Trump wants to cap credit card interest rates at 10%. Would that work? 

United States President Donald Trump has announced plans to cap credit card interest rates at 10 percent for one year, effective January 20, the date of his inauguration.

Trump, who first proposed such a cap on the campaign trail, floated the idea in a post on Truth Social last week, saying Americans were being “ripped off” with interest rates as high as 30 percent.

Trump returned to the idea again on Sunday, saying credit card companies had “really abused the public”.

“We’re putting a one-year cap at 10 percent. And that’s it. They know it,” Trump told reporters on Air Force One.

While there is bipartisan support in the US for lowering the costs imposed by card companies, experts have warned that Trump’s plans could also have unintended consequences, including limiting some consumers’ access to credit.

Why is Trump pledging to cap interest rates?

Americans owe credit card companies an enormous amount of money.

Outstanding credit card debt stood at $1.23 trillion as of September, up from $1.17 trillion the previous year, according to the Centre for Microeconomic Data at the Federal Reserve Bank of New York.

That figure does not include other common forms of debt that put pressure on household finances, such as auto loans and mortgages.

Broken down by customer, the average credit card debt was $6,555 in November, according to TransUnion, a US credit reporting agency.

As credit card debt has grown, so has the cost of borrowing.

The average interest rate stood at 22.83 percent in August, according to the Federal Reserve, up from 16.28 percent in 2020.

The cost of living is a major concern for US voters, and affordability is likely to be a key issue in midterm elections scheduled for November.

While Trump’s re-election was widely attributed to public ire over high inflation, a majority of Americans are dissatisfied with his handling of the cost of living, opinion polls suggest.

In addition to targeting credit card companies, Trump has also announced plans to lower mortgage rates and bar institutional investors from buying single-family homes.

What are the details of Trump’s plan?

Trump has disclosed few details.

For a cap on interest rates to be legally binding, Trump would need lawmakers in Congress to pass legislation, according to Brian Shearer, director of competition and regulatory policy at the Vanderbilt Policy Accelerator.

“He can’t do it through executive action legally. But there are bipartisan bills in the House and Senate that he and his allies could push,” Shearer told Al Jazeera.

Trump on Monday signalled his support for the “Credit Card Competition Act of 2023”, a bipartisan bill introduced by Democratic Senator Dick Durbin and endorsed by Republican Senator Roger Marshall.

The bill targets hidden “swipe fees” levied by Visa and Mastercard on both customers and merchants.

“Everyone should support great Republican Senator Roger Marshall’s Credit Card Competition Act, in order to stop the out of control Swipe Fee ripoff. Roger is a FANTASTIC Senator!!!” Trump wrote on Truth Social.

Another proposal, the 10 Percent Credit Card Interest Rate Cap Act, was introduced last year by independent Senator Bernie Sanders and Republican Senator Josh Hawley, but has since stalled in Congress amid opposition from the credit card industry.

A major question mark about Trump’s plans is enforcement.

The Sanders-Hawley bill, for example, would rely on the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission to police creditors, with violations attracting civil penalties.

Trump, however, slashed the budgets of both agencies last year.

The Trump administration is seen as particularly hostile towards the CFPB, a federal watchdog established in the wake of the 2008 global financial crisis.

Russell Vought, the White House budget office director, said in October that he intends to shut down the agency.

What are the benefits of capping interest rates?

A 10 percent ceiling on credit card interest rates could save Americans $100bn annually, according to a September analysis by Shearer, who previously worked at the CFPB.

But Shearer’s analysis also warned of negative consequences for consumers. He predicted that credit card companies would reduce their lending volume for customers with “fair” to “poor” credit scores and also cut rewards programmes.

According to the same analysis, however, a 15 or 18 percent cap would not lead to any reduction in lending while delivering consumer savings of $48bn or $16bn, respectively.

Shearer has argued that credit card companies are profitable enough to absorb the losses resulting from a cap and will be able to rely on other revenue streams, including billions of dollars in processing fees charged to merchants.

“I think the proposal would save money even if it’s just for one year. I’d of course want a permanent cap, but a one-year cap still saves money, and people are hurting now with high prices, so it would provide good relief,” he said.

What do critics say about Trump’s plan?

Industry critics say a cap on interest rates would lead to customers with lower credit scores being denied access to credit.

The Electronic Payments Coalition (EPC), which represents payment networks, banks, and credit unions in the US, said on Tuesday that more than 80 percent of credit card accounts could be “closed or severely restricted” under the cap, affecting 175-190 million customers.

“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,” EPC Executive Chairman Richard Hunt said in a statement.

The Bank Policy Institute (BPI), a nonpartisan public policy, research, and advocacy group, has also criticised proposals for a cap.

In an analysis in May, the BPI estimated that as many as two-thirds of customers who roll over their credit card balance each month – meaning they do not pay it off completely – would see their credit lines “curtailed or eliminated” under a 10 percent cap.

Has this been tried before?

Interest rate restrictions already exist in the US for certain borrowers.

Under the Servicemembers Civil Relief Act, members of the military benefit from a 6 percent cap on interest on loans, including credit card repayments, incurred before they began active duty.

Another law, the Military Lending Act, caps the maximum interest rate on some types of consumer debt to no more than 36 percent for active-duty personnel.

Federal credit unions, not-for-profit financial institutions open to all customers, are by law subject to a ceiling on their interest rates, currently set at 18 percent.

Efforts to cap borrowing costs have also been made at the state level.

In 2011, Arkansas amended its constitution to cap credit card interest rates at 17 percent.

The results in Arkansas have been mixed, according to research.

A 2022 study in the Journal of Financial Research found that the cap had created a “credit desert” for many residents with lower credit scores.

The study also found that some residents living in counties bordering other states crossed state lines to access financial services.