Trump’s Proposed Interest Rate Cap Will Hurt The People It’s Supposed To Help
Every election cycle seems to bring a new promise that sounds great at first glance but falls apart when you look at how the real world works.
The latest example is the proposal to cap credit card interest rates at 10%.
I understand why people like the idea. If you’re carrying credit card debt, hearing that politicians want to lower interest rates probably sounds like good news. Most Americans are feeling pressure right now. Prices are still high, many families are stretched thin, and a lower credit card payment sounds appealing. The problem is that good intentions don’t change math.
What sounds like consumer protection could end up doing the exact opposite. Instead of helping struggling Americans, a 10% interest rate cap would likely make it much harder for many of them to get credit at all.
That may sound dramatic, but once you understand how credit card companies actually make lending decisions, the outcome becomes pretty obvious.
How credit card lending actually works
A lot of people think credit card companies simply pick interest rates out of thin air.
That isn’t how it works.
When a bank issues a credit card, it is lending real money. The bank takes on risk every time a customer uses that card. Some customers pay their balances on time. Some carry balances for years. Others stop paying altogether.
The lender has to account for all of those possibilities. That is where credit scores come into play.
Your credit score helps lenders estimate how likely you are to repay what you borrow. It isn’t perfect, but it gives lenders a way to measure risk.
Many factors influence that score, including:
- Payment history
- Income
- Existing debt
- Work history
Generally speaking, people with stronger credit profiles receive lower interest rates. People with weaker credit profiles receive higher rates. Most consumers understand that part.
What many don’t understand is why those rates are different.
The answer is risk.
A borrower with a long history of paying bills on time is less likely to default. A borrower with missed payments, high debt levels, or a troubled credit history is statistically more likely to stop paying. When someone defaults, the lender doesn’t just lose future interest payments. In many cases, the lender loses part or all of the money that was originally loaned. That loss has to be absorbed somewhere. As a result, lenders charge higher rates to riskier borrowers because the odds of loss are greater.
Whether people like that system or not, it is how consumer lending has worked for decades.
The numbers don’t support a 10% cap
This is where the conversation usually shifts from politics to math, and math doesn’t care about campaign promises.
According to data referenced from the Federal Reserve Bank of New York, banks face several major costs when they issue credit cards.
First, they need money to lend.
The benchmark cost for obtaining that money is tied to the Federal Reserve’s Prime Rate, which currently sits at 6.75%.
Then there are operating costs.
Running a credit card program isn’t free. Banks have to pay employees, maintain systems, process transactions, provide customer support, investigate fraud, and comply with regulations.
According to the New York Fed, those costs average between 4% and 5% annually.
Then comes the biggest risk of all—defaults.
The New York Fed reports that subprime borrowers, defined in the article as borrowers with a 600 FICO score, have an annual charge-off rate of 9.3%.
When those three costs are added together, the picture becomes much clearer.
- Cost of Funds: 6.75%
- Operating Expenses: 4.00%
- Subprime Charge-Offs: 9.30%
That brings the total cost to lend to roughly 20.05%. Now think about that for a moment…
If a lender’s cost is about 20% but the government only allows the lender to charge 10%, the lender loses money on every dollar it lends.
No business can survive very long under those conditions. It doesn’t matter whether you’re talking about a credit card company, a restaurant, or a hardware store. If every sale creates a loss, the business eventually stops making those sales. That is basic economics.
Even borrowers with much stronger credit profiles create costs that exceed a 10% rate cap. The article notes that lending to a prime borrower with a 720 FICO score still costs lenders more than 16% once all expenses and losses are included. In other words, the problem isn’t limited to high-risk borrowers.
The math simply doesn’t work.
What would happen next?
This is where supporters of rate caps often miss the bigger picture.
Banks would not continue lending exactly as they do today while accepting guaranteed losses—they would change who they lend to almost immediately.
The first borrowers likely to lose access would be those with lower credit scores because they carry the highest risk. Many accounts would be closed. Credit limits would be reduced. New applications would be denied.
From the consumer’s perspective, it would feel as though credit suddenly disappeared.
The irony is that the people lawmakers claim they want to help would probably be hit the hardest.
According to a New York Fed study, when Illinois and South Dakota implemented 36% interest rate caps, subprime borrowers experienced nearly a 17% decline in debt balances, while the number of open accounts fell by about 20%.
Think about that.
Those effects occurred with a 36% cap. The proposal currently being discussed is 10%.
If 36% significantly reduced credit access, a cap less than one-third that size could have much larger consequences.
The American Bankers Association estimates that as many as 85% of open credit card accounts could be closed or sharply reduced under a 10% cap. Whether that estimate proves perfectly accurate or not, the direction is easy to predict.
Credit would become harder to obtain—not easier.
Small businesses would feel the pain too
One part of this discussion rarely gets enough attention is small businesses.
Many entrepreneurs depend on credit cards to manage cash flow, purchase inventory, cover operating expenses, and navigate slower periods throughout the year.
What many people don’t realize is that business credit cards almost always require a personal guarantee. That means lenders look at the business owner’s personal credit profile when making lending decisions. If consumer credit tightens, business credit tightens too.
A business owner who suddenly loses access to credit may delay hiring. Some may postpone expansion plans. Others may even cut expenses or reduce staff.
When enough small businesses start making those decisions at the same time, the effects spread throughout the economy.
That is why credit policy affects more than just individual cardholders.
Good politics and good economics are not always the same thing
As someone who works in the business credit industry, I understand why this proposal is gaining attention. People are frustrated. Many households are carrying debt. Everyone wants a solution, but not every solution actually solves the problem.
Sometimes a policy sounds helpful because it focuses on the symptom instead of the cause.
High interest rates are painful. Nobody enjoys paying them.
The question is whether artificially limiting rates improves the situation or simply reduces access to credit.
Based on the numbers, I believe the second outcome is far more likely.
Credit card companies are not charities. They are businesses, and if regulators force them into guaranteed losses, they will stop serving the customers who create those losses. That response is predictable.
In my view, a 10% rate cap would not make credit cheaper for most Americans. It would make credit unavailable for many of them.
And when access to credit disappears, the people hurt most are often the very people the policy was designed to protect.