Trump Proposes Credit Card Interest Rate Cap
At the World Economic Forum in Davos, former President Donald Trump suggested capping credit card interest rates at 10%, echoing a proposal made by Senator Bernie Sanders. While it’s clear these ideas resonate with many people, popularity alone doesn’t necessarily equate to sound policy.
Having served as Chief Economist at the Office of Management and Budget during Trump’s first term, I find it disheartening that he is adopting aspects of Sanders’ economic strategy. The success of the previous administration came from embracing free market principles—deregulation, competition, and respect for price signals. These strategies led to greater access to credit, lower costs, and solid economic growth. Moving towards price controls now would undermine that progress and resembles the socialist policies that Trump once criticized.
Historically, regulating credit pricing has often resulted in negative outcomes, particularly hurting low-income borrowers who may have imperfect credit but require access to funds.
The underlying frustrations prompting these proposals are valid. Many Americans are feeling the pinch from inflation, rising costs, and stagnant wages. However, implementing misguided policies on top of these challenges might just exacerbate the situation.
Credit card companies determine rates based on risk—if they can’t charge accordingly, they are likely to pull back on lending to higher-risk individuals.
To understand what a 10% interest cap entails, let’s look at current averages. The average annual percentage rate (APR) for credit cards is about 20%, but this number obscures a lot of variance; prime borrowers may benefit with rates around 14%, while subprime borrowers often face rates over 25%. These elevated rates reflect the actual risk involved, and a cap wouldn’t eliminate this risk but would prevent lenders from addressing it appropriately.
This situation could ultimately shut millions of Americans out of accessing credit entirely.
The American Bankers Association estimates that a cap could deny at least 137 million cardholders access to credit cards—these are typically individuals who truly need credit for emergencies or to manage day-to-day expenses and build credit history. Price controls like these could push them towards predatory lenders or payday loans, where interest rates can be unregulated and exorbitant.
We’ve seen similar scenarios play out before. Interest rate caps in the 1970s led to a significant decline in consumer credit availability until a Supreme Court decision changed banking rules. France’s stringent lending laws created a segment of the population permanently excluded from legal credit. Japan witnessed a collapse of its consumer lending market after imposing a cap in 2006, forcing borrowers into dangerous financial situations.
The rationale that these measures would combat “excessive” profits is flawed. Default rates consume a large portion of profits, meaning that credit card companies typically work with thin margins despite high nominal rates. In recent years, JPMorgan Chase & Co. has reported a 27% return on equity from its credit card division, which, while robust, doesn’t indicate excess when viewed in the broader financial landscape.
A more effective approach might be to enhance competition and promote financial literacy rather than impose caps. Removing barriers for new market entrants, ensuring clearer terms, and supporting credit-building alternatives would likely lead to greater access.
The first Trump administration recognized this principle. Trusting the market to function as it should proved effective. Transitioning to a model based on interest caps will not foster a more compassionate economy; it could restrict growth and access precisely where it’s needed most.
Politicians may claim they’re “fighting” credit card companies through interest caps, but in reality, they might be wrestling with the fundamentals of economics. Like the laws of nature, economic laws cannot be bent by legislative intent. The most disadvantaged will ultimately feel the impact of these decisions, discovering that 25% interest rates are more accessible than the 10% rates they are barred from obtaining.
In essence, the road to financial exclusion is often paved with good intentions. It may be more beneficial to focus on avenues for economic growth rather than limiting access through price controls that have historically failed.
