Sky-high credit-card interest rates are not popular. The idea of capping them, however, is popular — which is why politicians on both sides of the aisle are talking about limiting just how high credit-card companies can drive their rates. The issue is making for some perhaps unexpected bedfellows, a potential team-up you wouldn't expect. Such a cap would be a very big deal, shaking up the industry and Americans' access to credit. But just because both sides have hopped onto the idea doesn't mean it will actually happen. That will come down to whether everyone's actually serious about it, and there are reasons to have some doubts.
On the campaign trail, now-President-elect Donald Trump floated the idea of putting a temporary cap of 10% on credit-card interest rates to let people "catch up" on their debt, declaring that "we have no choice" but to do it. Now that he's headed to the White House, the message coming from some progressive voices is basically: OK, go ahead. Sen. Bernie Sanders said on X that he looked forward to Trump "fulfilling his promise" for an interest-rate cap, and reiterated the point in a recent interview with Business Insider. "He said, you know what, credit-card interest rates, which in some cases right now are 20, 25%, should not be higher than 10%. Well, you know what? I agree with that," Sanders said. Sen. Elizabeth Warren is singing a similar tune. "Bring it on," she said in an interview with Politico.
The banks and credit-card companies are not happy about the notion of a rate cap — the financial industry has a tendency to set its hair on fire whenever there's a whiff of a threat to a revenue stream. In reaction to Trump's campaign-trail remarks, the American Bankers Association said a rate cap would "result in the loss of credit for the very consumers who need it the most" and push them toward "less-regulated, more risky alternatives including payday lenders and loan sharks."
Matt Schulz, the chief credit analyst at LendingTree and the author of "Ask Questions, Save Money, Make More," said there's "no question" a 10% interest-rate cap would have a significant impact, which could include credit being restricted and rewards being reduced. "But it's always important to remember that the banks have lots of buttons to push, lots of levers to pull to regain revenue," he said.
Perhaps the bigger point here is that in an election year in which people expressed their dissatisfaction with the state of the economy, politicians have identified a salient issue that could seemingly help alleviate many Americans' financial burden. And when there's a seemingly popular solution, a lot of politicians want to hop on board. Focusing on credit-card companies and banks is an obvious move to speak to average people's money-related concerns, whatever your political stripes. Actually delivering that relief, however, is another question entirely.
You probably don't know exactly what your credit-card interest rate, or annual percentage rate, is — that's fine; a lot of people don't — but if you take a look at it, you might be surprised to see just how high it is. The average credit-card interest rate for new card offers is 24.43%, according to LendingTree — up about 10 percentage points from a decade ago. Interest payments are also becoming an increasingly important moneymaker for credit-card companies — the Consumer Financial Protection Bureau estimates they earned an extra $25 billion in revenue in 2023 by raising their rates. The margins they're making on APRs on revolving credit, meaning debt consumers carry month to month and don't pay off, are now at a record high.
"Obviously, the interest rates have to respond to changing market conditions, and we've definitely seen that happen. But we've seen that at the same time, they're baking in additional margins into those rates that go toward profit," said Julie Margetta Morgan, the associate director of research, monitoring, and regulations at the CFPB. "It's connected to the use of APRs as a center for profitability."
Margetta Morgan pointed to rewards. While credit-card rewards have typically been funded by interchange fees — the small fee a merchant pays every time you swipe your card — issuers are using interest rates paid on debt to fund them, too.
"Increasingly, the interchange may not be covering the cost of the reward programs or generating profits that justify the rewards," she said. "And then you can see rewards go from a program to entice people to spend more to drive interchange revenue to a program to entice people to spend more so that they end up revolving and paying interest."
These higher interest rates are also coming at a time when Americans have a lot of credit-card debt. Credit-card balances in the US rose to a record $1.17 trillion in the third quarter of the year, according to data from the Federal Reserve Bank of New York. You can see the problem. And as interest rates increase, it's becoming even more expensive to deal with the debt. Given this double whammy, a lot of people see an interest-rate cap as a solution: Schulz said that in LendingTree's surveys, about three-quarters of consumers supported a cap on credit-card interest rates, and of those who do, two-thirds said they'd support it even if it meant lower rewards. Six in 10 said they would support it if it meant less access to credit for people with not-so-great credit scores.
"It's not hard to understand the frustration," Schulz said.
On its face, a 10% interest-rate cap sounds like a good deal to a lot of consumers, especially at a moment when interest rates are so high. (Seriously, for some retail cards, APRs are in the 30s.) It also sounds like a good idea to populist-minded politicians, from Trump to Sanders. As to what it might look like in terms of policy, it's complicated.
Chi Chi Wu, a senior attorney at the National Consumer Law Center, told me they would "welcome the conversation" about a national interest-rate cap, though she expressed some doubt that Trump was serious about it, given that Elon Musk posted "Delete CFPB" a few weeks ago on X. "I question the sincerity of the Trump team's willingness to protect consumers when one of their key people, Elon Musk, has called for the abolishing of the most important agency protecting consumers' wallets," she said.
Musk aside, Wu said consumer advocates have generally supported rate caps at a national level. High interest rates can make debt impossible to pay off, leading people into a spiral where the amount they owe just keeps growing even as they try to pay it off. This is often true of predatory payday lenders, but it can also apply to credit cards — if you owe $5,000 on a store card and pay just the minimum $25 a month, you're in trouble. While some states have caps, lenders are usually able to get around them by setting up shop somewhere else. Banks charge interest rates in accordance with the states they're based in, not where their customers might live. On the other side, banks and credit-card issuers say that a 10% rate cap would ultimately come back to bite consumers — high interest rates allow these companies to make up for losses incurred from risky borrowers declaring bankruptcy or otherwise failing to pay back debt, and they say if they can't charge the high rates, they can't take on the risk. If that revenue stream shrinks, the issuers argue they would have to cut back on rewards and stop issuing credit cards to people with low credit scores and low incomes. To some extent, of course, banks will say that because they don't want any threat to any revenue stream. At the same time, a cap would make an impact on their balance sheets, though it's not entirely clear how severe it would be.
An interest-rate cap would likely cause some disruptions, but banks and credit-card companies are very good at figuring out how to make things work and keep growing their businesses.
Natasha Sarin, a law professor at Yale and former counselor to Treasury Secretary Janet Yellen, has been a quite vocal critic of the proposal for a 10% rate cap. In a Washington Post op-ed, she said it would make credit cards harder to get, especially for riskier borrowers who might then turn to payday lenders that get them into even more trouble. She points to the Credit Card Accountability Responsibility and Disclosure Act, which became law in 2009. Among other measures, the law requires issuers to notify customers of interest-rate increases 45 days in advance, limits some fees, and restricts credit-card companies from targeting consumers under 21. Sarin argues that while the CARD Act saved consumers $12 billion a year from the regulations overall, some people were harmed and shut out of the system.
"Certain types of borrowers found that their cost of credit increased and got less access to credit. These were often younger people without credit history," Sarin told me in an interview.
Aaron Klein, a senior fellow in economic studies at the Brookings Institution and former deputy assistant secretary for economic policy at the Department of Treasury under President Barack Obama, echoed the argument that a 10% rate cap is "too low" and would be a mistake. He said he would be more comfortable with a 36% cap — the limit for interest rates on consumer loans for active-duty service members under the Military Lending Act. Basically, if that's a good protection for the military, everyone should get access to it. "Thirty-six percent has proven to be a more politically and more sustainable cap for unsecured lending," Klein said.
Of course, there's a lot of space between 10% and 36%. Sanders and Rep. Alexandria Ocasio-Cortez introduced a bill in 2019 proposing a 15% cap, though it didn't get far. Margetta Morgan, from the CFPB, pointed out that credit unions have an 18% rate cap and are able to make it work.
"The data that CFPB has suggests that credit unions have been able to offer credit to a variety of people at or below that cap successfully over the years," she said. "And the big problem that they have is that they actually can't compete with the larger credit-card issuers who have the larger budgets for rewards programs, advertising, and merchant partnerships and pay for that increasingly with high interest rates."
An interest-rate cap would likely cause some disruptions, but banks and credit-card companies are very good at figuring out how to make things work and keep growing their businesses. They've done it before.
After the CARD Act, things were "chaotic" for a while, Schulz said, and one credit-card issuer went as far as to jack up its interest rate to 79.9%. "But then eventually everything settled back down into where we are now and record profits and that sort of thing," he said. "That's probably similar to what we would see if a rate cap hit. There would be a little bit of chaos for a while while banks figured out how to make their money again, and then everything would go forward."
That could include inventing fees — where one door closes in fee-land, another door opens. But it could also include a cutback on rewards, which are a regressive mechanism that tends to benefit the wealthy at the expense of the poor. Also, there's no rule saying banks are entitled to a certain amount of profits.
As mentioned, as much as one can debate the policy implications of an interest-rate cap, the politics of it are the primary issue. The central question is how serious politicians in Washington are about making it happen. Nearly every person I reached out to for this story opened with the caveat that they think a 10% cap is not a serious proposal from the president-elect. Consumer advocates say that while, sure, they're delighted to talk about it, just like Sanders and Warren, they do not see Trump putting it high on his priorities list.
When Trump said that, that was pandering with zero forethought and zero commitment.
"Smoking out the false populism of Trump's actual policies, as opposed to his rhetoric, can never be a bad thing," said Carter Dougherty, the communications director at Americans for Financial Reform, a consumer-advocacy group. "That said, color me skeptical that the Trump administration or congressional Republicans will actually try to do something to bring down the high costs of credit cards."
"When Trump said that, that was pandering with zero forethought and zero commitment," Klein said. He added that in 2016, Trump campaigned on implementing an updated version of Glass-Steagall, which separated commercial and investment banking and was repealed in 1999. "Once elected, he immediately moved to deregulate the banks," Klein said.
The Trump transition team did not respond to a request for comment.
A rate cap isn't the only solution to America's ballooning credit-card-debt problem and just how expensive it is to carry debt. The credit system is very complex, and reasonable minds might disagree on what's the right fix. Some consumers may be willing to give up rewards if that means a fairer, less expensive setup; others won't. One could also argue that the required minimum payments on credit cards should be higher so that people don't languish in debt for so long, or that it's actually OK for some people to not have access to endless amounts of credit they have no chance of paying back. Even if immediate action might not be on the table, that politicians are paying attention to the issue at all indicates there's a problem.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.