High interest rates in an election year means politicians have renewed their push for rate caps. But limits on interest rates are just price controls by another name and such policies cause more harm than good whenever they are implemented.
The motivations make sense. Although inflation rates are finally slowing down, many families still feel the pressure of runaway prices. From groceries to housing, inflation’s lingering effects are felt everywhere. With increased prices, many consumers have relied more on their credit cards to make ends meet.
Now, unable to pay their higher balances, Americans are seeing the highest delinquency rates since the economic malaise that followed the Great Recession. Credit card providers have in turn raised interest rates to guard themselves against new heightened risk.
With interest and debt stacking up, politicians offer their rescue plans for Americans this election year—with one prevailing solution being interest rate controls. While policymakers are right to look for solutions, government intervention is the last thing Americans need.
Interest rate controls have largely circulated in Democratic circles for decades, but the idea has since crossed the aisle. Former President Trump recently called for a temporary credit card interest rate cap of 10 percent. This poor policy proposal is becoming more popular, but popular does not mean beneficial.
One study by World Bank economists found that interest rate caps disproportionately pushed low-income families and those with poor credit scores out of the credit market. Other research finds interest rate controls increase inequality, reduce the amount of credit reliable borrowers can access, and worsen competition.
While policymakers may intend to protect consumers, evidence from the Great Recession suggests consumers are more likely to declare bankruptcy when blocked from the credit market. Combined with pushing more Americans into overdrafts and late fees, limiting credit options fails to provide better alternatives to the most vulnerable consumers.
Today, the average interest rate hovers around 25 percent, more than double Trump’s arbitrary 10 percent cap. A cap this low would reduce the overall credit supply, leaving many at-risk Americans without access to credit.
Former President Trump’s interest rate cap likely will not become law. But his endorsement could incite further price control efforts, this time with more bipartisan support. The political impulse to help debt-burdened consumers is justified and welcome. But as is often the case, government intervention will hurt more than it will help.
Rather than imposing price controls, policymakers should look for more helpful ways to grow the economy and reduce inflation. They should start by cutting federal spending. Deficit spending fuels inflation and causes interest rates to rise—both of which hurt consumer when they spend their dollars. Faced with higher prices and elevated interest rates, other effective methods include promoting competition and financial literacy.
Overall, hardline government intervention is not the helpful hand politicians wish it to be. Doing less is often better than doing more. That’s a message politicians should keep in mind when intervening in the marketplace to help consumers.
Nate Karren is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal