In recent years, the issue of exorbitant credit card interest rates has sparked considerable debate among policymakers, financial institutions, and consumers alike. With average interest rates hovering around 25 percent, and certain retail credit cards even reaching a staggering 30.45 percent, the conversation surrounding potential regulatory caps on these rates has intensified. Former President Donald Trump recently added his voice to the fray, proposing a temporary cap of 10 percent on credit card interest rates. At a rally in Long Island on September 18, he asserted, “While working Americans catch up, we’re going to put a temporary cap on credit card interest rates… We can’t let them make 25 and 30 percent.”
Trump’s proposal has been met with enthusiasm from some quarters, particularly among consumers burdened by debt. According to a LendingTree survey from 2019, a significant 53 percent of U.S. cardholders supported a cap of 15 percent, with 26 percent advocating for an even lower maximum. However, the financial industry has expressed staunch opposition to such measures, warning that capping interest rates could lead to unintended consequences.
The American Bankers Association (ABA) has historically resisted similar proposals, arguing that imposing caps would ultimately deprive consumers of credit options. A spokesperson for the ABA contended, “These consumers would be forced to use less-regulated, more risky alternatives including payday lenders and loan sharks.” This sentiment is echoed by John Berlau, a senior fellow at the Competitive Enterprise Institute, who cautioned that if lenders are compelled to limit their rates, they may also restrict access to credit for those with lower credit scores, exacerbating existing financial disparities.
Research supports these concerns. A study conducted in July 2023 examined Illinois’ 36 percent rate cap and found that it led to a 38 percent reduction in loans to subprime borrowers—those considered high-risk by lenders. Furthermore, a 2018 World Bank paper highlighted several adverse effects associated with interest rate caps, including diminished credit supply and increased fees, which could ultimately push vulnerable consumers toward high-cost alternatives, such as payday loans. Current payday loan interest rates can average nearly 400 percent, a stark contrast to the rates typically offered by credit cards.
Despite the potential drawbacks, the current landscape of consumer credit has prompted many lawmakers to consider reforms. Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez previously proposed a 15 percent cap, framing today’s interest rates as exploitative. Senator Josh Hawley has also introduced legislation to cap rates at 18 percent, emphasizing that “Americans are being crushed under the weight of record credit card debt—and the biggest banks are just getting richer.” These sentiments reflect a growing frustration with the financial system, particularly as the government has been quick to bail out banks while neglecting the struggles of working-class Americans.
The Consumer Financial Protection Bureau (CFPB) has also been active in addressing consumer credit challenges, unveiling new regulations in March that aim to limit late fees on credit cards to $8. This move indicates a broader push to protect consumers from financial pitfalls while acknowledging the complexities of the credit landscape.
As the debate continues, it is clear that any proposal to cap credit card interest rates must carefully weigh the potential benefits against the risks of limiting access to credit. While capping rates could provide immediate relief to consumers facing overwhelming debt, it could also inadvertently restrict options for those who rely on credit cards to manage their finances. Ultimately, the conversation must pivot toward creating a balanced approach that protects consumers while ensuring the sustainability of the credit market. This nuanced understanding is crucial, as the implications of such policies extend beyond individual consumers to the broader economy, influencing lending practices and financial stability for years to come.
