Yesterday, former President Donald Trump addressed the economic challenges Americans have faced in recent years. He stated, "While working Americans catch up, we’re going to put a temporary cap on credit card interest rates. We’re going to cap it at around 10%. We can’t let them make 25 and 30%."
The American Financial Services Association (AFSA) has consistently highlighted, including in its recent Consumer Credit Confidence Index survey, that consumers are experiencing significant financial strain due to ongoing inflation, layoffs, and economic uncertainty. The consumer credit industry, which generates trillions of dollars in economic activity annually, is also facing similar uncertainties. AFSA argues that rate caps on credit card interest are not a viable solution for improving the current economic situation in the U.S.
According to AFSA, rate caps of any kind are unworkable and actually harm the consumers policymakers aim to help by limiting access to various types of credit relied upon by tens of millions of Americans. Several academic studies support concerns that rate caps restrict access to credit for those who need it most.
Research indicates that Illinois' rate restriction led to a 38 percent decrease in loans to subprime borrowers and a 35 percent increase in the average loan size for these borrowers. Additionally, reports from the Federal Reserve and FDIC show that 19% of Americans are unbanked or underbanked and require robust competition in the nonbank market.
A comprehensive review by World Bank researchers found six potential harms from interest rate caps:
- Increases in non-interest fees and commissions
- Reduced price transparency
- Lower credit supply
- Decreased loan approval rates for subprime borrowers
- Fewer financial institutions and reduced density
- Negative impacts on bank and institution profitability
Some may argue that a temporary rate cap on one form of credit would have limited effects. However, historical precedents suggest otherwise; policies intended as temporary often become permanent fixtures. For example, the Spanish-American War tax was initially meant to be limited but continued for over a century.
AFSA supports pro-consumer policies that offer more choices and flexibility for finances. During the pandemic lockdowns, AFSA member companies played a crucial role in providing customers with necessary financial flexibility.
However, AFSA maintains that rate caps on credit products are not what American consumers need. It emphasizes the importance of policymakers understanding this issue and has been actively engaging with them about the critical role of credit in supporting the nation's economy, consumers, and businesses alike.
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