Facts Matter: Sound policy starts with sound analysis.The case for rate caps doesn’t hold up.

WASHINGTON, D.C. – Proposals to cap credit card interest rates at 10 percent have accelerated in recent weeks, buoyed by claims that such a policy would protect consumers without meaningfully restricting access to credit. That argument was advocated in a recent paper by former Biden CFPB Assistant Director Brian Shearer from the Vanderbilt Policy Accelerator, a piece that has also been cited frequently in media coverage. In this new Facts Matter blog from the Consumer Bankers Association (CBA), we highlight two major points that are missing from the discussion of this paper and address other issues with Shearer’s analysis.  

As this blog illustrates, a closer look at the paper’s own analysis reveals what CBA has long conveyed: a 10 percent cap would dramatically reduce credit card access for most Americans, undermining the very consumers policymakers aim to help. It also presents multiple flaws in the understanding of the credit card market.

By the author’s own calculations, a 10 percent cap would reduce credit for 75 percent of cardholders.

In his Vanderbilt Policy Accelerator paper, Shearer creates a table by copying figures from a recent Federal Reserve Staff Report and adjusting them to reflect such a rate cap—namely the interest rate spread underlying the figures from the Federal Reserve.

Using the Federal Reserve report, Shearer’s table below breaks down the profitability of cardholders at different credit tiers under the proposed 10 percent rate cap (see highlighted column). It shows that, under the rate cap, a majority of cardholders become unprofitable (see cells circled in red).

Recent data from the latest CFPB Credit Card Market Report shows the current breakdown of cardholders by credit score, allowing us to compare estimates from the Vanderbilt paper to the current breakdown of cardholders by credit score (see table below).

By the paper’s own calculations, credit card lending under a 10 percent cap would generate losses for cardholders with credit scores below 800. With 75 percent (over 150 million) of current cardholders falling below this threshold, a 10 percent rate cap would make credit cards economically unviable for the vast majority of Americans — eliminating credit cards as a source of short-term liquidity. This impact is not limited to current cardholders. Consumers with credit scores below 800 would also be essentially locked out of obtaining a credit card—one of the primary tools by which most consumers become “credit visible.”

The impact would not stop there. Under a binding rate cap, issuers would be forced to reduce credit lines for most borrowers to reduce exposure. That would mean frozen credit lines, sharply reduced borrowing capacity, and account closures once balances are paid down.

The consequences would continue to ripple outward from there. Lower credit limits raise utilization rates, the share of available credit a borrower is using, an important factor in determining credit scores. Even responsible borrowers would see their scores fall, making other forms of credit like auto loans or mortgages more expensive or harder to obtain.

At the macro level, reduced or closed credit card lines restrict consumer spending capacity. This reduction in spending would negatively impact economic growth, with credit cards currently supporting a significant share of consumer spending.

The Vanderbilt paper doesn’t understand how returns and opportunity cost work in banking.

A core flaw of the Vanderbilt paper lies in how it evaluates profitability. Specifically, it focuses on return on assets rather than return on equity, ignoring the equity banks are required to hold against riskier lending – notably credit cards – which are unsecured, revolving forms of credit unlike other forms of lending such as auto loans that have collateral (the car) and fixed terms.

It also ignores the obvious opportunity costs involved. If a rate cap compresses returns on credit cards to near zero, those loans may still appear “marginally profitable” on paper, but they no longer justify the equity required to support them compared to other products. Faced with that tradeoff, banks will rationally reallocate capital toward safer, more profitable lending. The result would not be the continued availability of low-rate cards for all, but a smaller, narrower credit card market concentrated among the lowest-risk, superprime (800+ credit score) borrowers.

The paper, and Shearer’s subsequent defense of it, also misunderstands how banks manage deposits and liquidity. Deposits are not free money that must be lent out at any positive return. They are liabilities that require careful liquidity planning. When lending no longer compensates for risk and capital costs, banks will not invest those funds in unprofitable and riskier credit card portfolios—especially during periods of economic stress. Instead, they could invest them in safer, high-quality assets with more liquidity like treasuries or mortgage-backed securities.

Looking Ahead: Forthcoming CBA analysis to address additional technical and practical issues with the Vanderbilt paper.

While CBA’s analysis will be granular in a subsequent Data Desk blog, we outline some of the other major flaws in the Vanderbilt paper below.

• Although the paper suggests that interchange fees could offset losses by supporting unprofitable credit score tiers, it ignores credible research on how spending and interchange are linked and how interchange income would be impacted during a recession.
• The paper also relies on data from a period of unusually strong credit performance, inflating its profitability figures.
• The paper fails to account for more recent data on how balances are split between borrowers and transactors, further inflating its assessment of profitability.
• The paper contends that when losses start to pile up during a recession and risk bank stability, the interest rate on cards could be increased ignoring well-established economic and monetary policy about reducing rates during a recession to spur the economy.

Sound policy starts with sound analysis. In this case, the case for a credit card rate cap doesn’t hold up. By relying on favorable data, flawed return assumptions, and optimistic views of cost offsets, it understates the economic and consumer harm of binding interest rate caps. Even still, its finding that three out of four Americans would see their credit access significantly reduced, not to mention rewards, is staggering. 

Stay tuned to our newly launched data hub to read a more in-depth analysis from our team.