The 10% APR Proposal: Relief for Consumers or a Shock to the Credit System?
By Jeffery Hartman | Institutional Debt Market Architect
There is growing policy chatter out of Washington regarding a one-year cap on credit card interest rates at 10%, potentially effective January 2026. Regardless of political alignment, this is not a symbolic move. This would be a Structural Shock to the entire consumer credit ecosystem—from underwriting to charge-offs, and from fintech pricing models to secondary debt markets.
"When you cap price, you don’t remove risk. You re-route it."
The credit system is not emotional. It is mathematical. Let’s discuss the reality of what this mandate actually means for the market.
The Structural Problem: Pricing Subprime Risk
Here is the reality the headlines ignore: Subprime and deep subprime risk cannot be profitably priced at 10%. Full stop. This creates immediate, violent downstream effects:
- Credit Tightens: Issuers will aggressively raise approval standards, cutting off marginal borrowers and causing entry-level credit access to collapse.
- The Purge: Issuers won't just stop lending; they will actively shut off existing consumer credit cards and look to sell off performing loan portfolios to de-risk their balance sheets before the cap takes effect.
You do not remove cost; you reallocate it to the most vulnerable consumers through Institutional Credit Exclusion.
The Great Credit Migration: Who Wins the Arbitrage?
This policy contains a fundamental flaw: it specifically targets credit card companies, not the entire lending market. When you restrict the regulated banking sector, the demand for credit does not vanish—it migrates.
The silent beneficiaries of a 10% credit card cap are the alternative lenders whose models fall outside the "card" definition:
- Buy Now, Pay Later (BNPL)
- Installment Lenders
- Payday & Specialty Subprime Lenders
By handicapping the traditional credit card, the government is effectively handing a massive market share to high-cost alternative financing. Consumers who lose their revolving lines will be forced into these high-velocity, less-regulated products. The "Relief" is an illusion; it is simply a Wealth Transfer to the shadow banking sector.
Secondary Market & Fintech Disruption
This is where the intelligence gap is widest. A 10% cap creates massive Secondary Market Distortion. Debt buyers price assets based on balance growth curves and interest accrual assumptions. This policy compresses recoverable value and forces a total rewrite of Portfolio Valuation Models.
Furthermore, Fintech platforms built on dynamic pricing and risk-tier segmentation will face a total breakdown of their unit economics. Some will adapt; others will disappear.
The Advisor’s Mandate: How to Prepare
If this becomes reality, the winners will be the institutions that deploy Risk Intelligence early. My mandate for issuers is three-fold:
1. Segmentation is Everything: You cannot treat your book as a monolith. You need behavioral segmentation and cohort-level risk mapping to identify where deterioration starts.
2. Early-Stage Intervention: When pricing is capped, Timing is the New Lever. Waiting until 120+ DPD is fatal. You need faster risk detection and pre-charge-off mitigation strategies.
3. Evolve the Charge-Off Strategy: The "warehouse and wait" model is toxic. Success will require smarter liquidation timing and Off-Market Disposition intelligence.
You can cap rates. You cannot cap risk. The system will always find another outlet. The question is: Are you an operator or a spectator?
