Trump wants to cap credit card interest rates at 10%. Will it really work?

Donald Trump’s plan to cap interest rates on credit cards could hurt the poorest Americans, experts have warned – unless it is very carefully thought through.

The US president has said he wants to cap interest rates on credit cards at 10% for one year from 20 January, promising “AFFORDABILITY!” for ordinary citizens.

“Please be informed that we will no longer let the American Public be ‘ripped off’ by Credit Card Companies that are charging Interest Rates of 20 to 30%, and even more, which festered unimpeded during the Sleepy Joe Biden Administration,” Trump wrote on Truth Social.

Read more:

• How the crisis of affordable credit is endangering the UK’s most vulnerable
• Buy Now Pay Later must be regulated – before it pushes even more vulnerable people into debt
• I took out loans and maxed out credit cards to fund my gambling addiction. I ended up homeless

A stopped clock is right twice a day, and Trump is correct that Americans owe credit card companies a great deal of money. Outstanding balances total around $1.23 trillion – roughly $6,500 per cardholder on average – while average interest rates now sit above 22%, up from around 16% in 2020.

The idea itself also has some bipartisan support. Last year, independent senator Bernie Sanders introduced legislation to cap credit card interest rates at 10%, though the bill stalled amid strong opposition from the credit card industry.

But would a cap actually make credit more affordable – or would it risk cutting off access to credit altogether?

What is Donald Trump proposing – and what might a similar policy look like in the UK?

For now, Trump’s proposal remains a proposal. There is no existing legal mechanism that would allow a US president to impose a binding interest rate cap on private credit card companies by decree.

Any enforceable cap would require legislation passed by Congress, and legal experts say an attempt to impose one via executive order would almost certainly be challenged in court.

But the questions it raises – about affordable credit – are relevant on both sides of the Atlantic.

In both Britain and the US, household finances are already fragile. Recent research from the Money and Pensions Service found that 25% of adults – around 11.5 million people – have less than £100 in savings, with one in six having nothing at all.

That kind of precarity can push people into impossible choices when an unexpected bill hits. Over the past three years, more than three million people in the UK have borrowed from an illegal moneylender.

In the US, many people rely on credit cards to manage everyday expenses. But high interest rates mean that balances can spiral quickly, especially for those already on low incomes.

So is an interest rate cap a solution? “It’s a very blunt instrument,” warns Maria Booker from Fair By Design.

“We would love for credit to be affordable, but there’s a real question about whether this is the right way to go about it.”

Banks and card issuers could respond by withdrawing products, tightening eligibility, or shifting costs elsewhere through higher fees, rather than simply lowering interest rates.

Industry group the Electronic Payments Coalition has warned that under a 10% cap, more than 80% of US credit card accounts could be closed or severely restricted.

“If you get the line wrong, firms will simply withdraw products,” Booker said. “And then people are pushed towards other sources of credit, which may be even more expensive or not regulated at all.”

There is some precedent for this kind of contraction in the UK. In 2015, regulators introduced a cap on the total cost of high-cost, short-term credit – such as payday loans – limiting repayments to no more than 100% of the amount borrowed.

“This mainly applied to high-cost short-term credit, not credit cards,” Booker said. “But what we saw after the cap came in was a huge reduction in availability.” By 2022, the size of the high-cost short-term credit market had fallen by around 90% compared to 2013.

“Some of that is due to the cost-of-living crisis and people being less able to afford loans,” she added. “But it was still a very significant contraction. And that was with a cap on the total cost of credit. Focusing on the interest rate alone is an even a blunter instrument. As well as the risk of products disappearing, it could result in credit card firms trying to claw back money in other ways such as additional fees or charges.”

Booker argues that any interest rate cap needs to be part of a wider package of reforms. “You probably need stricter affordability assessments, conduct rules, and disclosure requirements alongside a cap,” she said.

There is also evidence from the US that interest caps can reduce access to credit for the riskiest borrowers. The Military Lending Act, which caps interest rates on some forms of consumer credit at 36% for active-duty personnel, has been linked to reduced credit availability for those with the lowest credit scores.

That does not mean interest rate caps are doomed to fail. But both US and UK experience suggests that without careful design, they risk cutting off the people they are meant to help.

If Booker had Trump’s ear, she would tell him to “look at the real underlying causes to try and focus on what you’re trying to achieve, and if that’s reducing costs for people who are really struggling on low incomes, look at… where they get their credit from, and the reasons that they costs have gone up.”

“Then put in place a more comprehensive package rather than just one headline measure.”

Do you have a story to tell or opinions to share about this? Get in touch and tell us more. 

Change a vendor’s life this winter.

Buy from your local Big Issue vendor every week – and always take the magazine. It’s how vendors earn with dignity and how we fund our work to end poverty.

You can also support online with a vendor support kit or a magazine subscription. Thank you for standing with Big Issue vendors.