Trump Proposes 10% Cap on Credit Card Interest Rates Amid Soaring Costs

Yesterday, President Trump called for a 10% cap on credit card interest rates. This proposal comes at a time when credit card interest rates have surged to around 30%, even for borrowers with excellent credit scores. Such high rates have made it increasingly difficult for many Americans to manage their debt and maintain financial stability. Interest rate caps used to exist but were removed decades ago, leading to the current situation. This post explores the background of credit card interest rates, the impact of soaring costs on consumers, and what a 10% cap could mean for the economy and everyday borrowers.

I am a HUGE fan of such a cap! Generally speaking, "debt" is a 4-letter word we should avoid using.

The History of Credit Card Interest Rate Caps

Interest rate caps on credit cards were common in the United States before the 1980s. States had the authority to set maximum interest rates, which typically ranged between 10% and 18%. These caps protected consumers from excessive charges and kept borrowing costs manageable.

However, the landscape changed after the Supreme Court's 1978 decision in Marquette National Bank v. First of Omaha Service Corp. This ruling allowed banks to charge interest rates based on the laws of the state where the bank was located, rather than where the borrower lived. As a result, many banks moved to states with no or very high interest rate limits, such as Delaware and South Dakota. This led to the removal of effective caps nationwide.

Since then, credit card interest rates have climbed steadily. Today, the average credit card interest rate hovers around 20%, with many cards charging rates above 25% and some reaching 30% or more. This rise has made credit card debt a significant burden for millions of Americans.

Why Credit Card Interest Rates Matter

Credit card interest rates directly affect how much consumers pay when they carry a balance month to month. High rates mean that even small balances can grow quickly, trapping borrowers in cycles of debt. Traditionally, this debt entrapment was known as "usury" and the banks charging high rates and trapping people in a debt cycle were equated with drug dealers. The drug in this case was money needed to pay for things like food.

For example, a $5,000 balance at a 30% annual interest rate can generate $125 in interest charges each month if unpaid. Over time, this can add thousands of dollars to the total amount owed, making it harder for consumers to pay down their debt.

High interest rates also discourage responsible borrowing and saving. Many people avoid using credit cards or rely on payday loans and other costly alternatives when credit card debt becomes unmanageable.

The Impact of Soaring Interest Rates on Borrowers

The rise in credit card interest rates affects different groups in various ways:

• Consumers with excellent credit: Even those with high credit scores face rates far above 20%, which limits their ability to use credit affordably.

• Middle-income families: Many rely on credit cards for emergencies or everyday expenses. High rates increase their financial stress and risk of default. And emergencies will ALWAYS happen!

• Low-income borrowers: These individuals often pay the highest rates and may struggle to access other forms of credit, leading to a cycle of debt and financial insecurity.

  
  

The COVID-19 pandemic worsened the situation for many households. Job losses and reduced income forced more people to rely on credit cards and borrowing, increasing their balances and interest payments.

What a 10% Cap Would Mean for Consumers

President Trump's proposal to cap credit card interest rates at 10% aims to restore protections that existed decades ago, when other interest rates were much higher. Here’s what such a cap could mean:

• Lower borrowing costs: Consumers would pay significantly less interest, making it easier to pay off balances and avoid debt traps.

• Increased access to credit: More people might qualify for credit cards with affordable rates, improving financial inclusion.

• Pressure on credit card issuers: Banks and credit card companies would need to adjust their business models, possibly reducing fees or tightening lending standards.

• Potential reduction in credit availability: Some lenders might reduce credit limits or become more selective to manage risk under lower interest rates.

  
  

Challenges and Criticisms of Interest Rate Caps

While a 10% cap sounds beneficial for consumers, there are concerns about its broader effects:

• Impact on credit supply: Critics argue that lower interest rates could lead banks to offer fewer credit cards or reduce credit limits, especially to higher-risk borrowers.

• Higher fees: To compensate for lost interest income, credit card companies might increase annual fees or other charges.

• Economic consequences: Some economists warn that strict caps could reduce consumer spending and slow economic growth.

• Legal and regulatory hurdles: Implementing a nationwide cap would require changes to federal laws and could face opposition from the financial industry.

  
  

Examples from Other Countries

Several countries maintain interest rate caps on consumer credit, providing useful comparisons:

• Canada: The maximum interest rate on credit cards is 60% annually, which is still high but regulated.

• United Kingdom: The Financial Conduct Authority caps interest rates on credit cards at 27% annually.

• Australia: Interest rates on credit cards are not capped, but regulators monitor fees and charges closely.

  
  

These examples show that interest rate caps can coexist with a functioning credit market, but the specific level and enforcement matter greatly.

How Consumers Can Protect Themselves Now

While the debate over interest rate caps continues, consumers can take steps to manage credit card debt:

• Shop for lower rates: Compare credit card offers and choose cards with the lowest interest rates and fees.

• Pay balances in full: Avoid carrying balances to prevent interest charges. If you do this, you get the benefits of points without the cost. But the banks count on you eventually NOT paying off the balance in an emergency situation.

• Use balance transfers: Some cards offer 0% interest on balance transfers for a limited time, which can reduce costs.

• Create a budget: Track spending and prioritize paying down high-interest debt.

• Seek credit counseling: Nonprofit agencies can help develop debt management plans.

• Dave Ramsey: Dave Ramsey, who I am a huge fan of, offers many free resources on the internet and YouTube that will get you thinking differently about debt, and how destructive it is.

  
  

What’s Next for Credit Card Interest Rates?

President Trump’s call for a 10% cap has sparked renewed discussion about consumer protection and financial fairness. Lawmakers, regulators, and industry leaders will likely debate the proposal’s merits and challenges in the coming months.

Consumers should stay informed about potential changes and consider their own credit strategies carefully. Whether or not a cap is implemented, understanding interest rates and managing debt responsibly remains crucial.