A few days ago, President Trump staked a claim to the \u201caffordability\u201d issue by demanding that banks cap their credit card interest rates at 10% for one year.<\/p>\n
Actually, Trump announced that in effect he had imposed the cap, a claim that some news organizations<\/a> accepted as gospel. <\/p>\n So let\u2019s dispose of that misconception right off: Trump has zero power to cap interest rates on credit cards. Only Congress can do so.<\/p>\n The idea of a 10% rate cap has all the seriousness of bread-and-circuses governance.<\/p>\n \u2014 Adam Levitin, Georgetown Law<\/p>\n More to the point, his proposal, announced via a post on his TruthSocial platform<\/a>, is a terrible idea. It\u2019s half-baked at best, and harbors unintended consequences by the carload \u2014 so much, in fact, that the putative savings that ordinary households could see from the rate reduction might be diluted, or even reversed, by the drawbacks.<\/p>\n Still, the idea has so much consumerist appeal that it placed Trump in accord with some of his most obdurate critics, such as Sen. Elizabeth Warren (D-Mass.), who has been pressing to place limits on bank fees for years. Warren said she and Trump had a phone conversation<\/a> in which they seemed to have talked companionably about the issue. <\/p>\n Get the latest from Michael Hiltzik <\/p>\n Trump\u2019s announcement did have the salutary effect of placing the issue of financial services costs on the front burner, after its having languished for years. But it obscured the immense complexities of making any such change.<\/p>\n \u201cCertainly this demonstrates a populist streak on both sides of the aisle,\u201d says Adam Rust, director of financial services at the Consumer Federation of America. \u201cBut you can\u2019t just write a tweet and upend a huge market.\u201d<\/p>\n The market for credit cards is indeed huge. As of 2024, credit card debt in the U.S. exceeded $1.21 trillion. This is the most profitable line of business for many banks, producing $120 billion in interest income and $162 billion in fees, chiefly those the card issuers impose on merchants. <\/p>\n \u201cAlmost 30% of that is pure profit,\u201d reported Brian Shearer of Vanderbilt University, a former official at the Consumer Financial Protection Bureau, in a 2025 study<\/a>. <\/p>\n So it should come as no surprise that the entire banking industry has circled the wagons against a cap on credit card interest rates, especially one as stringent as 10%. On Jan. 9, the very day of Trump\u2019s announcement, five leading bank lobbying organizations issued a joint statement asserting that a 10% cap would be \u201cdevastating for millions of American families and small business owners who rely on and value their credit cards, the very consumers this proposal intends to help.\u201d <\/p>\n Among its drawbacks, the statement said, \u201cthis cap would only drive consumers toward less regulated, more costly alternatives.\u201d<\/p>\n It\u2019s tempting to dismiss the statement as the normal grousing of a big industry about a government regulation. Banks have acquired a certain reputation for profiteering from customers, especially less well-heeled customers, and playing fast and loose with the facts about their costs and profits. But the truth is that on this topic, they have a point. <\/p>\n Let\u2019s take a look, starting with some basic facts \u2014 and misconceptions \u2014 about credit cards.<\/p>\n The credit card market is heterogeneous, segmented by income and more importantly by credit score. Those with the highest FICO scores typically get the lowest interest rates, but are also more inclined to pay off their balances every month without incurring any fees, even as their average balances are the highest. <\/p>\n About 40% of all users, including many with middling credit scores, pay off their balances monthly but use their cards for convenience, to access fraud protections provided by credit cards but not by other forms of credit, and to garner card rewards. <\/p>\n Interest fees aren\u2019t the issuers\u2019 sole source of revenue. Most revenue comes at the other end of the transaction, in interchange or \u201cswipe\u201d fees paid by merchants. <\/p>\n That\u2019s why card issuers still cherish high-income transactors and shower them with rewards \u2014 the monthly balances of users in the 760-to-840 FICO score range vastly exceed those of other users, indicating that they\u2019re generating correspondingly more in interchange fees from the merchants they patronize.<\/p>\n The average interest rate on credit cards reached 25.2% last year, according to a December report by the Consumer Financial Protection Bureau<\/a>. It has steadily increased since 2022, mostly because of an increase in the prime rate, the benchmark for card issuers. <\/p>\n How did it get so high? Blame the Supreme Court, which in 1978 undermined state usury laws<\/a> by ruling that banks could charge customers the usury rate of their home state rather than the rate in the customer\u2019s state. That\u2019s why your credit card may be \u201cissued\u201d by a bank subsidiary in Utah, South Dakota or Delaware, which have lax usury limits. The solution would be enactment of a nationwide usury limit, but that falls entirely within congressional authority.<\/p>\n So what would happen if Congress did place a limit on the maximum credit card interest rate \u2014 if not 10%, then 15% or 18%, as has been proposed in the past? Shearer contends that banks make such fat profits from credit card users at every FICO level that they could still earn healthy returns even at a 15% cap. Shearer estimated that a cap of 15% would produce more than $48 billion in annual customer savings \u201ccoming almost entirely out of bank profits.\u201d<\/p>\n Other analysts are not so sanguine. \u201cThere is no free lunch here,\u201d argues Adam Levitin, a credit market expert at Georgetown law school. Levitin argues that while issuer profits are large, their margins are not so large. He calculates that a 10% cap would make the general credit card business unprofitable, because there wouldn\u2019t be enough headroom over the benchmark prime rate (currently 6.75%) to cover administrative costs and other overhead. <\/p>\n Issuers don\u2019t have many options to preserve their profitability. So they\u2019re likely to respond by shutting the door on low-income and low-FICO customers and ratcheting back credit limits. <\/p>\n \u201cThe effects will be devastating,\u201d Levitin says. \u201cFamilies that need the short-term float or the ability to pay back purchases over several months won\u2019t have it. How will they pay for a new water heater when the old one goes out and they don\u2019t have $3,000 sitting around?\u201d <\/p>\n Many will be forced to resort to other short-term unsecured lenders \u2014 payday lenders, buy-now-pay-later firms and others that don\u2019t offer the consumer protections of credit cards and would be exempt from the interest cap on credit cards. <\/p>\n \u201cThe idea of a 10% rate cap,\u201d Levitin says, \u201chas all the seriousness of bread-and-circuses governance.\u201d<\/p>\n The availability of credit from alternative consumer lenders that don\u2019t offer the statutory protections mandated for credit cards concerns consumer advocates.<\/p>\n A hard cap on interest rates \u201ccould create a sharp contraction in the kind of credit available in the marketplace,\u201d says Delicia Hand of Consumer Reports. \u201cIt sounds good, but there could be unintended consequences, especially if you don\u2019t think about what fills the gap,\u201d <\/p>\n Alternative products aren\u2019t regulated as stringently as credit cards. \u201cDirect-to-consumer products can layer subscription fees, expedited access fees, and \u2018voluntary\u2019 tips in combinations that produce effective annual percentage rates ranging from under 100% to well over 300% \u2014 and in some documented cases, exceeding 1,000% when annualized for frequent users,\u201d Hand said in remarks prepared for delivery<\/a> Tuesday to the House Committee on Financial Services. <\/p>\n If an interest rate cap is too tight, all but the highest-rated customers might face higher annual fees and stingier rewards. Issuers are likely to squeeze merchants too. Big businesses \u2014 think Costco and Amazon \u2014 might be able to negotiate swipe fees down and eat the remainder instead of passing them through to consumers. But small neighborhood merchants might refuse to accept credit cards for purchases below a certain amount, or add a swipe fee surcharge to customers\u2019 bills. <\/p>\n Other complexities bedevil proposals like Trump\u2019s, or for that matter bills introduced last year in the Senate by Bernie Sanders (I-Vt.) and Josh Hawley (R-Mo.) and in the House by Reps. Alexandria Ocasio-Cortez (D-N.Y.) and Anna Paulina Luna (R-Fla.), capping rates at 10% for five years. Those measures have the virtue of simplicity \u2014 they\u2019re only three pages long \u2014 but the drawback, also, of simplicity.<\/p>\n Among the open questions, Levitin observes, are whether the 10% cap would apply to all balances or just to purchases. If the former, it remakes credit cards into tools for \u201clow-cost leverage for cryptocurrency speculation and sports betting,\u201d because in today\u2019s interest rate environment it\u2019s cheap money. <\/p>\n Trump\u2019s announcement, in particular, displays all the drawbacks of insufficient cogitation characteristic of so many of his ventures. Published on Jan. 9, it called for the cap to be implemented on Jan. 20, the anniversary of his inauguration: a mere 11 days to implement a change in a $1.21-trillion market with potential ramifications on a dizzying scale. <\/p>\n Since he doesn\u2019t have the authority to mandate the cap by executive order, he\u2019s in effect calling for the banks to make the change voluntarily. Given the impact on their profits, on the gonna-happen scale, that\u2019s a \u201cnot.\u201d<\/p>\n Adding to the sour ironies of this effort, Trump\u2019s far-right budget director, Russell Vought, has been pursuing a vicious campaign to destroy the agency with statutory authority over the consumer lending industry, the CFPB \u2014 of which Trump appointed Vought acting director. <\/p>\n