U.S. President Donald Trump’s suggestion to limit credit card interest rates to 10 percent may offer temporary relief to certain consumers but experts warn it could trigger a more extensive credit crisis in the long term. Trump recently announced on Truth Social that credit card companies had until Jan. 20 to enforce the cap, emphasizing that his administration will not tolerate Americans being charged exorbitant rates of up to 20 or 30 percent.
However, the companies have not complied with the directive. Consequently, Trump is now calling on Congress to pass legislation to formalize the proposal into law. While the proposal has garnered bipartisan support, it has also faced criticism from notable Republican figures.
Economists, such as RSM’s chief economist Joseph Brusuelas, caution that imposing an artificial cap on interest rates could lead to a reduction in the availability of credit, particularly affecting borrowers deemed “risky,” such as those with poor credit scores. Financial institutions typically determine rates by utilizing a formula that combines the central bank’s benchmark interest rate with an assessment of the borrower’s risk level.
Brusuelas contends that despite potential short-term popularity, rate caps like the one proposed by Trump could disadvantage lower-income households that rely on credit for essential expenses, potentially leading to decreased spending and economic slowdown. This, in turn, could result in increased unemployment rates.
The average U.S. credit card interest rate stood at 23.79 percent in January, with rates for subprime borrowers exceeding 30 percent, according to LendingTree. Trump’s move to cap rates aligns with his promises on affordability from his 2024 presidential campaign, aiming to address the issue of rising household debt.
The U.S. banking sector, heavily reliant on interest rate income, could face significant financial losses if the 10 percent cap is implemented, as indicated by a study from Vanderbilt University. Jamie Dimon, CEO of JPMorganChase, warned at the World Economic Forum that such a cap could lead to an “economic disaster,” affecting a vast majority of Americans who rely on credit as a financial safety net.
Moreover, a cap on interest rates could impact U.S. credit card rewards programs, potentially prompting companies to adjust or reduce rewards offerings due to decreased income from interest. Trump’s proposal finds support from unexpected allies in progressive Democratic senators Elizabeth Warren and Bernie Sanders, who have long advocated for interest rate caps on credit cards.
While the proposal has gained traction, certain Republicans have expressed concerns about potential negative consequences, urging caution in the approach to addressing credit card interest rates.