Trump’s credit card interest rate cap would kneecap everyday Americans

Credit cards are an indispensable tool in the modern economy. Most adults use them for everyday purchases, emergency spending, and managing cash flow. Yet more Americans are struggling with credit card payments. A new Bankrate report found that about half of credit card holders carry debt from month to month, up from 45 percent in 2020. The report also found that roughly 56 million Americans have carried credit card debt for at least one year.

Last Friday, President Trump announced on his Truth Social platform his support for a one-year, 10 percent cap on credit card interest rates. Trump presents his proposal as a way to make life more affordable for the average American while stopping the alleged profiteering of the credit card companies.

Whether it is President Trump, Sen. Josh Hawley (R-MO) on the right, or Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) on the left, proponents of rate caps would be wise to remember that the long history on interest rate or usury caps is clear. Interest rate ceilings and price controls produce unintended consequences and harm the very consumers they claim to help.

You can’t make credit free by ignoring risk

The president seems to think tweaking interest rates would make credit cards more affordable. However, this is based on a misunderstanding of how interest rates function. Credit card interest rates reflect credit risk, operational costs, and regulatory requirements, not arbitrary profiteering. Credit card companies issue revolving credit to millions of Americans with varying credit histories. High-risk borrowers pay higher interest rates to compensate lenders for the likelihood of default. Essentially, interest rates are the price of accessing credit.

Cutting rates means cutting access

The reality is that these interest rates are the mechanism that supports credit card access for millions of Americans, including high-risk borrowers. Lower rates may sound nice as a political sound bite, but as CEI’s John Berlau points out, such a cap would dramatically shrink credit card availability to the very people proponents want to help. Evidence from similar consumer credit markets demonstrates these adverse effects. In Illinois, a 36 percent interest rate cap reduced loans to subprime borrowers while increasing average loan size. In Oregon, restrictions on short-term credit led to a measurable decline in lending, particularly to higher-risk borrowers.  

As the laws of economics are universal, interest rate caps enacted by other countries have harmed their citizens as well. In Chile, policymakers lowered the legal ceiling on how high unsecured consumer loan interest rates could be charged by roughly 20 percentage points, effectively tightening the maximum rate lenders could offer. A Stanford University study demonstrated that after the policy change, average contract interest rates – the average interest rate agreed to in loan contracts – fell by about 9 percent, but the number of loans issued also dropped by about 19 percent, reflecting a meaningful contraction in credit supply when price ceilings bind.

The International Monetary Fund similarly illustrates how credit contracted in Japan, India, Kenya, Nicaragua, South Africa, and Armenia because of interest rate ceilings. A World Bank review of interest rate caps in more than 70 countries found that these caps often prompt lenders to withdraw from riskier or lower‑income segments, effectively reducing access to credit for the borrowers who need it most.

The problems with interest rate caps don’t just transcend borders, they transcend time. During the Great Depression, interest rates on small loan brokers were capped. The National Bureau of Economic Research documents that as a result, loan volumes declined sharply and credit availability decreased. When those caps were later relaxed, lending rebounded. Credit access was also restricted as a result of usury laws in 19^th century New York and 18^th century England. History shows that affordability of credit does not help anyone if they are denied access to it.

When the credit card disappears, riskier alternatives move in

While credit supply contracts with credit card interest rate caps, the demand for credit does not disappear. Berlau previously pointed out that those who have been shut out from credit card access will find alternative means to acquire the money they need, including payday loans, check cashers, pawn shops, loan sharks, and second mortgages. Many of these markets are regulated, sometimes even more tightly than credit cards, but they function very differently. This substitution effect is not theoretical. When Ohio de facto banned payday loans, demand for pawnbroker services increased.

As a report from the Progressive Policy Institute highlights, credit cards provide protection that these alternative financial services generally lack, including fraud protection and robust dispute resolution. More than a decade ago, CEI and allied experts submitted evidence to an Australian Senate inquiry warning that excessive regulation of card fees and interest can harm consumer welfare and restrict market development. In Chile, this forced substitution away from formal credit reduced consumer surplus by an equivalent of 2.5 percent of average income, with larger losses for riskier borrowers. This is what a paternalistic “consumer protection” framework, rather than one that simply protects consumers from fraud and deception, looks like in practice. It produces fewer credit cards, inferior substitutes, and measurable losses for those with the least ability to adapt.

Even if you keep your card, you still pay more

If you end up as one of the lucky ones who still has access to credit post-cap, don’t get excited because you’ll still be nickeled and dimed. Costs will likely reappear in other forms. My CEI colleague Iain Murray and the World Bank underscore that lenders often respond to caps by compensating for the loss. This compensation can be in the form of higher fees, fewer credit card rewards, or lower credit card limits.

We have real‑world evidence of how capping revenue streams reshapes card products. An academic analysis by researchers at George Mason University, including GMU law professor and CEI board member Todd Zywicki, found that the Durbin Amendment’s cap on debit card interchange fees halved the average allowable fee, leading banks to adjust their pricing and product offerings. Between 2009 and 2012, banks more than doubled the minimum monthly balance required for fee‑free checking accounts (from around $250 to over $750) and doubled average monthly fees on non-free accounts (from about $6 to more than $12 by 2013).

The Federal Reserve further illustrates that average debit card rewards fell from roughly 5 cents per transaction to 2 cents per transaction after the cap, or a 60 percent decline in rewards. This finding provides an empirical measure of the reduced incentive for banks to offer rewards since rewards are funded by the same revenue source sharply curtailed by the cap.

Credit card interest rate caps aren’t compassion – they’re punishment

Despite what proponents would like to think, a credit card interest rate cap will not provide affordability to the American public. CEI’s Ryan Young is correct that policymakers need to think beyond stage one when it comes to credit card price controls.

Millions of Americans will be denied access to credit and forced into riskier financial alternatives if this becomes law. Even those who keep their credit cards will pay higher fees, lose rewards, and face lower credit limits. Trump may believe he is protecting Americans, but what he is actually doing is taking a sledgehammer to their credit cards. If the cap is enacted, the only thing that will be capped aside from credit card interest rates is economic opportunity for hardworking Americans.