Experts warn that Trump's 10% credit card interest cap could harm borrowers by limiting their access to credit.

• The potential unintended consequences of former President Donald Trump's call to limit credit card interest rates to 10% have been highlighted by financial experts and consumer advocates.
• "The availability of credit would decrease," stated Ted Rossman, a senior industry analyst at Bankrate.
• A leading consumer advocate stated that a president has no authority to establish a limit on credit card interest rates.

This week, former President Donald Trump has made news with another unexpected economic policy statement. Trump previously pledged to offer free in vitro fertilization treatments, eliminate federal income tax on tips, provide tax-free overtime pay, and exempt Social Security benefits from income tax. Now, if he is reelected in November, he has announced that he will cap credit card interest rates at approximately 10%.

"At a rally in New York on Sept. 18, the Republican presidential nominee stated that they would put a temporary cap on credit-card interest rates while Americans work to catch up. They emphasized that interest rates cannot be allowed to reach 25% and 30%."

As the presidential race between Trump and Harris nears its end, many U.S. households are struggling with credit card debt.

In the second quarter of 2024, the average credit card balance was $6,329, an increase from $4,828 in the same period in 2021, according to TransUnion. Meanwhile, the current delinquency rate of more than 3% is the highest since 2011, as shown by Federal Reserve data.

If Trump's proposed rate cap is enacted, it will significantly affect both consumers and the financial industry.

Currently, the average interest rate on credit cards is over 20%, with some cards charging as much as 36% APR, according to Ted Rossman, a senior industry analyst at Bankrate.

Rossman stated on CNBC that a 10% cap would completely disrupt the credit card market.

The Trump campaign aims to offer temporary relief to hardworking Americans who are struggling to pay their bills, including mortgage, rent, food, and gas expenses, through a proposed cap on interest payments.

While Harris hasn't suggested limiting credit card interest rates, she has emphasized the impact of debt on Americans and pledged to erase medical debt for many families. Additionally, the vice president has frequently highlighted her efforts in the Biden administration to forgive billions of dollars in federal student loans.

The Biden administration has made efforts to decrease the fees that consumers pay, including high charges for late credit card payments. In February, the Consumer Financial Protection Bureau found that credit card interest rates have never been higher, and that issuers are making significant profits from this.

A national interest rate cap requires Congress

Consumer advocates argue that under current federal law, nationwide limits on credit card interest rates are few and far between.

The 2006 Military Lending Act established a 36% rate cap on various lending products marketed to active duty service members and their families. Similarly, federal credit unions are generally limited to an 18% interest rate on their credit cards.

The authority to set bank interest limits is mostly left to the states, according to Adam Rust, director of financial services at the Consumer Federation of America, a non-profit organization.

According to the 19th century National Bank Act, banks must adhere to the interest rate limits set by the state in which they are headquartered, as stated by Rust.

He stated that most credit cards are issued by banks in South Dakota, Delaware, or Utah due to these states' highly permissive rules.

Rust stated that even if Trump were in the White House, he would not have the authority to change this landscape, despite his campaign trail promise.

Rust stated that a president has no authority to establish a limit on credit card interest rates.

The Consumer Financial Protection Bureau, a U.S. government agency, is responsible for safeguarding consumers from financial exploitation.

If Congress passes legislation, Trump can impose a nationwide interest rate cap, according to Rust.

To implement a national interest rate ceiling on credit cards, Congress would need to pass an amendment to The Truth in Lending Act.

Efforts to limit banks' ability to charge high credit card interest rates have been halted, including bills aiming to cap rates at 36% and 18%.

Rossman stated that Trump's proposal is a powerful political argument, but he believes it is unlikely to be passed by the House and Senate.

Consumer advocates doubt that a second Trump presidency would improve borrowing conditions for consumers compared to current policies.

The Trump administration weakened the Consumer Financial Protection Bureau, rolled back protections against 400% APR payday loans, and took other steps that weakened consumer protections, according to Lauren Saunders, associate director at the nonprofit National Consumer Law Center.

A 10% interest rate cap could backfire

Experts on both sides of the debate warned that a 10% interest rate cap could negatively impact consumers in several ways.

According to policy analyst Nicholas Anthony of the libertarian Cato Institute's Center for Monetary and Financial Alternatives, banks would limit the number of higher risk consumers to whom they agreed to issue credit cards if interest rates on credit cards were reduced dramatically.

Anthony stated that lenders may cut off people if they are deemed too risky or expensive to serve, or they may provide fewer services.

Rossman, of Bankrate, agreed.

""If 10% is the maximum interest rate banks can charge, they won't find it profitable to provide credit, resulting in a decrease in access to credit," he stated."

Saunders cautioned against allowing the banking sector's predictions of the negative consequences of a proposed 10% interest rate cap to overshadow her argument for implementing an interest rate cap between 10% and the current highs.

""Banks claim that a 36% rate cap would cause the sky to fall, and they have opposed any such cap," she said."

Trump's proposal inadvertently resulted in additional costs, which were a concern for consumer advocates.

"Rust stated that capping interest rates would benefit consumers, but only if it does not result in an increase of penalty fees. Otherwise, it becomes a game of whack-a-mole."

The Consumer Financial Protection Bureau found that credit card issuers charged $14 billion in late fees in 2022, which was over 10% of the $130 billion total in interest and fees charged to consumers.

The CFPB's proposed rule to cap credit card late fees at $8 is being challenged in court by the U.S. Chamber of Commerce and banking trade groups.

In May, a Trump-appointed federal judge temporarily halted the implementation of that rule.