New York Fed Examines Credit Card Interest Rate Caps

A recent New York Fed study reveals the unintended consequences of interest rate caps, showing that usury limits under debate in Congress often result in credit reallocation rather than consumer protection.

As federal policymakers in the 119th Congress debate the 10% Credit Card Interest Rate Cap Act and a proposed executive order to cap rates nationally, a new study from the Federal Reserve Bank of New York provides a look at how such usury limits actually play out in the real world and their unintended consequences.

The New York Fed study used quarterly credit bureau data from nearly four million households. The Fed researchers observed their debt balances, number of accounts, and delinquencies across three states that capped consumer interest rates and control states that did not enact interest rate limits.

The “Rationing” Reality: Risky Borrowers Lose Access

The New York Fed’s staff report, “Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits,” examined the impact of 36% interest rate caps in states like Illinois and South Dakota.

The findings include:

• Credit Contraction: Lending to high-risk (subprime) borrowers decreased sharply. These individuals saw their debt balances decline by 16.9% and the number of their open credit accounts drop by 20% compared to borrowers in states without caps.
• No Improvement in Outcomes: Despite the intent to protect vulnerable households, the Fed found that delinquency rates did not improve for these borrowers. In short, the caps reduced access to credit but did nothing to minimize credit stress.

Perhaps the most surprising finding was that credit did not disappear entirely — it shifted. When lenders are forced to cap rates, they often reallocate credit away from high-risk borrowers toward lower-risk, higher-income households for whom the rate cap is not a binding constraint, the Fed found.

Because credit scores are positively correlated with income, these caps effectively transfer credit from lower-income individuals to those who are already more financially secure.

Industry Stakeholder Input

While the New York Fed studied 36% caps, banking industry leaders are sounding the alarm over the proposed 10% federal cap.

Banking trade groups — the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum and Independent Community Bankers of America — issued a joint statement on the planned executive order to cap credit card interest rates.

• Industry experts from America’s Credit Unions predict that a 10% cap would be devastating, based on Federal Reserve data, potentially cutting off 47 million subprime borrowers (one-third of all consumers) from mainstream credit entirely.
• The American Bankers Association notes that when regulated credit is capped at a level that doesn’t cover the cost of risk, consumers are driven toward less regulated, more costly alternatives like payday loans.
• With consumer spending driving 70% of the U.S. economy, cutting access to the $3.6 trillion credit card market could cause a significant decline in sales for retailers of all sizes, according to the analysis from America’s Credit Unions.
• Lenders who cannot price for risk or rely on a complete credit picture may be forced to stop lending to anyone but the “credit-assured,” leaving millions of Americans without a fallback for a $400 emergency expense, according to Bankrate data.

The data suggests that while interest rate caps are intended as a form of social protection, they may function as a mechanism for rationing.

As the New York Fed study concludes, these limits don’t make credit safer for the vulnerable — they simply make it unavailable, while expanding credit for those who need it least.