Trump wants to cap credit card interest rates at 10%. But such limits could harm consumers

They can be an essential tool for dealing with financial difficulties, a great way to finance your family vacation or a free pass granting access to luxury airport lounges. But for many consumers, they can also be a debt trap with no escape.

Like Robin Hood in reverse, credit card companies take interest payments from those who have a balance and redistribute them in the form of rewards that benefit those who don’t.

Extremely high annual percentage rates (APRs) on U.S. credit cards worsen the debt trap for those carrying a balance. Four years ago, the average APR was less than 15%. By 2024, it would exceed 21%, and a growing number of Americans find themselves with interest rates above 30%.

President Donald Trump on Friday called for a one-year cap on credit card interest rates at 10%, starting Jan. 20.

This comes after Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) introduced a bill last year that would cap credit card interest rates at 10% for five years. On the campaign trail, Trump supported the idea, despite strong opposition from banks and credit unions that issue credit cards.

“When large financial institutions charge more than 25 percent interest on credit cards, they are not caring about making credit available. They are engaging in extortion and loan sharking,” Sanders said in a press release.

The bill aims to limit profits generated by credit card loans and provide financial assistance to working families. However, if passed, the measure would likely reduce easy access to credit and also reduce the credit card rewards that fuel the industry.

The unintended consequences of capping credit card interest rates

Whenever Congress imposes new regulations on the economy, second- and third-order effects often create unintended consequences, experts and industry groups said. Fortune last year. By solving the problem of high credit card APRs, a rate cap could very well end up hurting those it was intended to help.

Credit card interest rates vary widely depending on each cardholder’s unique risk profile. Limiting banks’ ability to charge rates commensurate with historic default levels would likely send shockwaves through the industry.

Jennifer Doss, editor-in-chief of Cardratings.com, explains that cards with high APRs give banks the opportunity to offer credit to people who otherwise wouldn’t qualify. “Credit card companies typically charge higher interest rates to mitigate the perceived higher risk,” she said. “As a result, people with lower credit scores generally face higher interest rates. »

John Cabell, general manager of payments intelligence at JD Power, adds that rate caps could make it economically unviable for issuers to extend credit to people struggling with delinquency.

“If you are forced to cap [APRs for] For those with the highest interest rates, it would no longer make sense for the issuer to offer them a product, because it might not even be net positive from an income perspective,” he said.

Consumers deprived of access to credit cards due to interest rate caps would still need access to credit. They might end up opting for payday loans or similar options that carry even higher rates than high-interest credit cards.

“Research clearly shows that when politicians, rather than the free market, dictate prices, consumers end up paying the price through limited choices outside the well-regulated banking system,” said Lindsey Johnson, president and CEO of the Consumer Bankers Association.

A cap on interest rates could lower credit card rewards

Capping card rates would also likely reduce credit card rewards. If you’ve ever redeemed points or miles for a flight or hotel stay, you’ve benefited from high interest rates on credit cards. This is because revenue generated from interest payments on card balances helps fuel the points, miles and cash back ecosystem.

Cabell says cardholders who never carry a balance need to understand that their expectations of getting “something for nothing” come at a high cost to other consumers. “Wealthy individuals benefit from all these advantages, to the detriment of poorer consumers who do not benefit,” he said.

Customers who reap the most rewards from credit cards pay no interest. Federal Reserve research found that each year, a whopping $15 billion is transferred from those with balances and redistributed to those who earn rewards.

Credit card fees on retail transactions, some as high as 4%, are another source of credit card rewards, and some experts believe that credit card fees may have a more direct financial link to the rewards system. However, a separate bill in Congress targets high sweep fees.

The Credit Card Competition Bill, a bipartisan bill introduced in 2024 by Senators Dick Durbin (D-IL) and Roger Marshall (R-KS), targets the dominance of payment processors Visa and Mastercard, which together collected $93 billion in credit card swipe fees in 2022.

The bill would require large financial institutions to allow at least two credit card payment processing networks to be used on their credit cards, and one of them cannot be Visa or Mastercard. This would give merchants greater flexibility in choosing payment networks and, hopefully, reduce swipe fees.

If both bills pass, the reduction in revenue from interest payments and swipe fees would likely be the final straw for credit card rewards programs.

A version of this story was originally published on February 6, 2025.