limits how much they can charge. Once they restock, they’ll pay the same higher costs as everyone else. Yes, some might make higher short-term profits. That’s the point. Markets reward those who plan ahead — and that’s exactly what keeps shelves stocked when policy shocks materialise.
  • Democrats Realize Rising Input Costs Raise Prices? Thankfully, most Democrats now acknowledge that tariffs, by raising input costs, lead to higher consumer prices on affected products. Good. But here’s the real question: if higher input costs from tariffs make things more expensive, why wouldn’t the same be true for minimum wage hikes, strict labor rules, or costly environmental mandates? If we’re following this basic economic logic, it should apply across the board. One to ponder for progressives.
  • Tighter rent control in California? Assemblyman Isaac G. Bryan has introduced AB 246, which would impose a rent freeze across Los Angeles County at levels charged as of January 7, 2025, with civil penalties of up to $10,000 for violators. Politico reported last week that California Democrats are divided on the proposal, citing concerns about potentially harming mom and pop landlords. This would be an extremely tight price control, bringing all the worse damage that rent control entails.
  • Large Supermarket Facing UK Equal Pay Law Case? Britain’s misguided equal pay law now threatens to ensnare the country’s largest supermarket chain. We’ve written before about how this law makes no economic sense. Yet precedents from those previous cases have seen an equal pay claim against Tesco taking shape, as the business stands accused of paying store workers less than distribution center employees, for roles that courts might ultimately deem of “equal value.” The financial hit could run into many billions of pounds, and all based on the flawed assumption that regulators or courts can objectively determine what different jobs are worth.
  • An Economic Case For Anti-Price Gouging Laws: A new academic paper tries to justify price gouging laws by redefining price gouging through economic welfare theory. The argument? In rare situations — like during a natural disaster — if a product is essential, supply is fixed, and low-income people rely on it heavily, then capping prices could raise societal welfare (if we assume the government has a preference for redistribution). But, as should be obvious, the assumptions here largely determine the conclusion. In policy terms, setting the “right” price would still require governments to know who needs and values what and to be confident that keeping prices low won’t hurt supply or future supply. In practice, prices help ration scarce goods and signal suppliers to bring more, even if just through emergency preparation or option-ready stockpiling. Interfering with that process makes shortages worse.