Former President Donald Trump's latest populist economic salvo has given credit card issuers a new headache, even though experts are dismissive of its chances.
The Republican presidential nominee's plan to temporarily cap credit card interest rates at roughly 10% would not only face skepticism on Capitol Hill, it would undoubtedly encounter fierce opposition from card companies, which would be forced to rethink their business models if the idea ever came to fruition.
During a Wednesday campaign rally, Trump told a Long Island crowd that "while working Americans catch up," he plans to "put a temporary cap on credit card interest rates" of "around 10%."
"We can't let them make 25 and 30%," Trump said, apparently in reference to banks that offer credit cards to consumers.
Trump's proposal would slash credit card companies' interest revenues for however long it was in effect. The current
While lower interest rates would seemingly offer a reprieve to borrowers carrying large balances, several experts warned about unintended consequences.
"It will be functionally the end of lending as you know it," said Brian Riley, the co-head of payments at Javelin Strategy & Research.
Though the credit card industry has historically been quite profitable, the interest that banks collect from cardholders helps to offset various costs. Those costs include not only the interest that banks pay to depositors but also a wide range of non-interest expenses, from paying employees at call centers to mailing paper statements. Card companies also need to offset the money they lose when borrowers run into trouble and don't pay back their balances.
The formula would get far trickier if issuers' top-line interest revenue were slashed, which Riley and other experts said could prompt some lenders to exit the market. Other lenders would still offer credit cards but probably only to consumers with high credit scores, since those people are more likely to pay back their debt and prevent banks from absorbing charge-offs.
Ted Rossman, a credit card analyst at Bankrate.com, said Trump's proposal "would really decimate access to credit because it wouldn't be profitable."
"There just wouldn't be incentive for banks to offer credit cards," he said.
Card companies could theoretically compensate by charging more fees, said Chi Chi Wu, a senior attorney at the National Consumer Law Center. But doing so could make it even tougher for consumers to compare card options, she said, since they would have to evaluate the impacts of different fees for different cards.
"It's better when the profits from credit cards are in the APR and not in fees because it's more transparent," she said.
There just wouldn't be incentive for banks to offer credit cards.
During the early stages of the COVID-19 pandemic, the Consumer Financial Protection Bureau, led at the time by Trump nominee Kathy Kraninger,
Trump's call for a temporary interest rate cap is just the latest political issue putting the card industry on the defensive. Banks are
Trump's proposal isn't fully fleshed out, and his campaign did not respond to questions sent by email.
Among those questions: How long would the temporary cap on credit card interest be in effect? And would Trump try to implement it with or without the involvement of Congress?
Jaret Seiberg, a policy analyst at TD Cowen's Washington Research Group, wrote in a note to clients that Congress would have to be involved, and he sees little chance of the idea getting implemented.
"Regulators lack the power to do this unilaterally, with Congress expressly barring the Consumer Financial Protection Bureau from exercising usury authority," Seiberg wrote. "Given how conservative the judiciary has become, we do not see how unilateral action could survive a legal challenge."
Some states have caps on consumer interest rates, and there have been proposals to enact such policies at the federal level, though the proposed caps have been less restrictive than the idea Trump floated.
Sen. Jack Reed, D-R.I., and other Senate Democrats last year proposed capping interest rates on consumer loans at 36%. Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, D-N.Y., have sought to go further by capping credit card interest rates at 15%. And Republican Sen. Josh Hawley of Missouri last year proposed an 18% cap on credit card interest.
The starkly different political views of the backers of those proposals illustrate that progressives and the
But the chances of legislation to cap credit card interest rates moving forward are low, Boltanksy wrote, arguing that the absence of centrist lawmaker support makes the likelihood even lower.
"There is a deep chasm between rhetoric and reality," he wrote.
But following Trump's endorsement of an interest rate cap, Seiberg said it seems likely that Democrats will make a legislative push for a usury cap in 2025. "They will likely cite Trump's support as a reason for Republicans to get onboard regardless of which candidate wins the White House in November," he wrote.
While a 10% or 18% interest rate cap would be a "nonstarter," there would be a higher likelihood of a 24%-36% cap getting enacted, "though even that will be a challenge," Seiberg wrote.
On Thursday, the Consumer Bankers Association declined to comment specifically on Trump's proposal but reiterated the industry's opposition to price controls on credit card interest rates.
The American Bankers Association said in a written statement that while it does not know the details of Trump's proposal, it has opposed similar proposals, including the one from Sanders and Ocasio-Cortez during the 2020 campaign.
Such proposals "would result in the loss of credit for the very consumers who need it the most," the ABA said.
"Instead, these consumers would be forced to use less-regulated, more risky alternatives including payday lenders and loan sharks," the group said.
Jialan Wang, a former CFPB economist who teaches at University of Illinois at Urbana-Champaign, said she agrees with Trump that credit card costs are high. But she said the right approach is to "foster more competition" by encouraging more entrants to compete with industry heavyweights, and also by simplifying a product that has become "too complicated."
"If you have a product with 10 types of fees, 20 types of rewards, consumers are not going to be able to shop around," Wang said. "So make that product simpler. That's a way to reduce prices."
