Op-Ed: Lindsey Johnson: Why the crusade from Bernie Sanders and Josh Hawley on interest rates will do more harm than good

Sens. Josh Hawley (R., Mo.) and Bernie Sanders (I., Vt.) have teamed together to introduce legislation that would cap credit card interest rates for everyone in America at 10 percent. The senators have made it part of their political campaigning, this week speaking to Fox News and others on the need for this government-mandated price control.

But the attention-grabbing rhetoric pushed by Senators Hawley and Sanders ignores the facts: there is overwhelming evidence to show that capping interest rates harms consumers. It raises costs and restricts access to credit for the hardworking Americans who need it most.

Senators Hawley and Sanders suggest consumers would save money under their 10 percent rate cap proposal. However, their math is wrong and misleading. Let’s take the following hypothetical scenario: a consumer has $1,000 in credit card debt. For the sake of argument, let’s assume they pay it off in three months. At current average interest rates, they would be charged $40. That is significantly less than the 300-600 percent interest that the same consumer would be charged if they went to pawn shop or payday lender.

Credit cards are an essential tool because they offer flexibility. Consumers have the option to pay off their debt tomorrow or over a longer period, but only if they need. When life throws you a curveball, for example losing a job or facing an unexpected bill, consumers can take the time they need to pay off their credit card. Or, if they get a bonus or unexpected influx in cash, they can pay off the credit card bill at once. Flexibility is critical.

Here’s the real-world situation: banks aim to both extend credit to the broadest range of consumers, while still ensuring the safety and soundness of not only the consumer receiving the credit, but the bank overall financial system as well. The American banking system is among the most competitive in the world, with nearly 4,000 credit card issuers across four major credit card networks. These cards come in all shapes and sizes with different APRs to meet different customer needs. If a customer doesn’t like their credit card, they can shop around and get a different one with features that meet their unique financial needs.

For consumers looking to pay down or pay off their card debt, 95 percent of balance transfer offers are for 0 percent. A balance transfer lets you move an outstanding balance from one credit card to another, sometimes for a nominal fee. And in one month alone, banks mailed over 600 million pieces of mail to Americans offering them credit card alternatives.

The evidence overwhelmingly shows that rate caps stifle innovation, reduce access to credit, and disproportionately impact subprime borrowers. You can simply look at the several states that tried to create a rate cap and failed.

When Illinois imposed an all-in rate cap of 36 percent, Federal Reserve Board research found that the “cap decreased the number of loans to subprime borrowers by 38 percent.” As the authors explained, “[l]egislators motivated by genuine public interest rationales might not recognize the harmful consequences of their actions for these higher-risk borrowers with few credit alternatives.”

It doesn’t stop there. Dartmouth researchers showed that a similar APR cap in Oregon was responsible for “harming, not helping, consumers on average.” Ultimately, “restricting access caused deterioration in the overall financial condition of Oregon households.”

The evidence is overwhelming — implementing an interest rate cap would not have the intended outcome. Senators Hawley and Sanders should put politics aside and look at the data: a government-mandated price control on interest rates for credit cards would do more harm than good for consumers around the country.

Lindsey Johnson is the President and CEO of the Consumer Bankers Association, which represents America’s leading retail banks.