‘Access to credit would dry up’

Former President Donald Trump has made headlines over the past week with yet another surprise economic policy announcement. After promising free in vitro fertilization treatments for women, no federal income tax on tips, tax-free overtime pay and no income tax on Social Security benefits, Trump now says that if he is elected president in November, he will cap credit card interest rates at around 10%.

“While working Americans catch up, we’re going to put a temporary cap on credit-card interest rates,” the Republican presidential nominee said at a rally in New York on Sept. 18. “We can’t let them make 25% and 30%.”

Trump’s promise falls in the home stretch of an extremely close presidential race between him and the surprise Democratic nominee, Vice President Kamala Harris. It’s also a moment in which credit card debt is heavily burdening many U.S. households.

The average credit card balance was $6,329 in the second quarter of 2024, compared to $4,828 during the same period in 2021, according to TransUnion. The current delinquency rate of more than 3% is the highest since 2011, Federal Reserve data shows.

Trump’s proposed rate cap, if enacted, would have a huge impact on both consumers and on the financial industry.

The average interest rate on credit cards is currently over 20%, with some cards charging as much as 36% APR, said Ted Rossman, a senior industry analyst at Bankrate.

“A 10% cap would completely upend the credit card market,” Rossman told CNBC.

While the Trump campaign has yet to provide details of how the proposed cap would work, campaign spokesperson Karoline Leavitt said the intent was to “provide temporary and immediate relief for hardworking Americans,” including those “who are struggling to make ends meet and cannot afford hefty interest payments on top of the skyrocketing costs of mortgages, rent, groceries and gas.”

Harris hasn’t specifically proposed capping the interest on credit cards. However, she has focused on the burden of debt on Americans, with a vow to wipe away medical debt for millions of households. The vice president has also repeatedly touted her work in the Biden administration to get billions of dollars in federal student loans forgiven.

The Biden administration has also worked to reduce the so-called junk fees consumers pay, including steep charges for late payments on credit cards. In February, the Consumer Financial Protection Bureau conducted an analysis of the interest rates on credit cards, concluding that, by some measures, the cards have never been so expensive and that issuers are profiting hugely as a result.

A national interest rate cap requires Congress

Under current federal law, nationwide limits on credit card interest rates are scarce, consumer advocates say.

The 2006 Military Lending Act set a 36% rate cap on many lending products sold to active duty service members and their families. Likewise, federal credit unions are typically restricted to an 18% interest rate on their credit cards.

Beyond these examples, however, the authority to set bank interest limits is largely left to the states, said Adam Rust, director of financial services at the Consumer Federation of America, a non-profit.

Under the 19th century National Bank Act, banks are required to abide only by the specific interest rate limits of the individual state in which the bank is headquartered, Rust said.

“Not coincidentally, most credit cards are issued by banks located in South Dakota, Delaware or Utah, because those states have very permissive rules,” he said.

Despite his recent campaign trail promise, even if Trump were in the White House, he would not have the authority to alter this landscape, Rust said.

“A president cannot set a cap on credit card interest rates,” said Rust.

Nor can the Consumer Financial Protection Bureau, the U.S. government agency tasked with protecting consumers from financial abuses.

If Trump wants to impose a nationwide interest rate cap, “it will take congressional legislation,” Rust said.

Specifically, Congress would likely need to pass an amendment to The Truth in Lending Act, before the federal government could implement a national interest rate ceiling on credit cards.

But recent bills seeking to limit how much banks could charge for credit card interest have stalled, including an effort to cap rates at 36%, and another to cap them at 18%.

“It’s a compelling political talking point,” Rossman said of Trump’s proposal. “But I seriously doubt something like this would pass” the House and Senate.

Meanwhile, consumer advocates are skeptical that a second Trump presidency would actually produce better terms for borrowers than current policies.

“The past Trump administration weakened the Consumer Financial Protection Bureau, rolled back protections against 400% APR payday loans and took a number of other steps that weakened consumer protections,” said Lauren Saunders, associate director at the nonprofit National Consumer Law Center.

A 10% interest rate cap could backfire

Financial experts on both sides of the debate expressed concerns that a 10% interest rate cap could backfire on consumers in various ways.

One argument is that if banks were to see a dramatic reduction in the interest rates they were permitted to charge all credit card holders, they would respond by limiting the number of higher risk consumers to whom they agreed to issue credit cards, said Nicholas Anthony, a policy analyst at the libertarian Cato Institute’s Center for Monetary and Financial Alternatives.

“In response to this cap, lenders are likely to cut people off if they’re deemed too risky or expensive to serve, or they might also give out fewer services,” Anthony said.

Rossman, of Bankrate, agreed.

“The unintended consequence would be that access to credit would dry up,” he said. “It just won’t be profitable [for banks] if 10% is the most they could charge.”

But Saunders warned against letting the banking industry’s gloomy predictions about the potential impact of a proposed 10% interest rate cap drown out what she sees as a strong case for imposing an interest rate cap above 10%, but below the current highs.

“Banks have opposed any rate cap,” she said. “They claim the sky would fall with a 36% rate cap, too.”

Nonetheless, consumer advocates had other concerns about the inadvertent costs of Trump’s proposal.

“Capping interest rates will help consumers so long as it does not lead to crossover increases in penalty fees,” Rust said. “Otherwise, it is a game of whack-a-mole.”

In 2022, credit card issuers charged $14 billion in late fees, he noted. This figure represented over 10% of the $130 billion total that the companies charged consumers in interest and fees, the Consumer Financial Protection Bureau found.

A new CFPB rule that would limit credit card late fees to $8 is currently tied up in the courts, facing lawsuits brought by the U.S. Chamber of Commerce and banking trade groups.

In May, a Trump-appointed federal judge temporarily blocked that rule from taking effect.