Credit Cardholders—Especially Those With Lower Incomes—Could Be In For A Shock

The Timeless Folly of Price Controls

Throughout history, price controls have proven to be a doomed policy, leaving a trail of economic destruction in their wake. From the crumbling Roman Empire to the ill-fated presidency of Richard Nixon, attempts to artificially cap prices have consistently led to shortages, black markets, and widespread economic chaos. Yet, despite these lessons, the temptation to impose price controls persists, like a recurring mosquito buzz in the ears of policymakers.

The most recent iteration of this misguided policy is a congressional bill proposing to cap credit card interest rates. Advocates of the bill argue that it will provide relief to Americans buried under mounting debt, exacerbated by inflation during the Biden administration. On the surface, this seems like a compassionate solution to a pressing problem. But scratch beneath the surface, and it becomes clear that such a policy would backfire, harming the very people it aims to help—and causing collateral damage to the broader economy.

The Historical Precedent of Price Controls

To understand why price controls are so dangerous, one need only glance at history. The Roman Empire, for instance, tried to fix wages and prices in an effort to stabilize its economy. Instead, it caused widespread shortages, economic stagnation, and eventually contributed to the empire’s decline. Similarly, in the 20th century, President Richard Nixon’s decision to impose price controls in the 1970s led to chaotic results. Gasoline shortages, long lines at grocery stores, and a general undermining of the market’s ability to function were just a few of the consequences.

These examples are not outliers. Time and again, price controls have been tried—and failed—in various forms and across different eras. They are a textbook example of good intentions gone wrong. The root of the problem is simple: markets are dynamic systems, and artificially setting prices distorts the incentives that drive production and consumption. When prices are not allowed to reflect the true balance of supply and demand, the system breaks down.

The Current Proposal: Capping Credit Card Interest Rates

The latest attempt to impose price controls comes in the form of a congressional bill aimed at capping credit card interest rates. Proponents of the bill argue that it will protect consumers from exorbitant interest charges, particularly at a time when many Americans are struggling with debt. The logic seems straightforward: if credit card companies are allowed to charge less, borrowers will have an easier time paying off their debts.

But this logic is superficial. The real-world effects of such a policy would be far more complicated—and far less beneficial. For one, credit card companies are not charities. If their ability to charge interest is capped, they will find other ways to make up for lost revenue. This could include increasing fees for late payments, raising annual fees, or even denying credit to riskier borrowers. The people who would be most affected by these changes are precisely the ones the bill is supposed to help: low-income individuals and those with poor credit histories.

Why Price Controls Fail

The fundamental flaw in price control policies is their failure to account for human behavior and market dynamics. When prices are artificially lowered, demand tends to increase, while supply decreases. This imbalance leads to shortages, as producers are no longer incentivized to produce goods or services at below-market prices. In the case of credit card interest rates, capping them would reduce the profitability of issuing credit, leading banks to tighten their lending standards.

Another consequence of price controls is the rise of black markets. When legal avenues for buying and selling goods or services become unprofitable, people turn to illegal alternatives. In the context of credit card interest rates, this could lead to the proliferation of predatory lending practices, where borrowers are forced to accept even higher interest rates in the shadows of the unofficial economy. Far from solving the problem of high interest rates, the bill would push the problem underground, making it harder to regulate and more dangerous for consumers.

The Human Cost of Misguided Policies

While the economic arguments against price controls are compelling, it is the human cost that truly underscores the folly of such policies. For millions of Americans living paycheck to paycheck, access to credit is a lifeline. It allows them to cover unexpected expenses, pay for medical bills, or simply make ends meet during tough times. By capping interest rates, Congress would be making it harder for these individuals to access the credit they so desperately need.

Moreover, the bill would disproportionately harm low-income borrowers, who often rely on credit cards as a last resort. These individuals already face limited financial options and are less likely to qualify for loans with favorable terms. If credit card companies respond to the interest rate cap by tightening their lending standards, these borrowers would be the first to lose access to credit. The result would be a further entrenchment of inequality, as those who need credit the most find themselves shut out of the system.

Learning from History to Avoid Future Mistakes

The proposal to cap credit card interest rates is a classic case of a well-intentioned policy with deeply misguided consequences. History is replete with examples of how price controls have backfired, causing shortages, fostering black markets, and exacerbating the very problems they were meant to solve. It is a lesson that policymakers would do well to learn—and learn quickly.

Rather than relying on Band-Aid solutions like price controls, Congress should focus on addressing the root causes of the problem. This includes measures to strengthen financial literacy, promote competition in the banking industry, and create policies that support economic growth and reduce inequality. By addressing the underlying issues, policymakers can create a more sustainable and equitable system—one that does not rely on the failed promises of price controls.

In the end, the debate over credit card interest rates is not just about economics; it is about people. It is about ensuring that those who need credit the most have access to it, without being forced into the shadows of a black market. It is about learning from history and avoiding the mistakes of the past. And it is about recognizing that, when it comes to price controls, the road to ruin is often paved with good intentions.