Take, for example, this recent announcement by former President Donald Trump to cap credit card interest rates at 10%. This audacious step has now opened up a contentious conversation on the state of U.S. consumer debt. Millions of Americans have faced the devastating consequences of record high credit card balances. The argument now is whether such a cap would really provide relief, or merely bring different – and potentially worse – problems for borrowers.
Selena Cooper, a young single mom and former call center employee. Since May, she has been swiping her Discover card to put her two-year-old daughter into childcare so she can continue job searching. Confronted with rising expenses, Annie has cleared out her savings and still accrued $6,000 in debt on her three credit cards. Fast forward to today, and things have gotten tougher. Interest rates on her Capital One cards have doubled to 16%, and her American Express card’s rate increased overnight from 10% to 18%.
The reality is that credit card interest rates have increased dramatically in recent years. In Nov. 2023, that average rate is around 22%, a major increase from the more than 13% rate seen about 10 years ago. President Trump’s proposal would extend this to 10% maximum rates for one year beginning January 20. The new plan has already drawn fire from banking industry leaders. They claim that this cap would limit consumer access to credit.
Jane Fraser, chief executive of Citigroup, cautioned against the proposed cap, stating, “A severe impact on access to credit and on consumer spending across the country” could result if interest rates are capped. Analysts and economists are largely dismissive of any consumer benefits that consumers might expect to see from the cap. Critics say it won’t provide meaningful relief to Americans who are already struggling financially.
Benedict Guttman-Kenney, an assistant professor of finance at Rice University, noted that banks would likely respond to a cap by increasing loan restrictions. Importantly, he cautioned that people with lower credit scores may be the worst hit. Banks could try to find other ways to make money like raising their annual fee or late payment fee. With 37% of adults in a credit card debt crisis, it’s a perfect storm waiting to happen. Considering total credit card debt in the U.S. recently hit $1 trillion, these changes could further confuse consumers.
As you can see from Cooper’s testimony, these are real concerns of financial pressures our public servants find themselves under because of their current debt. She noted that the proposed 2% rate cap would only go so far. She continued, it still wouldn’t be enough to free her from the burden of her debt. What keeps me up at night is the $6,700 Morgan confessed. So, I’m a little tight, but I have some room. Once I’ve got a stable job, I’ll be in a position to pay it down.
The proposal has received praise from supportive lawmakers but serious criticism from other lawmakers. Last year, Senators Josh Hawley and Bernie Sanders led the way by introducing a bill. This legislation would have established a limit on credit card interest rates. These conversations around the bill demonstrate a sincere and warming concern for consumers as costs continue to spike and household budgets feel the acute stress.
Susan Schmidt, an analyst at the Office of Management and Budget, commented on one key point. She said, “Consumers are hurting right now, and they’re going to keep hurting.” She thinks the Trump administration is making sincere attempts to address these problems. As she emphasizes, no policy is without its tradeoffs.
Critics contend that limiting interest rates to 10% is not enough and fails to tackle the causes of consumer debt. Schmidt said a 10% cap probably didn’t strike the right solution. He’s not convinced it will do much good for the folks already heading to jail in droves. Human transit advocate Guttman-Kenney came close to expressing this idea by saying, “It’s not obvious that people are going to be better off.”
Brian Shearer, CFA, a financial guru, pointed out that consumers will reap some benefits thanks to lower interest rates. He cautioned that they might see their rewards systems shrink as banks try to recalibrate what they’re offering. “To keep lending, banks would need to lower returns at least a little,” he noted. The savings they would all save from interest would, even to the people that lose some rewards, far exceed the lost rewards.
Others view such a proposal from Trump as tonic, a welcome focus on consumer welfare over corporate greed. While some herald its promises, many are cautious about its far-reaching consequences. Morgan expressed her perspective on the proposal: “This is one of the few things he’s done that prioritizes people over businesses.”