Interest Rate Cap and the cost on Credit.
Credit Card interest rates have become one of the most visible pressure points in the American financial system. With the average interest rate now around 19.61%, millions of consumers carrying month to month balances feel burdened in a system where interest compounds in the blink of an eye. With that in mind, the idea of capping credit card interest rates, particularly at 10% has moved from an unimaginable policy to serious discussion on the Hill.
The appeal of this is obvious to the average American, if borrowing costs are hurting consumers then cap the price and make it more affordable. Lower rates would mean lower interest charges, faster payoffs, and relief for households living paycheck to paycheck. Politically, it is feasible and emotionally popular with the electorate that is searching for affordability results in an increasingly expensive America. Economically, however, it conflicts with one of the most basic principles: price ceilings distort supply.
In basic economic terms, a price ceiling is a maximum placed on what suppliers can charge for a good or service. When that ceiling is set below equilibrium, demand rises while supply falls, producing shortages. This logic applies to all goods and services just like credit. Credit carries default risk, operational costs, fraud losses, regulatory requirements, and scarcity which is how interest rates signal how lenders price those things. When you cap the price of credit below what is reflected through risk, lenders do not simply accept the loss out of benevolence but instead ration supply.
That is the core concern raised by both Bank Policy and the American Bankers Association. Specifically, the analyses from the Bank Policy Institute suggests that a strict 10% cap would make a large share of existing credit card lending unviable, especially for borrowers with lower credit scores or shaky credit histories. These are the same borrowers who pay higher rates today not because of corporate greed, but because their probability of late payments and default is higher which results in a higher interest rate, which is how banks price in risk. Remove the ability to send those rate signals, and lenders will respond by shrinking credit availability, tightening standards, lowering credit limits, and removing cards for some individuals entirely.
In political terms, this means the borrowers that this policy is supposed to help will end up making them worse off as access to credit will shrink. Critics of this policy already understand that this policy will be regressive as riskier clients would see fewer approvals, account closers, and smaller credit lines. Despite being card holders today, clients that have lower credit scores, do not pay off full balances, and hold higher rates could lose this access.
President Trump’s interest in a rate cap fits with his broader “Trumponomics” populist policy base. Targeting credit card interest rates allows him to politically message affordability policies and channel frustration toward financial institutions. But this political play does not guarantee economic success. While high credit card rates can be a burden, there are more effective approaches to ease borrowing burdens for consumers without shrinking access. A more effective approach would focus on expanding competition, particularly from expanding network routing on all credit cards and incentivizing Credit Union charters, this will organically bring down rates. Another critical change could be focusing on effective financial planning, and budgeting strategies to avoid heavy credit burdens, large interest payments and effective planning to budget monthly for any expenses.
A 10 percent cap may sound compassionate, but economics is not focused on intentions, when prices are capped without regard to supply, scarcity follows which causes rationing. In credit markets, this translates to denied applications, reduced limits, and fewer options for those people who are willing to use cards. If policymakers want a system that is fair for all and function, the focus should be on expanding competition and reallocating resources toward financial education and transparency to make credit choices.