Trump's Proposed Credit Card Interest Rate Cap: A Temporary Fix or a Double-Edged Sword?

Many Americans are struggling under the weight of record-high credit card debt, which now stands at $1.14 trillion according to the Federal Reserve Bank of New York. With the average credit card interest rate climbing to 21.5% in May—significantly higher than pre-pandemic levels—it's no surprise that proposals to cap these rates have gained traction. Former President Donald Trump's recent call to cap rates at less than half their current level has resonated with many who are feeling the pinch.

Trump's proposal, however, faces an uphill battle in Congress, where similar initiatives by both Republican Sen. Josh Hawley and progressive lawmakers like Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have failed to advance. Even if such a measure were to pass legislative hurdles and withstand legal challenges from the credit card industry, there could be unintended consequences.

Capping interest rates at 10% could reduce the monthly interest payments for the average American with $6,500 in credit card debt from $116 to $54, potentially shortening the debt repayment period. However, this move could also lead to credit card companies restricting credit availability as they seek to maintain profitability in the face of reduced interest income.

Credit card companies use interest rates to manage the risk of lending, with those carrying a higher risk of default typically facing higher rates. A rate cap could force companies to stop lending to higher-risk customers, disproportionately affecting younger, lower-income, and less-educated individuals who often rely on credit cards for essential purchases during financial hardships.

Trump's campaign spokesperson, Karoline Leavitt, stated that the proposal aims to provide "temporary and immediate relief" to Americans struggling with the high costs of living. However, details on the implementation of such a cap remain unclear.

Moreover, a rate cap could impact those with excellent credit scores, as the rewards and benefits they enjoy could be significantly reduced. This was the case after a 2010 law capped fees on debit card purchases, leading to banks eliminating reward programs. Similar threats have been made regarding credit card rewards if restrictions on fees, such as President Joe Biden's proposal to cap credit late fees, are implemented.

The group most likely to benefit from a rate cap would be those with excellent credit who rarely carry a balance and would pay a lower rate to clear it. However, for the majority, the potential benefits of lower interest rates could be offset by reduced credit availability and diminished rewards.

In conclusion, while a temporary cap on credit card interest rates may offer short-term relief, it could also have long-term repercussions on credit access and rewards for consumers. As with many financial policies, the devil is in the details, and a careful balance must be struck to ensure that such measures do not inadvertently exacerbate the financial challenges faced by those they aim to assist.