While President Donald Trump’s proposed 10% cap on credit card interest rates might seem appealing at first to consumers, it’s important to remember that not everything that glitters is gold.
From the credit industry to advocacy groups, experts agree such a cap could limit credit access and have unintended rippling effects across an already shaky economy.
What a 10% Cap Means for Consumers
The Electronic Payments Coalition released a study this week in response to Trump’s proposed 10% cap, stating that “90% of current cardholders — between 175 (million)-190 million Americans — would effectively lose access to credit. Essentially, any American with a credit score of less than 740 would see their card eliminated or credit limit drastically reduced.”
According to the most recent Federal Reserve data, credit card rates on all accounts assessed interest average 22.3%.
EPC Executive Chairman Richard Hunt said in a statement, “A one-size-fits-all government price cap may sound appealing, but it wouldn’t help Americans — it would do the exact opposite, harming families, limiting opportunity and weakening our economy.”
Restricted access to credit would likely lead to a rise in predatory lending practices as well, according to many experts. “If banks refuse to offer credit to those customers, it’s entirely likely they will need something to address their short-term cash flow challenges,” says Adam Rust, director of financial services for the Consumer Federation of America. “And the alternatives — such as payday loans — are problematic.”
Celia Winslow, president and CEO of American Financial Services Association, says that “interest rates are not really the best way to measure whether or not credit is affordable. It’s been shown time and time again that every time you put an interest rate cap in, credit is cut off. And it’s often for the near-prime or subprime borrowers. But a rate as low as 10% would cut credit cards off for an even larger number of people.”
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Potential Trade-offs
So what if you have a credit score above 740? A 10% cap is good news for you, isn’t it? Not necessarily.
The EPC stated that “cardholders who retain access to credit would likely face lower credit limits, tighter credit standards and reduced rewards. These effects are likely to be imposed on all open accounts, irrespective of credit score.”
So under a cap as low as 10%, your credit card rewards might not be worth as much. And you’d most likely see credit card issuers implementing other strategies to make up for the loss in revenue — such as increased annual fees, reduced benefits and lowered credit limits.
“If profit is squeezed in one place, where does it make up? Historically, it’s not just within the credit card space itself, it can be other places in the company as well,” Winslow says, referencing the reduction in free checking after the CARD Act was passed in 2009. “Before the CARD Act was passed, many consumers had free checking accounts. After that amendment passed, we saw free checking go away for a lot of people. Now, if you don’t want to pay for your checking account, you either have to keep a certain amount of money in your account, sign up for direct deposit or certain other qualifiers.”
Banks still would be making money on credit cards, Rust says.
Rust says that “even with a rate cap, credit cards are still going to be enormously profitable. With over $150 billion in swipe fees in 2024, and tens of billions of dollars in other fees, no rational CEO is going to abandon that kind of business to make more mortgages at 6%.”
[Read: Rewards Credit Cards]
Bottom Line
A 10% cap on credit card interest rates may seem good at first blush, but the reality is a little more complex than that. “A 10% rate cap might not be the right number,” says Rust. “The goal is to find a way to make the cost of credit more reasonable without reducing credit availability. That’s the essential issue here. Credit unions offer credit cards at rates at or below 18%, and they are able to do that. So they’ve shown the precedent can exist for there to be a cap that works.”
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Could Trump’s Rate Cap Kill Your Credit Card? originally appeared on usnews.com