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Industry Opinion
How Americans Would Benefit from a Credit Card Interest Cap
By Nironjan Roy, CPA, CMA — Certified Anti-money laundering Specialist and Banker
In the USA and Canada, a credit card is very popular among people who can hardly think of living without the use of the card, which is indiscriminately used to buy every necessity, from a cup of coffee to paying tuition fees.
At the same time, a credit card is the most attractive investment opportunity for banks, financial institutions, and even many large retailers, which offer different forms of credit cards, including regular, reward, premium, and priority ones. However, the good and bad sides of this essential financial product are high interest rates that cause a severe financial burden for consumers, while at the same time, provide the source of good revenue for the card issuers. Now a discussion has started on reducing interest rates on credit cards.
U.S. President Donald Trump has decided to put a temporary 10% cap on the interest rate applied to credit card lending. While justifying the proposed maximum interest rate limit on credit cards, President Trump has said that American households are already under economic pressure, which needs to be eased, and reducing the interest rate on credit cards is one option. He has openly commented in his social media post, “We will no longer let the American Public be ripped off by Credit Card Companies, which are charging interest rates of 20% to 30% and even more.” Trump’s contemplation of reducing interest rates on credit cards does not seem to be a sudden move; rather, this is another agenda item, like higher tariffs, he threw during his presidential campaign in 2024.
Interest on credit cards is exorbitantly high, ranging from 22% to 30%. Usually, those who have a low credit score pay very high interest, while those who have a good credit score pay relatively less interest on a credit card. Additionally, credit cardholders are required to pay an annual fee, whereas the card issuers are eligible to receive a swipe fee, which is paid by the retailers when charging a credit card for every purchase. Even the credit card issuers incur expenses for offering reward points. So, multiple sources of revenue are associated with the credit card business. Most banks and financial institutions try to justify that a higher interest rate on credit card lending is necessary because of the higher risk of loan losses from riskier borrowers, who may not repay.
Exorbitantly high interest on credit cards always bears a dual inverse impact on the cardholders and issuers.
Card issuers, which are mostly banks and financial institutions, consider credit card lending as brisk business with a source of significant revenue generation. For example, if a bank can lend $100 billion in credit cards, its revenue from this source will stand at over $20 billion every year. This financial product is considered a sustainable asset as the credit card balance is hardly paid off; it keeps growing over the years, with increasing use and interest accumulation. So, revenue generation from credit card lending is incremental and sustainable in nature, although there is high default risk, which can, however, be mitigated with strict credit rating control and adequate provisioning policy. Because of this high revenue generation scope, many large retailers like Walmart have introduced their own credit cards.
Credit card results in a substantial financial burden for consumers because of high interest rates, although this facility provides adequate affordability for the consumer, who can maintain a quality of life regardless of their own income. For example, a person with an annual income of $50,000 can afford a living standard of $100,000 using a credit card. In that situation, a person with a $100,000 credit card balance will have to pay $22,000 interest every year, which is equivalent to one year’s accommodation expense. If applicable tax and other eligible deductions are taken into consideration, a very small amount from income will be left for meeting other living expenses, so there must be a deficit every year, which is met with further borrowing from a credit card. This consequence continues year after year, and thus, the credit card balance is neither reduced nor paid off, but rather inevitably increased every year in most cases. This is, in fact, a situation of a credit card trap and vicious cycle with which most Americans and Canadians are stuck without any scope of exiting.
Trump’s proposed 10% cap on credit card interest may bring great relief to most consumers. As reported in the media, a study has revealed that 10% cap on credit card interest would save borrowers $100 billion a year in interest costs. Trump’s attempt to restrict interest on credit cards seems a very positive initiative from the consumers’ perspective, because this move, if it goes ahead, will apparently reduce financial burden for household families, so they welcome Trump’s decision.
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Conversely, banks and other card issuers will, of course, be unhappy with the apprehension of losing sizable revenue, which is now being reflected in the statement and opinion of banks’ senior executives. As learned from the media, Jeremy Barnum, chief financial officer of JPMorgan Chase, has recently said that if Trump’s proposed 10% cap on credit card interest becomes effective, the entire card business would have to significantly change.
Although President Trump has repeatedly said that he is going to limit interest rates on credit cards, details on implementation have not been made clear yet. Initially, it was thought to be enforced through executive order, but later indicated to get it done through Congress, which may delay the process. A temporary interest cap for one year was discussed without elaboration on whether the entire credit card balance or only the new balance will fall under the proposed 10% cap. Even what will happen after the expiration of one year cap period is not known yet. These ambiguities and obscure issues imply that the proposed 10% interest cap may not finally be effective, but rather will remain as rhetoric. However, high interest is the most common concern of American what Trump knows well, and thus may move ahead with his proposal for at least some interest rate cut instead of 10%.
Now the question arises. How Americans will benefit from the proposed cap on credit card interest if the move finally becomes effective. Apparently, there may be a direct gain and loss situation for Americans, as the consumers will directly gain by reducing their financial burden, while the card issuers will directly sustain significant revenue loss due to lower interest on credit card lending. However, direct financial gain is likely to be outweighed by the countereffect of some indirect measures that the card issuers may undertake to recover foregone revenue due to the interest rate cap. For example, card issuers may charge different types of fees for holding cards. More importantly, many banks and card issuers may undergo excessively increasing credit card limit applying the concept of maximizing revenue with volume increase. This measure will undoubtedly raise the consumers’ disposable income with a dual impact of paying more annual interest and a future higher debt burden. This situation, if it arises at all, will leave most American consumers with dire consequences in the future when the interest cap is lifted. So, President Trump’s move of putting 10% cap on credit card interest may benefit American for short term but eventually affect them in the long run.
Now the question arises. How Americans will benefit from the proposed cap on credit card interest if the move finally becomes effective. Apparently, there may be a direct gain and loss situation for Americans, as the consumers will directly gain by reducing their financial burden, while the card issuers will directly sustain significant revenue loss due to lower interest on credit card lending. However, direct financial gain is likely to be outweighed by the countereffect of some indirect measures that the card issuers may undertake to recover foregone revenue due to the interest rate cap. For example, card issuers may charge different types of fees for holding cards. More importantly, many banks and card issuers may undergo excessively increasing credit card limit applying the concept of maximizing revenue with volume increase. This measure will undoubtedly raise the consumers’ disposable income with a dual impact of paying more annual interest and a future higher debt burden. This situation, if it arises at all, will leave most American consumers with dire consequences in the future when the interest cap is lifted. So, President Trump’s move of putting 10% cap on credit card interest may benefit American for short term but eventually affect them in the long run.