President Donald Trump spent the weekend trying to jawbone credit card companies into capping interest rates at 10 percent. He gave them a Jan. 20 deadline to comply, though without any administrative rulemaking or legislation to give legal force to his demand. He’s re-upping a call he made on the campaign trail and increasingly desperate, heading into the midterms, to look responsive to voter concerns about affordability. But the policy would make life less affordable for people who could no longer access credit.
For starters, compliance would be impossible. There is simply no way to offer short-term, unsecured credit to the vast majority of people at interest rates as low as 10 percent. Interest rates reflect the risk that lenders take on when making a loan. Higher risk means higher rates.
One reason credit card lending is risky is because borrowers don’t have to put up any assets to secure the loan. A mortgage is less risky because, if the borrower fails to repay, the lender can ultimately repossess their house.
For perspective, consider two other interest rates: the federal funds rate and the prime rate. The federal funds rate is what the Federal Reserve sets, and it’s currently 3.5 to 3.75 percent. That’s the rate banks pay when they borrow from other banks. It’s the lowest interest rate anyone pays because it’s incredibly low risk. Banks, famously, have a lot of money.
The prime rate is the rate most consumer lending is based on. It is higher than the federal funds rate, currently 6.75 percent, because even a very creditworthy consumer is far less creditworthy than a bank. Someone with an excellent credit score and substantial assets would have a hard time getting a personal loan for below 7 or 8 percent right now.
If those are the rates for extremely safe loans, then there is no way to lend for ordinary credit cards at 10 percent for most people. An unsecured, revolving line of credit is much riskier, and the price should reflect that. Only a few cards restricted to people with very high credit scores currently offer rates below 10 percent.
If you think credit card debt is a problem, as it is for many Americans, then you shouldn’t want to lower the price of it, which is what capping interest rates would do. Making minimum payments on an increasing debt at a 10 percent interest rate is still perilous for a person’s finances.
While it is true that credit card debt accounts for a larger percentage of income for poorer people than for richer ones, it is not true that only poor people borrow with credit cards. In fact, from the point of view of the credit card companies, they’d rather charge interest to richer people, who both spend more money and are more likely to make payments. Upper-middle-class households are the likeliest to have credit card debt.
Lack of access to credit and banking services is a larger problem for poor people than high interest rates. A high-interest, low-limit credit card could be better for a poor person if the alternatives are writing a bad check (which is a crime) or borrowing from loan sharks (which employ far more brutal collection tactics than banks).
Sens. Josh Hawley (R-Missouri) and Bernie Sanders (I-Vermont) introduced legislation last year to cap credit card interest rates at 10 percent. It went nowhere, likely because most senators don’t want to wreck the American economy. Trump’s Friday night post on Truth Social came shortly after he met at the White House with provocateur Tucker Carlson, who endorsed the Hawley-Sanders bill and has used his platforms to advocate anti-usury laws.
It’s always easy to demagogue moneylenders, but it’s not just them who would suffer from capping interest rates and the inevitable contraction of credit that would result. Retailers, which are among the country’s largest employers, would be crippled by declining purchase volume. Some airlines and hotels, which rely on affinity card deals for huge shares of their revenue, could go bankrupt. A giant shock to the banking system would hurt an untold number of small businesses in unforeseen ways.
Above all, the president has no authority to enact an interest rate cap by social media post. The American economy is the best in the world in part because of the confidence that consumers will keep spending and that one person can’t make such major changes on a whim.
The joke going around Washington is that Trump didn’t capture Nicolás Maduro to bring him to justice for his crimes but to solicit economic advice. Like his proposed ban last week on large investors buying houses, or his continuing attacks on Federal Reserve independence, capping interest rates on credit cards is more in line with Venezuelan chavismo than American capitalism.
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