As the inflation rate surged throughout 2021 and 2022 and put pressure on consumers’ wallets, another important trend was underway: credit card interest rates were rising. With the Federal Reserve raising the federal funds rate substantially to combat inflation, credit card interest rates climbed sharply in 2022 and 2023 as a result of the increased costs of lending, rising from an average of 14.51% in Q4 2021 to 21.19% just two years later. However, even as inflation subsided and prices stabilized, credit card interest rates remained elevated.
Why is this the case? Ultimately, credit card interest rates reflect the state of the broader consumer credit market. In recent years, that market has started showing signs of stress, particularly among less creditworthy borrowers, who have higher credit card debt and more frequent delinquencies. Higher market-wide risk — alongside a still high federal funds rate — has caused banks that issue credit cards to raise interest rates and keep them high.
Consumer discontent with these high rates has spurred a bipartisan effort to address the issue. In February 2025, Senator Bernie Sanders (I-Vt.) and Josh Hawley (R-Mo.) introduced legislation that would cap credit card interest rates at 10% for five years, claiming that the bill would provide “working families with desperately needed financial relief.” A 10% cap was also floated by Donald Trump on the campaign trail, to provide relief “while working Americans catch up.”
However, limiting credit card interest rates to an arbitrary 10% effectively deprives credit card issuers of their most powerful tool to manage risk. As a result, a rate cap would dramatically reduce access to credit for the very people it aims to protect, just as the economy teeters on the precipice of a recession. By significantly limiting their ability to qualify for and use credit, it would even cause many consumers to turn to predatory alternatives such as payday lenders.
The following sections of this paper dive into the consumer credit market and evaluate the different options policymakers can use to make it function better for working Americans. First, it reviews the current state of the market, highlighting the important role that consumer credit plays in the economy, how credit card issuers decide upon interest rates, and breaking down why interest rates have risen in recent years. Second, it explains the economics of rate caps, and how workingclass Americans would bear the brunt of a cap’s consequences. Lastly, the paper explores some better policy alternatives to protect consumers, including greater transparency, better financial capability for households, and alternatives to traditional credit.
