The proposal to limit credit card interest rates to a maximum of 10% could drastically alter the landscape of consumer credit, according to insights from SoFi Technologies CEO Anthony Noto. This potential policy, aimed ostensibly at reducing borrowing costs for consumers, might instead lead to a notable reduction in credit card lending availability without curbing consumer appetite for credit.
In a statement shared on the social media platform X, Noto responded directly to the suggestion by President Donald Trump regarding the interest rate cap. He emphasized that if such legislation were to be enacted—a condition he regards as uncertain—there would likely be a pronounced contraction in the industry's credit card lending volume.
Explaining the dynamics behind this anticipated contraction, Noto highlighted structural challenges faced by credit card issuers. Unlike secured lending products, credit cards are unsecured and serve a wide spectrum of consumer credit profiles, from low-risk to high-risk borrowers. The proposed cap would restrict issuers' ability to price the risk appropriately, which in many cases could render certain accounts financially unviable.
Facing these profitability constraints, issuers might respond by tightening lending criteria. This could manifest as fewer approval rates for new credit card applications, reductions in existing credit limits, or outright closure of some cardholder accounts. Such steps would reinforce Noto's perspective that interest rate caps do not remove underlying credit risk but simply relocate it within the financial system.
Despite potential tightening in the credit card market, Noto underscored the persistent consumer demand for credit access. He pointed to the reality that everyday expenses and unforeseen financial needs persist regardless of regulatory adjustments, thereby maintaining pressure on consumers to seek borrowing options.
Furthermore, Noto observed the common consumer behavior of opting for credit cards offering appealing rewards, which may lead to carrying substantial balances at elevated annual percentage rates often ranging from 20% to 30%. He noted that many of these balances effectively function as interest-only payments, with principal remaining largely unchanged over extended periods.
In the event of diminished credit card lending, Noto suggested a potential shift in consumer borrowing patterns toward alternative credit products, such as installment loans including personal loans. These products typically present lower interest rates coupled with amortizing payment structures that systematically reduce the outstanding balance over time. As credit card availability contracts, borrowers might turn to these installment-based options earlier, potentially reducing the prevalence of sustained high-interest revolving card balances.
This shift could expand market opportunities for personal loan providers, depending on their underwriting policies and pricing models. Reduced competition from credit cards might allow these lenders to serve a wider segment of consumers, altering the competitive dynamics within consumer credit markets.
Voices from the broader financial sector have echoed concerns about the implications of interest rate caps on credit access. For instance, JPMorgan Chase Chief Financial Officer Jeremy Barnum remarked during a recent earnings call that capping credit card interest could considerably restrict consumer access to credit, describing such an outcome as "a pretty severely negative consequence for consumers." He further warned that the economic ramifications could be adverse as well.
Similarly, several banking industry associations, including the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association, the Financial Services Forum, and the Independent Community Bankers of America, jointly cautioned against the proposed rate cap. They contended the measure could divert consumers away from established, mainstream credit products toward less regulated and more expensive alternatives, underscoring concerns about increased consumer financial vulnerability.
In summary, the proposed 10% credit card interest rate cap represents a policy intervention with complex implications. While designed to alleviate borrowing costs, experts and industry leaders warn it might restrict credit card lending, reshape consumer borrowing behaviors, and potentially increase reliance on costlier credit options outside traditional banking frameworks.