With job growth slowing down and experts fearing a recession, many Americans may soon feel more financial strain. In cases where immediate additional funds are needed, credit can be a helpful financial tool. However, with a proposed cap on credit card interest rates, many Americans could lose access.

Sen. Josh Hawley’s proposed Capping Credit Card Interest Rates Act would limit the interest lenders could charge on credit to 18 percent annually. At 20.68 percent as of May 2023, credit card interest rates are at an all-time high since 1995. Rates have risen swiftly in the last five months due mainly to the actions of the Federal Reserve.

Though less discussed, when the Federal Reserve hiked its target interest rate, this also increased the prime rate, which is used to calculate credit card rates for a bank’s most creditworthy clientele. All other higher-risk credit rates tend to follow when the prime rate goes up. Ironically, now that the Federal Reserve has induced these massive rate hikes and caused lenders to raise their rates, the Senate may force lenders to lower.

Because 20.68 is an annualized rate, the impact on interest rates for short-term credit extensions will be more dramatic. For example, a 2-week $100 loan at 18 percent interest would only pay the lender an additional $0.70 or 0.7 percent of the original loan.

On top of the prime rate, banks must also account for operational costs, regulatory compliance, and risk costs. The lender is at a loss if a borrower defaults on their credit card debt. Lenders must cover these potential losses with interest rates that make lending profitable. If lenders cannot adjust interest to match the risk imposed by specific borrowers, they will simply withhold lending to those borrowers. This is why 20.68 percent interest is the average, but changes in risk between individual borrowers will cause variation in the rate. When banks are legally prevented from increasing their rates above a certain amount, it limits who banks can profitably lend to.

The predominant consensus on price controls amongst economists is that when prices are capped, supply shrinks because it becomes unprofitable for suppliers to continue supplying products with higher costs than revenue. Interest rates are the price for taking a loan, and when these rates are capped, loan suppliers can’t profit from higher-risk loans. In today’s context, an 18 percent cap would put even the average credit card user outside the range of most lenders.

An expected response from proponents of the bill is that borrowers are being swindled into using credit cards at such high rates. The idea is that a rate over what politicians deem acceptable is “predatory,” and consumers just aren’t smart enough to avoid the lending hucksters.

Much like with other bans meant to save consumers from themselves (caps on short-term small-dollar loans being a prime example), no alternative system is offered to alleviate the reason people use credit cards in the first place. Proponents will point out debt-struck borrowers as a reason to cap but offer no plan to assist the nearly 1/3rd of Americans who couldn’t pay for a $400 emergency expense. Of these Americans, the most common option to make an emergency payment when cash is not readily on hand is with their credit card. Since low-income consumers are usually over-represented as high-risk, they are the most likely group to lose access to credit if caps are implemented.

Before lawmakers implement price controls to ostensibly “help the little guy” from creditors, they need to examine the economics of this action. To go through with this measure would be a disservice to the over 100 million Americans who have trouble covering emergency expenses and often turn to their credit cards for support. Don’t cut these consumers out with blind good intentions.

Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.