US President Donald Trump announced plans to cap credit card interest rates at 10% for one year starting on January 20, the day of his inauguration.
Trump, who first proposed such a cap on his campaign, floated the idea in a post on Truth Social last week, saying Americans were being “ripped off” with interest rates as high as 30%.
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President Trump returned to the idea Sunday, saying credit card companies are “really abusing the public.”
“We have a one-year cap of 10%. That’s it. They know it,” Trump told reporters on Air Force One.
While there is bipartisan support in the U.S. for cost cuts imposed by credit card companies, experts warn that Trump’s plan could have unintended consequences, including limiting access to credit for some consumers.
Why is President Trump promising to cap interest rates?
Americans owe huge amounts of money to credit card companies.
Credit card debt outstanding as of September was $1.23 trillion, up from $1.17 trillion a year earlier, according to the New York Fed’s Microeconomic Data Center.
This figure does not include other common forms of debt that strain household budgets, such as car loans and mortgages.
According to U.S. credit reporting agency TransUnion, the average credit card debt by customer was $6,555 in November.
As credit card debt increases, so do borrowing costs.
The average interest rate in August was 22.83%, up from 16.28% in 2020, according to the Federal Reserve.
The cost of living is a major concern for American voters, and affordability is likely to be a key issue in the midterm elections scheduled for November.
Trump’s re-election is widely attributed to public anger over high inflation, but polls show a majority of Americans are dissatisfied with his handling of the cost of living.
In addition to targeting credit card companies, President Trump also announced plans to lower mortgage rates and ban institutional investors from purchasing single-family homes.
What are the details of President Trump’s plan?
President Trump has provided few details.
For the interest rate cap to be legally binding, President Trump would need to get lawmakers to pass it, said Brian Shearer, director of competition and regulatory policy at the Vanderbilt Policy Accelerator.
“He legally cannot do it through executive action, but there are bipartisan bills in the House and Senate that he and his allies could push through,” Shearer told Al Jazeera.
President Trump on Monday announced his support for the Credit Card Competition Act of 2023, a bipartisan bill introduced by Democratic Sen. Dick Durbin and supported by Republican Sen. Roger Marshall.
The bill targets hidden “swipe fees” that Visa and Mastercard charge both customers and merchants.
“Everyone should support the great Republican Sen. Roger Marshall’s Credit Card Competition Act to stop the out-of-control swipe fee rip-off. Roger is a great senator!!!” Trump wrote on Truth Social.
Another proposal, a 10 percent credit card interest rate cap, was introduced by independent Sen. Bernie Sanders and Republican Sen. Josh Hawley last year, but has since stalled in Congress due to opposition from the credit card industry.
The big question mark about President Trump’s plan is enforcement.
The Sanders-Hawley bill, for example, would put the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission in charge of policing creditors and would impose civil penalties for violations.
But President Trump cut the budgets of both agencies last year.
The Trump administration is seen as particularly hostile to the CFPB, the federal watchdog agency created in response to the 2008 global financial crisis.
White House Budget Director Russell Vought said in October that he intended to close the agency.
What are the benefits of setting a cap on interest rates?
A September analysis by Shearer, who previously worked at the CFPB, found that capping credit card interest rates at 10% could save Americans $100 billion a year.
But Shearer’s analysis also warns that there are negative implications for consumers. He predicted that credit card companies would reduce the amount of loans they lend to customers with “fair” to “poor” credit scores and also cut rewards programs.
However, the same analysis shows that while a 15 percent or 18 percent cap would save consumers $48 billion or $16 billion, respectively, it would not lead to any reduction in lending.
Mr. Shearer argued that credit card companies are making enough profits to absorb the losses from the caps and can rely on other sources of revenue, such as the billions of dollars in fees charged to merchants.
“Even if it’s just for one year, I think this proposal will save money. Of course, we would like to have a permanent cap, but even a one-year cap would save money and would be a good relief because people are suffering from high prices right now,” he said.
What are critics saying about Trump’s plan?
Industry commentators argue that capping interest rates would prevent customers with low credit scores from getting loans.
The Electronic Payments Coalition (EPC), which represents U.S. payment networks, banks and credit unions, announced Tuesday that more than 80% of credit card accounts could be “closed or significantly restricted” under the cap, potentially impacting between 175 million and 190 million customers.
“While across-the-board government price caps may sound appealing, they don’t help Americans. They do just the opposite, hurting families, limiting opportunity, and weakening our economy,” EPC Executive Chairman Richard Hunt said in a statement.
The Banking Policy Institute (BPI), a nonpartisan public policy, research, and advocacy group, also criticized the proposed cap.
In a May analysis, BPI estimated that as many as two-thirds of customers who roll over their credit card balances each month (meaning they don’t pay them off) end up “reducing or eliminating” their credit limit by up to 10%.
Has this been attempted before?
Interest rate limits are already in place for certain borrowers in the United States.
Under the Servicemembers Civil Relief Act, service members benefit from a cap of 6% on loan interest (including credit card repayments) accrued before starting active duty.
Another law, the Military Loans Act, caps the maximum interest rate on some consumer debts for active-duty military personnel at 36%.
Federal credit unions, which are not-for-profit financial institutions available to all customers, have an interest rate cap by law, currently set at 18%.
Efforts to limit borrowing costs are also underway at the state level.
In 2011, Arkansas amended its constitution to cap credit card interest rates at 17%.
Research shows mixed results in Arkansas.
A 2022 study published in the Journal of Financial Research found that the cap has created a “credit desert” for many residents with low credit scores.
The study also found that some residents of counties bordering other states cross state lines to access financial services.
