Experts say President Trump’s credit card interest rate cap could backfire

Former President Donald Trump made headlines last week with yet another surprising economic package, including free IVF treatments for women, exempting tipping from federal income tax, and more. Overtime pay After eliminating income tax on Social Security benefits, Trump has said he would cap credit card interest rates at around 10% if elected president in November.

“I’m going to put a temporary cap on credit card interest rates until working Americans catch up,” the Republican presidential candidate said at a rally in New York on Sept. 18. “We can’t let them charge 25 percent or 30 percent interest.”

Trump’s pledge comes at a time when a presidential election is extremely close, with the unlikely Democratic candidate, Vice President Kamala Harris, weighing heavily on many American households.

The average credit card balance for the second quarter of 2024 was $6,329, up from $4,828 for the same period in 2021. Trans UnionThe current delinquency rate is More than 3% That’s the highest level since 2011, according to Federal Reserve data.

If implemented, President Trump’s proposed interest rate caps would have a major impact on both consumers and the financial industry.

The average credit card interest rate now exceeds 20%, with some cards hitting as high as 36%, according to Ted Rothman, senior industry analyst at Bankrate.

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

The Trump campaign has not yet released details about how the proposed cap would work, but campaign spokeswoman Carolyn Leavitt said the intent is to “provide temporary and immediate relief to hard-working Americans,” including “those who are struggling to make ends meet and can’t afford high interest payments on top of soaring mortgages, rent, groceries and gas bills.”

Harris has not specifically proposed capping credit card interest rates, but she has focused on Americans’ debt burden, vowing to eliminate medical debt for millions of families, and the vice president has repeatedly touted her efforts to raise billions of dollars for the Biden administration. Federal Student Loans It’s permissible.

The Biden administration is also working to reduce so-called junk fees paid by consumers, such as late credit card penalties. In February, the Consumer Financial Protection Bureau conducted an analysis of credit card interest rates and concluded that by several measures, credit cards are more expensive than they’ve ever been, and that issuers are raking in huge profits as a result.

Current federal law places few nationwide limits on credit card interest rates, according to consumer advocacy groups.

of Military Loan Act of 2006 It placed a 36% interest rate cap on many loan products sold to active-duty military personnel and their families. Federal credit unions are usually restricted The interest rate on credit cards is 18%.

But outside of those instances, the power to set bank interest rate limits rests mainly with states, said Adam Rust, director of financial services for the nonprofit Consumer Federation of America.

19th century National Bank ActLast said banks only have to comply with the specific interest rate restrictions in each state in which they are based.

“Not coincidentally, most credit cards South Dakota“It should be banned in Delaware and Utah because those states have very loose regulations,” he said.

Despite recent campaign promises, Trump wouldn’t have the power to change that situation even if he were in the White House, Last said.

“The president can’t put a cap on credit card interest rates,” Mr. Last said.

So is the Consumer Financial Protection Bureau, a U.S. government agency tasked with protecting consumers from financial fraud.

If Trump wanted to impose a nationwide interest rate cap, “that would require Congressional legislation,” Last said.

Specifically, Congress would likely have to pass an amendment. The Truth About the Money Lending Business ActBefore the federal government implemented a nationwide interest rate cap on credit cards.

But recent legislation to limit how much interest banks can charge on credit cards has stalled, including an effort to cap interest rates at 36 percent. Limit to 18%.

“This is a compelling political argument,” Rothman said of Trump’s proposal, “but I seriously doubt such a bill would pass the House and the Senate.”

Meanwhile, consumer advocates are skeptical that Trump’s reelection would actually result in better terms for borrowers than current policies.

“The past Trump administration Weakened the Consumer Financial Protection Bureau, Removes protections against 400% annual interest payday loans “They have also taken several other steps that weaken consumer protections.” Lauren SandersHe is vice president of the nonprofit National Consumer Law Center.

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

One argument is that if the interest rates banks are permitted to charge all credit card holders were dramatically reduced, banks would respond by limiting the number of high-risk consumers they agree to issue credit cards to, said Nicholas Anthony, a policy analyst at the Center for Monetary and Financial Alternatives at the libertarian Cato Institute.

“In response to the caps, lenders will likely terminate loans with people they deem too risky or expensive to serve, or they may reduce the amount of servicing they provide,” Anthony said.

Bankrate’s Rothman agreed.

“The unintended consequence will be that access to credit will dry up,” he said. “It will just not be profitable.” [for banks] If 10% is the maximum charge.”

But Sanders warned not to let the banking industry’s pessimistic predictions about the potential impact of the proposed 10% interest rate cap drown out what she sees as a strong case for imposing an interest rate cap of more than 10% but below current high levels.

“Banks are against the interest rate cap,” she says. “They say if we cap it at 36 percent the sky will come crashing down.”

Nevertheless, consumer advocates had other concerns about unanticipated costs of Trump’s proposal.

“Interest rate caps can help consumers as long as they don’t lead to a compounding increase in penalty fees,” Last said. “Otherwise, it’s a game of whack-a-mole.”

In 2022, credit card issuers $14 billion in late feesThat figure accounted for more than 10% of the total $130 billion that companies charged consumers in interest and fees, according to a Consumer Financial Protection Bureau study.

The CFPB’s new rule to limit credit card late fees to $8 is currently facing a lawsuit from the U.S. Chamber of Commerce and banking trade groups and is pending in court.

In May, Federal judge appointed by Trump It temporarily blocked the rule from going into effect.