U.S. President Donald Trump recently released an audacious plan. His plan would limit credit card interest rates to 10% for one year, beginning on January 20th. This common sense initiative would provide relief to the over 39 million Americans dealing with exploding credit card debt. Today, this debt has passed $1 trillion. Bank execs moved fast to pillory the proposal. They suggest that setting a cap at all would have a draconian effect, effectively cutting off credit to a majority of consumers.
The concept of capping credit card rates isn’t new. It has ignited conversations in legislative chambers everywhere and received endorsements from legislators from both parties. Last fall, Republican Senator Josh Hawley joined forces with his new best buddy, Democratic Senator Bernie Sanders, to introduce their first bipartisan bill. Their legislation would limit credit card APRs at a flat 10 percent. Now, as of November, average credit card interest rates have skyrocketed to around 22%. That is a jump of 103% from the 13% rate observed only ten years earlier.
The worsening cost of living crisis coupled with a surge in American’s credit card debt has further burdensome impacts on American households. Today, more than 37 percent of adults owe a balance on their credit cards, a testament to our increasing dependence on borrowed funds. For Selena Cooper and too many other young Americans, that debt burden creates a cycle that’s hard to escape. Cooper has amassed $6,000 on her three credit cards, while Morgan has about $6,700 in credit card debt.
The proposal has gained support from varied analysts and economists. They caution that it’s not a magic bullet solution to consumer debt issues. They argue that without strong, full enforcement measures, the cap isn’t going to help consumers in all the ways that lawmakers hope.
“It’s not clear that people are going to be better off,” said Benedict Guttman-Kenney.
Banking advocates are making the rounds to warn senators of the adverse impacts the cap on rates will have. They are cautioning that the financial sector will pull back from lending. This is sure to impact people with lower credit scores, who lenders perceive as higher-risk borrowers. This would result in reduced availability of credit for those who can benefit from it the most.
“People will lose access to credit on a very, very extensive and broad basis, especially the people who need it the most,” stated Jeremy Barnum, Chief Financial Officer at JP Morgan.
In addition, banks may look for other sources of income to make up for losses incurred due to capped interest rates. Or they might raise the cost of annual fees or late fees to ensure their ability to continue earning profit margins. In fact, interest charges are the bread and butter of banks and other large lenders. They’re projected to reach an astounding $160 billion in 2024.
Despite these concerns, many consumers see the proposal as a long-awaited lifeline. Selena Cooper, who hopes a rate cap would allow her to better manage her debt. She acknowledges it will not allay her financial woes completely.
“It would help a little bit, but it’s still not going to get me out of debt,” Cooper remarked.
Morgan shared her struggles with $6,700 in debt. In light of her concerns about debt, she remains hopeful about getting future employment to help pay it off.
“I’m losing sleep over the $6,700, but I have a little wiggle room to be able to do that because once I get a job, I can pay it off,” Morgan explained.
The continuing discussion around Trump’s suggestion goes even further in helping to explain today’s consumer financial stress. As Susan Schmidt from Schwab noted, consumers are under more stress than ever from their financial circumstances.
“It does show that consumers are feeling pinched; they’re going to continue to feel pinched,” she noted.
Critics of the proposal say it can’t endure, even if it offers short-term rescue. Elizabeth Warren suggested that if Trump genuinely aimed to resolve issues like high credit card interest rates or housing costs, he would need to leverage his influence more effectively in negotiations.
“If he really wants to get something done, including capping credit card interest rates or lowering housing costs, he would use his leverage and pick up the phone,” Warren stated.
The surrounding discussion on whether or not Trump’s proposal is a good idea illustrates the complicated balance between consumer needs and banking industry panic. In a recent speech, incoming Speaker Mike Johnson had important warnings about implementing such measures without great care.
“It’s something that we’ve got to be very deliberate about,” Johnson remarked.
This concern was well recognized by industry leaders such as Brian Shearer who understood that all policy changes have built-in pros and cons. He emphasized that placing a cap would be an expensive burden on the average household. It’s a big picture change that would put more money into the pockets of many Americans.
“This is something people would see; they would notice; they would feel it,” Shearer stated. “This alone would impact their household budgets substantially. No policy is without some pros and cons.”