10% cap on credit card interest: a very bad idea!

A cap on credit card interest rates has been discussed on and off for several years, generally championed by liberal Democrats including Elizabeth Warren and Alexandria Ocasio-Cortez.  The idea does have some modest support from a handful of Republicans in Congress too.  Independent (liberal) Bernie Saunders and Republican Josh Hawley introduced the “10% Credit Card Interest Rate Cap Act” in the House in February 2025 (read it here), where it has languished without much consideration since then.  However, the idea has suddenly found new life. 

President Trump, grasping for straws to address the affordability crisis that is chipping away at his support, has shown his populist streak by embracing a one-year 10% cap on credit cards interest rates, which he announced on Truth Social on January 9^th.

Mr Trump does not have the authority to impose such a cap, which is the purview of Congress.  However, by suddenly embracing a policy that is “owned” by liberal politicians, perhaps Republicans in Congress might also abandon their core principal of open markets to rally around a topic that – at least cosmetically – addresses affordability.  Even if this proposal fizzles, the president has shown he has no qualms about putting massive pressure directly on the major credit card issuing banks to encourage them to lower the interest rate on credit cards to 10%.

Why is an interest rate cap a bad idea: the immediate effects

Anything which interferes with the market pricing of consumer credit will lead to unintended consequences. 

• The profit margin for banks on credit cards will decline if the interest rate is capped, causing banks to reallocate scarce capital to other lending segments which offer marginally better risk-return profiles.  This could include more focus on segments like automobile loans, mortgages, home equity lines, personal consumer finance loans, etc.

• Credit card lenders will become more discriminating as to the consumers to whom they will offer credit cards.  They will be much less likely to offer credit cards to marginal borrowers, meaning those with limited or poor credit histories who normally benefit the most from access to unsecured credit.

• Credit card issuers will likely curtail the marketing of new credit cards, an offshoot of the first bullet point but one that will make credit cards generally less available.

• The “perks” associated with credit cards (membership points, frequent flyer points, etc) might be rolled back in an effort by credit card issuers and affiliates to protect their otherwise-declining profit margins.

Exactly what might happen and just how this might play out is difficult to say, although once the thumb of the government is placed on the scale, it will interfere needlessly with the mechanism for properly pricing credit.  I seriously doubt that banks and other credit card issuers will sit there and let this happen without responding, no matter how much Mr Trump moans and berets them.

Along these lines, Jamie Dimon has perhaps been the most outspoken bank CEO, when he said at the WEF in Davos that “President Donald Trump’s proposal to cap credit-card interest rates would spell “economic disaster” for the US, forcing banks to pull credit lines for many Americans.” (from #Bloomberg, here). 

Why is an interest rate cap a bad idea: the other effect that troubles me

The U.S. economy is driven by consumer spending, which accounts for around 70% of GDP.  In fact – and let me digress – the real reason the U.S. runs a balance of trade deficit is because Americans like to spend, spend, spend, on both domestic and foreign products!  Americans are not afraid to finance their insatiable appetite to buys goods and services on credit, including by using credit cards aggressively.  If banks were to curtail the issuance of credit cards and reduce credit card limits, the effects would most adversely fall on those folks that rely on consumer credit the most.  Although the extent of the effect of less credit availability on consumer spending is uncertain, it would unquestionably be negative. 

Will a 10% credit card cap really help affordability?

Although the headlines scream “yes”, just how much a credit card interest rate cap would help consumers is far from clear.  Certainly,  the lower rate would not benefit people that are in trouble on their debt repayments, especially people that are already in default (and are already subject to a higher default interest rate).  Also, credit card issuers will likely try to make up for lower profit margins through other mechanisms, like up-front fees, periodic annual fees, or higher late payment fees.  Keep in mind that people running balances on their credit cards tend to be lower- and middle-income families.  These are the people suffering most from the affordability crisis, and a credit card cap does not seem likely to really benefit these people in a material way. 

The U.S. credit card market: metrics of consumer credit cards

According to an extensive study by the Federal Reserve Bank of New York (“Household Debt and Credit” released November 2025) there was $1.2 trillion of aggregate outstanding credit card debt at the end of the third quarter 2025.  Below are some metrics on U.S. credit cards.

• Ownership Rate: About 81% of U.S. adults had a credit card in 2024, notes Academy Bank and The Motley Fool.

• Multiple Cards: The average adult holds over seven credit cards but actively uses about 3.7, reports Experian.

• Carrying Balances: Around 46% of cardholders carry a balance from month to month, according to data from Academy Bank and Clearly Payments.  According to the Bank Policy Institute, 58% of consumers pay off their balance each month in full, while 22% of consumers rarely pay off their balance each month in full.  Perhaps not surprising, consumers that rarely pay off their balances have the highest average interest rate according to this study. 

• Average balances: TransUnion has said that the average balance on a credit card for those borrowing is $6,473.

• Deliquencies: According to the Federal Reserve Bank of New York study (referenced above),  the credit card delinquency rate for more than 90 days is 12.49%, significantly higher than mortgages, auto loans and even student loans.  Keep in mind that credit card debt is unsecured, while mortgages and auto loans are secured.   

I also read that average credit card balances have been declining, which could very well be attributable to the growth of buy now pay later (“BNPL”) plans like Klarna, PayPal and Affirm.  These are essentially substitutes for credit card debt although they have a short-term repayment schedule that must be met (as opposed to revolving indefinitely).  

Credit card providers

The graphic below from Cardrates.com illustrates the top 10 U.S. credit card providers in the U.S.  The top six providers – JP Morgan Chase, American Express, Citibank, CapitalOne, Bank of America and Discover – collectively have circa 69% of the market.  The top 30 credit card companies have around 90.9% of the total market.

Deeper analysis of credit card economics

If you really want to get into the trees regarding the economics of credit cards, especially their profitability and risks, the Federal Reserve Bank of New York published a very good study (March 31, 2025) that you can find here: “Why Are Credit Card Rates So High?”

Conclusion

 As I pen this article, the January 20^th deadline for a 10% interest rate cap proposed by President Trump in his Truth Social post has come and gone, with no major credit card provider voluntarily reducing their credit card interest rate to 10%. The banking industry is completely opposed to this idea on the basis that it would severely restrict access to credit for consumers, especially those that most need it.  Mr Trump might now be forced to try a more conventional route and take the matter to Congress for consideration.  Even then, the likelihood of Congress formally passing legislation to cap credit card interest rates is very low simply because most people – aside from a few Congressmen – realise it is a bad idea.  I suspect we will hear more about this topic at Mr Trump’s State of the Union address on February 24^th, as he continues to try to address the very issue that he used to defeat Mr Biden – affordability.  Until then, I suspect nothing more will happen as far as an interest rate cap on credit cards.