Proposed Credit Card Interest Rate Cap Could Save Americans Billions
Recent analysis from Vanderbilt University suggests that if President Donald Trump’s proposal to limit credit card interest rates to 10% were implemented, Americans could collectively save around $100 billion in interest annually. This study, released on Thursday, supports Trump’s campaign promises regarding financial reform.
The research indicates that even with a cap at 15%, banks and credit card companies can maintain profitability, especially if they continue to offer customer rewards such as points and access to premium services. With a 10% cap, while banks might face tougher challenges, they could still find ways to profit by adjusting certain rewards, potentially making it workable for the majority of their customers.
Historically rooted, interest rate caps are re-emerging through Trump’s populist agenda. During his 2024 presidential campaign, he first suggested this temporary rate cap, but it hasn’t been discussed much since then.
Nonetheless, this proposal has gained traction among some lawmakers. Senators Josh Hawley and Bernie Sanders have put forward a bill in Congress aimed at instituting this 10% cap. Additionally, Rep. Alexandria Ocasio-Cortez has introduced similar legislation in the House.
Interest rate caps exist in various forms in the U.S. The Military Loan Act prohibits charging more than 36% interest for financial products aimed at military personnel, while credit union rates are capped at 18% by the National Credit Union Administration.
The banking sector is fiercely against the proposed cap. They argue that such limitations could dismantle their business models and jeopardize the rewards programs that many Americans value for travel and other perks.
This concern prompted Brian Shearer, the report’s author, to delve deeper into the issue. With experience under both Republican and Democratic administrations in the Consumer Financial Protection Agency, he aimed to assess the viability of Trump’s proposed cap, suggesting that it could be a serious topic worthy of examination.
Currently, U.S. consumers carry a record amount of credit card debt, approximately $1.21 trillion, translating to an average of around $6,400 per person. The Federal Reserve shows that the average credit card interest rate stands at about 21%, significantly up from the 12% average seen a decade ago.
Banks generate revenue from credit cards in two primary ways: through fees charged to merchants for processing transactions and from interest and fees levied on cardholders. For instance, annual fees and accrued interest on unpaid balances contribute to bank earnings.
Shearer notes that interchange fees are what allow banks to stay profitable even if credit card interest rates rise. Reward programs, primarily funded by these interchange fees, support this profitability. For example, American Express reported $35.2 billion in revenue from merchant fees.
Under Shearer’s projections, capping rates at 15% could lead to approximately $48 billion in savings for consumers, while the savings would rise to around $100 billion at a 10% cap. His analysis assumes banks would aim to charge as close to the proposed cap as feasible.
The study indicates that banks would likely continue funding reward programs via interchange fees, meaning that reductions in compensation for consumers could be limited. The most significant impact could fall on individuals with lower credit scores, who are often viewed as higher-risk borrowers. Despite this, Shearer expresses belief that any necessary reward cuts would be manageable and structured to maintain profitability. Historically, those with lower credit scores often carry balances rather than pay them off monthly.
“Yes, rewards might have to be reduced, but that’s not a narrative you hear often,” Shearer remarked.
This research stems from Vanderbilt’s policy accelerator, which analyzes contemporary political subjects to assess their feasibility and potential implementation.
