For consumers paying off high-interest credit card debt, a recent proposal from the Trump administration – a one-year cap at 10% on credit card interest rates – appears to be a much-needed relief.
So why are some experts skeptical of its long-term impact and its ability to be passed by a Congress controlled by Trump’s party?
While Vivian Tu, founder and CEO of Your Rich BFF, can’t speak for members of Congress, she can explain who will actually benefit from Trump’s plan — and who could end up worse off. Spoiler alert: it’s not just about banks. In a recent video, Tu used some creative (and tasty) props to break it all up.
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To illustrate how a 10% interest rate cap could affect different consumers, Tu stacked three snacks from her pantry as a visual metaphor for the three main types of credit card users:
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People who pay their balance in full and on time. At the top of the pile, represented by a pack of Oreos snacks, this group avoids interest altogether, meaning a rate cap would have little to no impact on their finances.
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People who have credit card debt but are actively paying it off. A container of chili chips has replaced borrowers in what Tu calls “a slow repayment process because the interest rates are very high.” This group could see significant relief following the rate cut.
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People are deeply in debt and are starting to miss payments. At the bottom of the pile was a jar of peanut butter and chocolate, representing the riskiest borrowers — and, according to Tu, the most vulnerable to unintended consequences if lenders withdrew access to credit.
After delineating the three types of credit card users, Tu noted that a 10% cap on interest would not have a significant effect on the first group, who already pay nothing in interest.
However, those in the second category could see what Tu called “a significant benefit” from the rate cut, as a reduction in interest could accelerate profits. “I completely agree. It would be a huge benefit,” she said.
For credit card users in the third cohort, things get more complicated. Tu described credit cards as “a lesser evil” for these users, who would otherwise resort to payday loans or other predatory sources of fast cash. And credit card companies factor that risk into high interest rates.
“Credit card companies need them to pay higher interest rates to account for the fact that some of this population will eventually default on their debt – that is, never pay it off,” she said. “If credit card companies cannot offset their losses through interest payments, they will likely simply cancel the credit cards of millions of ‘less creditworthy’ borrowers.
Unfortunately, this could force some of these borrowers to resort to loan sharks or payday loans – less than ideal alternatives.
While Tu suggested that the Trump administration should put in place models to ensure that the number of credit card users who benefit from them exceeds those who could suffer the consequences, other financial and political figures have stronger opinions.
Beyond concerns about how consumers might be affected, some critics warn that a 10% interest rate cap could significantly reduce revenue for credit card issuers.
Banking industry officials rejected the proposal, arguing that a reduction in interest income would likely lead lenders to limit access to credit, particularly for borrowers with low credit scores.
Jeremy Barnum, chief financial officer of JPMorgan Chase, warned that a cap could have ripple effects throughout the economy, saying it would negatively affect consumers and the economy as a whole.
“Specifically, people will lose access to credit – on a very, very broad, very broad basis – particularly those who need it the most, ironically,” he said. “It’s a very negative consequence for consumers and, frankly, probably also a negative consequence for the economy as a whole right now.”
The American Bankers Association and other industry groups have echoed concerns that a cap would push consumers toward less regulated and more expensive alternatives.
That said, not all experts agree that the impact on banks would be as severe as critics suggest. According to a PBS News article, researchers who studied the proposal found that Americans could save billions of dollars in interest each year — money that could potentially be put back into the economy as a whole.
“The same researchers found that although the credit card industry would be hit hard, it would remain profitable, even though rewards and other credit card benefits might be reduced,” the report said.
Although Trump has largely enjoyed his party’s support, the proposal represents a potential political break.
According to The Hill, House Speaker Mike Johnson (R-La.) told reporters that Trump and other supporters of the plan “probably haven’t thought through” the possibility that credit card companies would stop lending money — or set low caps on how much people can borrow.
Still, Trump’s plan has some surprising supporters, including Sen. Elizabeth Warren (D-Mass.), who encouraged Trump to aggressively fight for the proposal in a private phone call, as The Hill reports.
Congressional approval is essential because the president does not have the constitutional authority to regulate the business practices of private companies, such as setting interest rates. At this point, widespread congressional support is uncertain.
Trump’s announcement comes at a politically difficult time for the president and his party, especially as Americans voice growing concerns about affordability.
In an article about Trump’s efforts to combat the affordability crisis — likely ahead of the midterm elections — Tami Luhby, a senior editor for CNN, wrote that “experts question whether his latest round of ideas could actually stem the nation’s affordability crisis and help ease Americans’ hardship.”
When Luhby spoke with Andy Laperrière, head of U.S. policy research at Piper Sandler, he expressed concerns that interest caps could make it harder for Americans with low credit scores to get credit cards. He also compared Trump’s bid for affordability with that of former President Joe Biden, saying it focused on attacking industries for high prices and “offering token solutions.”
Even whether or not Trump’s credit card interest rate cap becomes law, experts like Tu say they’re glad broader discussions about affordability are taking place.
“I’m glad we’re starting to focus on affordability for the consumer,” she said. She ended her video by calling for extensive modeling and research to ensure that “a well-intentioned decision does not do more harm than good.”
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Editor’s Note on Political Coverage: GOBankingRates is nonpartisan and strives to objectively cover all aspects of the economy and present balanced reporting on politically charged financial topics. You can find more coverage on this topic at GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Who benefits from Trump’s proposed credit card interest cap? Vivian You break it down
