President Trump recently took to Truth Social to call for a one-year cap on credit card interest rates at 10%. The proposal has superficial appeal to many Americans. After all, American consumers owe a total of $1,233 trillion in credit card debt. The average debtor has an unpaid balance of $7,886. Many Americans are in coo much debt because high prices are forcing them to use credit cards to pay for everyday expenses like groceries and gas—as well as for emergency expenses like car repairs and medical bills.
With the average interest rate on credit cards around 23%, many Americans are unable to pay more than just interest payments, while the principal continues to increase. In fact, 60% of Americans with credit card debt take at least a year to pay it off. The number of Americans struggling to pay off high interest credit card debt may make a 10% cap seem reasonable. However, an examination of the proposal’s likely effects shows that it would, like many interventions in the free market, have unintended consequences that would hurt the very Americans the proposal claims to help.
Economic historian Philip W Magness described the effects of a government-imposed limit on credit card interest payments on X, “the only people who are paying 20% etc. are those who don't pay their bills. Now there might be a perfectly good reason to float something on a credit card for more than a month – especially if you have a big purchase, and you anticipate being able to pay it off soon. So perhaps you'll pay the minimum while working to pay off the rest. But if you let your balance accrue and don't pay it off, then yes. You're going to get charged interest, and probably at a very unpleasant rate. That's what happens when you spend money that isn't yours and then pretend you don't have to pay it off! Now consider what happens if the government caps rates. Higher risk/lower credit individuals will no longer face 20% interest rates for failing to pay their credit card balances. They won't even qualify for a credit card anymore, because no credit card provider will even accept them. So what do they do instead if they need money to cover a purchase? They take out payday loans and similar risky short term instruments with even higher interest rates and penalties.”
In other words, those currently paying 20% or more on credit card debt may end up paying even more in interest if the government “helps” them by capping rates. Forcing these consumers to use payday loans could make it more likely they remain trapped in a cycle of debt—as a substantial part of their paycheck will be spent paying off last month’s payday loan. This guarantees they will need to take out even more loans to pay this month’s grocery bills, rent, and any emergency bills like uncovered medical expenses or car and home repairs.
This could result in more states regulating or even banning payday lenders. This would force these consumers to make cuts in their spending including on necessities, even delaying necessary medical treatments. The other alternative would be for them to patronize “loan sharks” who charge even higher rates and whose collection methods would not be approved by federal banking regulators. Many will also seek assistance from government programs like Medicaid and SNAP (food stamps)—thus expanding government debt.
Fortunately, President Trump cannot impose an interest rate cap via Truth Social. Unfortunately, if President Trump decides to support legislation imposing a temporary or permanent 10% cap on credit card debt, it could pass Congress. Capping interest rates has long been supported by progressives like Senator Elizabeth Warren.
If Trump convinces GOP Congressional leadership to bring an interest rate cap bill to the floor it would likely pass, as almost every Democrat would vote for it as well as many Republicans who don’t want to be attacked for “siding with the big banks against President Trump and the American people.” The upside of a credit card interest rate cap is it could serve as a reminder that Ronald Reagan was right when he said: the most terrifying words in the English language are, “I’m from the government and I’m here to help.”
