Ready to pay a maximum of 10 percent on your credit card balance for a year?
If President Donald Trump has his way, that could become a reality. The president called for a one-year, 10 percent cap on credit card interest rates on Truth Social last Friday, then doubled down while speaking to the press on board Air Force One Sunday.
However, the path to capping credit card interest rates for 12 months isn’t as simple as commanding banks and issuers to lower their rates. In all likelihood, Trump would have to convince lawmakers to enact federal legislation, as pushing a rate cap via executive order would be tenuous ground, said Felix Shipkevich, special professor of law at Hofstra University.
“Yes, but the most straightforward and durable path would be through federal legislation,” Shipkevich told The Independent by email. “Congress has clear authority to regulate credit card pricing under existing federal consumer finance and banking statutes.”
If Congress became a dead end and Trump tried to enact a 10 percent rate cap on credit cards, he’d face a tough road, Shipkevich said.
“If a rate cap were imposed through executive action or aggressive regulatory interpretation, I would expect immediate legal challenges seeking injunctions and raising statutory authority and administrative law arguments,” Shipkevich said.
Capping credit card interest rates would likely lead to credit card companies taking on projected losses. To counter that, they’d likely find other ways to generate revenue, Shipkevich said.
“They would shift toward revenue sources that remain permissible, such as annual fees, account fees, and reductions in rewards programs,” he said. “Issuers would also manage risk by limiting balances and restricting credit availability, which reduces interest exposure altogether.”
Practically speaking, a shift of revenue generation from interest to other aspects of card ownership would ultimately hurt consumers, said Brian Riley, director of credit payments at Javelin Strategy & Research.
Credit card issuers would most likely restrict new credit cards to borrowers with FICO scores of at least 740.
“This will reduce lending, but it will eliminate future lending risk to high-risk borrowers, directly improving operational revenue,” Riley told The Independent in an email. “Cutting off credit limits to those outside prime credit is severe, but the lender has a responsibility to its shareholders, particularly given the public benefit of credit extension.”
How many consumers would be impacted if credit card issuers reserved their cards for those with the best credit? Riley says about 50 percent.
“Lenders cannot be forced to lend,” he said. “If lending becomes unprofitable, lenders will tighten credit and serve only the least-risky, most-profitable segments. As it stands, less than half the U.S. population would be served, other credit products will have less investor confidence, and merchants will pay a severe price.”
Riley also believes that card issuers may switch to charging a minimum payment of around 3 percent to 10 percent. This would allow issuers to get more revenue each month and offset what they lose through an interest cap. However, it would put some borrowers at risk of being delinquent (at least 30 days late) because of higher monthly payments.
“Doubling the minimum due to a 10% increase … would mitigate much of the risk in interest rate spreads,” he said. “However, expect a spike in delinquencies as households face less available credit and higher payment rates.”