Real Issue, Wrong Response

A new Wall Street Journal survey of 1,500 registered voters finds Americans across party lines embracing policy proposals long considered outside the political mainstream. One finding should be of particular interest for AFSA members and their customers: Nearly four in five voters support capping credit card interest rates at 10 percent.

That may be an indicator of real strain in household finances, or it may be consumers who simply think they will get a better deal. The former is a real issue that goes beyond credit cards, the latter is simply short-sighted. Here’s why.

Credit card balances have passed $1.2 trillion, most cardholders carry a balance month to month, and families have spent two years absorbing price increases that their paychecks haven’t matched. AFSA’s own surveys of consumer credit executives show the same picture from the lender’s side of the desk, with demand for credit rising even as household finances tighten. When four in five respondents say yes to a rate cap, they are mostly saying that life costs too much.

The Journal analysis notes one point that deserves as much attention as the headline number: the survey didn’t present the possible negative consequences of these proposals, and the example it offers is that a rate cap “could prompt finance companies to stop lending to lower-income households that carry balances.” The pollsters measured the appeal of the concept, but not the cost.

So, it’s worth walking through what a 10 percent cap would do. A credit card rate must cover three things. The lender’s own cost of funds, above 4 percent before a dollar is lent. The losses from borrowers who don’t repay, which run higher the further down the credit spectrum a lender serves. And the cost of servicing millions of small, unsecured, use-it-when-you-need-it credit lines. Add those up and a 10 percent ceiling sits below the cost of lending to almost anyone whose credit is less than perfect. A cap at that level doesn’t lower the price of credit. It removes the product for everyone priced above it.

One of the pollsters behind the survey described the through-line of these populist ideas as the sense that someone is standing between you and a fair price. That may play for consumers in some markets, but not credit. What stands between a borrower and a 10 percent rate is not a gatekeeper who could simply step aside. It’s simple math. Interest rates are the price of risk, and a statute can cap the price without capping the risk. When the two are forced apart, lenders don’t lend at a loss. They stop lending to the borrowers the math no longer covers.

Which raises the question the survey never asks. Who is harmed by the unexpected consequences of such a policy? Not the cardholder with a 780 score and three rewards cards. The first people cut off are the young worker with a thin file, the family rebuilding after a rough stretch, the borrower whose score still reflects a layoff two years ago. The very Americans whose strain produced that four-in-five number. States that imposed caps far higher than 10 percent watched lending to nonprime borrowers contract sharply, and researchers found the borrowers shut out didn’t stop needing credit.

The need doesn’t disappear when the card does. The transmission still fails, the water heater still gives out, and the demand flows somewhere, toward products with fewer protections and less oversight, and too often toward the kind of operators who monetize financial distress rather than resolve it.

 “Affordability anger” deserves a policy answer. The answer is competition among regulated lenders, transparent pricing and disclosure, financial education that starts young, a real fight against the fraud that raises costs for everyone, and above all, preserving access to reliable, regulated credit for the moments families need it most. Voters are telling policymakers the household math has gotten too hard. The wrong response is a policy that makes the math simpler by taking away one of the answers.