Hawley and Sanders team up to fight credit card interest rates. Instead, they risk harming consumers.

This week, Sen. Josh Hawley (R-Mo.) and Sen. Bernie Sanders (I-Vt.) introduced bipartisan legislation to cap credit card interest rates. The legislation would immediately cap rates at 10 percent and keep those rates in place for five years.

The legislation is an attempt to provide financial relief to Americans struggling with credit card debt. It follows on a campaign promise made by President Donald J. Trump to cap rates—also at 10 percent. This promise cited a desire for “temporary” caps but gave no further context in terms of timeframe.

Though the bipartisan attempt to help struggling families may be well intentioned, the effects of such price controls are likely to do more harm than good.

Reduced Access to Credit for Those Who Need It Most

Attempts to forcibly reduce interest rates are typically done with the intention of helping lower-income Americans pay down debts faster or not incur interest on debt as rapidly. Indeed, some Americans use credit cards as a way to spend money they may not have, sometimes out of necessity on items like groceries, car payments, cellphone bills, and more. However, when government price controls cap interest rates, credit card companies must make up that revenue elsewhere. Oftentimes, this means restricting lending to lower-income individuals—typically those who need it most. In fact, a few years ago, Illinois imposed its own state-level interest rate caps, which ultimately led to a 38 percent decrease in loans to subprime borrowers and self-reported worsening of financial standing. This policy directly harms the very people it purports to help by cutting off their ability to access credit. Worse, it may send desperate individuals outside the already highly regulated banking system to nefarious places to obtain capital, such as those seen in Missouri. Responsible individuals should be allowed to use the financial leverage credit cards provide to gain temporary and immediate access to capital, but forcibly reducing interest rates destroys that opportunity for many.

Discouraging Good Financial Habits and Increasing Costs on Other Borrowers

Government and businesses should be dedicated to encouraging good financial habits, including not spending beyond one’s means and paying off credit cards in full each month. However, artificially reducing rates sends incorrect signals on financial behavior and consequences, perhaps encouraging borrowers to pay down debt slower when the repercussions are not as severe. This counters the legislation’s intended effect.

Another unintended consequence of capping rates is that it may lead to increased costs for other borrowers. This could come in the form of increased fees, including annual fees, for example. Instead of benefiting consumers, those who are financially responsible will be harmed by unfair—though financially necessary—cost increases.

Decreased Credit Card Offerings

For those who are still able to access credit cards, their value may be greatly diminished with price controls on interest. Many Americans select credit cards based on their unique offerings, such as flight rewards and cash back at grocery stores. However, these offerings could ultimately be limited by forcibly reducing credit card companies’ income.

Even though President Trump and Sens. Hawley and Sanders frame the issue of credit card interest rate caps through the lens of helping Americans, research on similar attempts shows that the downstream effects of such policies ultimately do more harm than good. Credit cards operate in a highly competitive space with a wide variety of offerings, and the rates reflect a free-market balance between what consumers want and how businesses can afford to provide it to them. Federal legislators should not disrupt this balance or distort market signals that help providers understand their consumers.