President Trump’s call for a one year 10% rate cap on credit cards has gotten a lot of attention and a surprisingly favorable reception. It’s a reworking of a bill proposed last year by Bernie Sanders and Josh Hawley in the Senate and Alexandria Ocasio-Cortez and Anna Paulina Luna in the House. The 10% rate cap was a terrible idea in 2025 and it’s a terrible idea now. It really doesn’t matter which end of the horseshoe it comes from. While it might sound great to get cheap credit, there’s no free lunch here.
Let me start by underscoring something that regular readers will know: I have a long record of being critical of the credit card industry. When I was just a rookie professor I was the only individual to testify before both the Senate and House in support of what became the CARD Act. Card pricing still reflects an exercise of a good deal of market power. But these days the card industry is pretty clean in terms of billing tricks and traps and is a much better alternative than many other sources of small dollar credit.
I also have no issue conceptually with usury laws, which are something I have written about over the course of my career. But there’s a smart way to do them and a dumb way, and this is just plain dumb. The rate cap is inflexible and drastically too low. Simply put, the function of a rate cap on credit should be to protect against truly unmanageable credit at the margin. The policy reasoning behind usury laws is a suspicion that anyone borrowing at an extremely high rate is either uninformed or under such financial distress that they cannot say no. In other words, usury laws are meant to address concerns about market failures. It is not an affordability tool for the broad middle class. You cannot fix the economic strains on the middle class through credit policy, and you might even make them worse. To paraphrase a former blogger on this site, credit is a bandaid, not a life raft.
So with that, let’s turn to the 10% rate cap idea.
What Is Actually Being Proposed?
My understanding of the President’s proposal is that he wants a temporary 1-year cap on credit card interest rates at 10%. What exactly does that mean? I’m not sure.
- Is that 10% interest rate or 10% APR? Those aren’t the same thing. If the former, is it simple interest or compounded (and how frequently)? If the latter, it is going to really hit cards with annual fees.
- Does 10% apply to all balances (as under Sanders-Hawley) or just purchase balances? If it’s everything, it’s basically creating low-cost leverage for cryptocurrency speculation and sports gambling (usually treated as cash advances, which have a higher interest rate than purchase balances).
- Does 10% override penalty rates for delinquent accounts?
- What happens at the end of the year? Would rates spring back to their contractual levels only on future balances or also on existing balances? And if they spring back, would it be applied to balances going back into the 1-year or only prospectively? These mechanics matter.
On some level these are all in-the-weeds details, but the point is that rate caps aren’t so simple, especially with revolving balances. Making laws work well requires getting the plumbing and wiring right. That sort of technical stuff is weedy, but really, really matters.
How Much Would This Proposal Save Consumers? [updated 1/13/26 using CFPB 2025 Credit Card Report data]
Nationally, there’s about $1.23 trillion in card debt. But not all of that is part of revolving balances. 43% of cardholders paid their account balances in full each month in 2024, but that accounts for only 18% of outstanding dollar balances. So we need to reduce the relevant total debt outstanding to about $1 trillion. Additionally, the average rate on new offers is around 24%, but a sizable portion of outstanding ($352 billion) is at zero percent promotional rates and wouldn’t be affected by a rate cap. Instead, only about $657 billion would be affected.
If the average rate on those balances is 24%, continuously compounded, then a reduction to 10% would over the year save consumers around $109 billion.
Individually, the average card balance is (a bit under) $7,000 and the average rate is 24%, compounded continuously. Reducing that to 10% generates annual savings of about $1,162.54.
These “savings,” however, are just the reduction in interest paid on cards (assuming no change in balances). They do not account for the knock-on effects of capping card rates, which are likely to eat away much, if not all of the savings.
Are There Any Legal Obstacles?
The only way to cap credit card interest rates is through legislation. Good luck with that. (It’s so sad when the Onion runs the same story 12 years later because the joke still resonates.) But even with legislation, there’s still a Takings Clause problem.
The Takings clause prohibits uncompensated takings of property by the government. The federal government is free to mess with existing contracts, but when it does so with a retroactive effect, there’s likely to be a takings issue. To the extent that the law would apply only to future purchases using cards, there is no takings problem. But capping interest on existing balances is probably an uncompensated taking and therefore unconstitutional.
I say “probably” because given borrowers’ option to prepay, the card issuer arguably does not have a property right in future, unaccrued interest (that’s how it works in Chapter 11, which is not a taking). But I suspect it still is a taking because capping interest rates on existing balances would likely induce many borrowers not to prepay, but to actually extend their balances. Enabling borrowers to cheaply extend their balances is economically the same as if the government took a “put option” with a lower strike price from card issuers and gave it to the borrowers.
Ultimately, it doesn’t really matter if I’m right here. It would presumably take a while for this to all get litigated, and what happens in the meanwhile, when it’s uncertain? If the issuers cannot get a preliminary injunction, then if they win, there’s a nasty snap back of existing rates to balances that might be larger than they would otherwise be. And if they get a preliminary injunction, then the political benefit is reduced.
Economic Problems
The key criticism of the 10% idea is that there is no free lunch here. A 10% credit card rate cap will have a whole bunch of knock on effects. What are the consequences?
As a starting point, it’s important to recognize that it is impossible to operate a general card program profitably at 10% interest unless it is very heavy on transactors with high credit scores. Card issuers depend on three sources of revenue: interest, fees, and interchange and have cost of funds, credit losses, operating expenses, and rewards costs. If interest is 1000 bp, fees 250bp and interchange 800 bp, with cost of funds at Federal Funds (currently 364bp) credit losses (lets say 500bp on a blended portfolio), 500bp in operating expenses and 700bp in rewards, we are already in negative territory (-14bp). To even start to attract investment, the issuer would have to net at least 300bp, I’d think.
On a subprime portfolio it would be worse, with credit losses at 800bp (interchange and rewards would both be lower, say 400bp and 300bp respectively, but would net out around the same). So we’re talking about issuers operating at a loss of about 300bp, putting us at least 600bp in the hole. It’s hard to see a way that this will work at 10% interest without changing other parts of the card issuer business model
If card issuers can’t operate profitably at 10%, what will they do? They might try cutting some costs like rewards and advertising. But they really can’t do that so easily because that’s how they compete with each other. Rewards aren’t going to go to zero. So what else might they do? Stop lending and cut off existing lines. How does that help anyone?
If a rate cap actually lowered the cost of credit without affecting its availability (unlikely), it would have a big inflationary effect, just like the Covid relief payments. Injecting $109 billion into the economy is like putting a drop of pure, unrefined coaxium into the Millennium Falcon’s hyperdrive. That sort of sugar high feels great initially, but pretty awful thereafter.
But I doubt that we’d see credit costs drop without availability being curtailed. Card issuers are likely to curtail credit access in the face of a rate cap. And they have every legal right to do so. The CARD Act prevents card issuers from changing interest rates at will, but they can reduce credit limits or terminate cards at will. Nothing under the CARD Act prevents that. Instead, the most likely outcome will be a huge contraction of credit card lines, particularly for borrowers with lower credit scores.
The effects will be devastating. Families that need the short-term float or the ability to pay back purchases over several months, won’t have it. How will they pay for a new water heater when the old one goes out and they don’t have $3,000 sitting around? There will be some migration to other types of credit, like “marketplace lenders,” meaning that a 10% rate cap would benefit non-bank fintechs at the expense of banks. There’s no logic in having usury rates that apply based on institution type, yet here we are.
The contraction of card credit will also be a pain in the butt for families that rely on credit cards for convenience liquidity—they’ll have to find another way to pay for all the streaming subscriptions and Amazon–and their rewards points will get squeezed. Chances are that we’ll see more use of debit cards with overdraft lines. That’s a bad trade given that legal protections for debit card users are weaker than for credit card users and overdraft lines can be much more expensive than a credit card if one is a “sloppy payor.”
A non-exclusive alternative to a contraction in credit availability would be an increase in credit card prices other than interest. I doubt we’d see much revival of annual fees, but the back-end, behaviorally contingent fees and junk fees (“network security fee” sort of thing) one finds are likely to proliferate.
But the fee increase I’d really expect to see would be merchant fees. Merchants really have no ability to bargain over these things (a couple of really big merchants aside), so that’s the easiest place for card issuers to seek to recover revenue. And increased merchant fees will mean higher prices at the register (or less customer service from merchants). There really is no free lunch.
(And yes, this is different than the effect of capping less salient fees like over limit fees. Capping less salient fees just pushes costs to more salient fees, which means they are subject to more competitive pressure.)
Nor does capping credit card rates just punish banks. A lot of credit card receivables are securitized. If a rate cap affects securitized receivables guess who loses? Pension plans and insurance companies that need the revenue to fund annuities they’ve sold.
More broadly, this sort of law would be terrible the American business environment. The American economy has prospered from having generally free and fair markets. Free markets give businesses the confidence to invest without worrying about politically tilted governmental interference and fair markets give consumers the confidence to deal with businesses. You need both to have an optimal economic environment. A 10% rate cap on credit cards is a unwarranted impingement on market freedom and particularly bad when paired with the Trump administrations’ laying waste to the CFPB, the main tool for ensuring fair markets for consumers.
So whom does a 10% rate cap help? It helps politicians who want to make a show of helping on affordability, but don’t really care about the consequences. And maybe, just maybe, it helps some small set of people whose cards aren’t cancelled with some subsidized credit. But for most people, it will result in disruption to their personal finances, a loss of credit access, and a need to turn to other, less reputable and less convenient sources of credit. It’s a loser of an idea, whether it comes from Bernie or Donald. The idea of a 10% rate cap has all the seriousness of bread-and-circuses governance.
So What Should Be Done, Mr. Smarty Pants?
A 10% rate cap is a really bad idea. But that doesn’t mean that there’s nothing to be done about the cost of credit. A very easy starting point would be for the CFPB to properly implement the “ability to repay” provision in the CARD Act. The Fed implemented that rule (and the CFPB adopted it without change) by requiring that the consumer be able to make the minimum monthly payment–basically 2% plus finance charges. Pretty much anyone can meet that standard. One could imagine the standard having more teeth.
Second, if the cost of credit is a concern, why not ensure that existing state usury laws are effective? Congress could amend section 85 of the National Bank Act to limit interest rate exportation by banks. The rise of massive credit card debt was enabled by a Supreme Court decision in 1978 that allowed national banks to export the interest rate allowed in the state in which they are based to the borrower’s state, without regard for the borrower’s state’s usury laws. That’s why credit card lenders have flocked to states like Delaware, South Dakota, and Utah, with lax usury laws. (OCC opinion letters have further facilitated this by interpreting the state in which the bank is “located” to be where the lending operation occurs, not the state of the bank’s charter. States got into a race to the bottom then with parity laws to protect their own state-chartered banks and the result is that state usury laws rarely apply to banks. Overturning the Marquette decision would enabling local communities to decide on what they think are appropriate usury laws.
Third, if the idea is a national market should have national laws, then let’s have a national usury law, and not just for credit cards, but let’s make it a smart one. That means that the rate should be a floating rate over some base index (California did this recently with a cap of 36% over Fed Funds for small dollar loans). Additionally, the limit should be set at a more reasonable level that enables lenders to operate profitably, but ensures against the loans being made to uninformed or overly desperate borrowers who cannot protect their own interests. An example of this would be the 36% cap that applies to loans to military members and their dependents. Another approach would be South Africa’s in duplum rule, which caps outstanding interest/fees at the amount of the outstanding principal. There’s a bunch of ways one might consider, but they require a more careful balancing than a blunt and temporary 10% rate cap.
At the end of the day, however, there’s no escaping the fact that credit regulations cannot move the needle much on affordability. Cheaper mortgages don’t reduce the cost of housing–they result in home prices being bid up. Cheaper car loans result in higher sales prices for cars. Fixing affordability is a lot more complicated and will take work on the supply-side (more housing, e.g.) and figuring out ways to constrain the cost growth of health care and education. And a big factor will be finding a way to boost the real wages of American workers. No one has a great solution for these things, so there’s a temptation to turn to quickie, headline grabbing fixes like 10% credit card rate caps. But let’s not fool ourselves that such proposals are serious solutions to the financial strains on the middle class.
Comments
3 responses to “Why a 10% Credit Card Rate Cap Is a Terrible Idea”
interesting analysis, adam. a constitutional point: i don’t think unsecured credit raises a takings clause issue, only a contacts clause one. indeed, wouldn’t making contract impairment a takings problem render the contracts clause superfluous? i defer to lubben…
Article I, section 10, says
No state shall …..; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts…..
I think that means that Congress can pass laws that impair contracts, as long as they don’t deprive someone of a property right. In United States v. Security Industrial Bank, 459 US 70 (1982) the Court ruled that lien avoidance provisions in the Bankruptcy Code if applied retroactively would raise constitutional questions.
I think that an interest rate cap would impair the obligation of the credit card contracts but would not be a complete obliteration of a property right. That’s not to say that it would be sound policy
This was an incredible read. Do you think if there is simply no way to salvage the idea of a 10% rate card’s though?
Perhaps a compromise could be that each bank offers a capped option as a tangible alternative to existing cards. A material commitment to personal austerity might have positive implications after all. I find it a bit pessimistic to think credit regulations cannot move the needle on affordability. Sadly, the politicians are willing to act for headline grabbing fixes mostly, but that would at least be doing something about the problem.