When President Donald Trump announced earlier this year that he planned to order credit card companies to cap the annual percentage rate at 10% for one year, the proposal touched off an uproar of sorts.
Such a move would effectively halve the credit industry’s current average rate, which is around 20% right now.
While lower fees and cheaper rates may sound appealing, some involved in the industry caution that the idea might have unintended consequences for businesses and consumers alike, restricting access to credit for individuals with lower scores or limited histories. Those who do qualify may face reduced credit limits, shorter promotional APR periods, or higher annual fees.
“The proposed 10% federal interest rate cap aims to lower consumer costs but will likely undermine affordability,” said Catherine Dillon, executive vice president and chief operating officer at Fall River Five Cents Savings Bank, which is also known as BankFive.
The MetLife and U.S. Chamber Small Business Index shows that credit cards remain one of the top financing tools for small businesses. From purchasing inventory to handling emergency repairs, credit cards play a crucial role in keeping both businesses and families afloat, observers say.
The consequences of a 10% rate cap come down to “basic economics,” according to William Stern, founder of Cardiff Inc., a California-based lender that provides financing to small businesses.
“Price controls create shortages,” he said. “If you cap credit card rates, banks will stop issuing cards to anyone they deem risky. This could lead to a massive credit freeze.”
Stern said that for Main Street businesses, the business credit card is a working capital loan.
“If this cap goes through, issuers will slash credit limits overnight, jeopardizing small businesses that rely on liquidity,” he said.
At this point, Trump’s proposal has gone no further than his initial proposal.
Still, the discussion surrounding the idea continues. According to a recent Morning Consult survey conducted for the American Bankers Association, 94% of U.S. consumers are satisfied with their credit cards and do not wish for interference in their rewards programs.
While the intent behind the cap is to aid consumers, some believe that it may inadvertently lead to higher costs in other areas.
“You can’t legislate the price of risk,” Stern said. “Banks will simply adjust their fees and rewards, which means consumers won’t save money; they’ll just be charged differently.”
Another less-discussed consequence, according to industry leaders, would be the effect on airlines, which generate billions of dollars annually from fees tied to branded credit cards.
In 2023, over 31 million Americans held airline travel reward cards, with 57% of frequent flyer miles generated through these credit cards. Additionally, nearly 16 million domestic air trips were funded by points earned via airline-branded credit cards.
At an industry summit last month, a trade group representing major U.S. airlines warned that Trump’s proposal could severely impact the aviation industry, potentially leading to fewer passengers and fewer available flights.
But it’s clear that Americans are grappling with record credit card debt, which has surpassed $1.2 trillion, according to the Federal Reserve Bank of New York, with average interest rates nearing 22%.
In Rhode Island alone, the average per capita debt stands at $8,069, the Fed said.
The American Bankers Association warns that a cap would not promote affordability but rather restrict access to credit for millions of Americans, and government-imposed price controls typically result in increased costs rather than relief.
In previous instances in Illinois and Oregon, rate caps restricted access to credit and worsened financial conditions for consumers, the ABA said.
Industry analysts say that 74% to 85% of open credit card accounts could face closures or significant reductions in credit limits, affecting between 137 million and 159 million cardholders nationwide.
Historically, states held the authority to enforce usury laws against lenders, but this changed following the Supreme Court’s 1978 decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corporation, which limited states’ power to impose restrictions on out-of-state lenders.
Sens. Jack Reed, D-R.I., and Sheldon Whitehouse, D-R.I., are backing a bipartisan bill that would return those rights to states.
“Too many Rhode Islanders are stuck under a mountain of credit card debt driven ever higher by compounding interest rates and fees dictated by corporations,” Whitehouse said in a February statement.
“Our bill will restore states’ ability to protect their citizens from predatory rates and provide families with some relief on their credit card bills,” he said. “We need to empower states to protect their residents from these abuses and help them chart a realistic course for financial security.”
The legislation has garnered support from organizations such as the Providence-based Capital Good Fund and Americans for Financial Reform.
Andy Posner, founder and CEO of Capital Good Fund, said there is a need for strong protections against predatory lending practices.
“Consumers need both access to credit and robust safeguards,” he said.
A new poll from the progressive advocacy groups Groundwork Collaborative and Protect Borrowers contradicted the earlier Morning Consult survey for the American Bankers Association that found most consumers were satisfied with their credit cards. The poll found that 59% of voters back a 10% cap even if banks end up tightening access to new credit, while 63% support it regardless if this led to reduced or eliminated rewards programs.
The ABA projects that in Rhode Island, between 73% to 85% of open credit card accounts could be closed or have significantly reduced lines if credit legislation or Trump’s proposal passes.
Dillon said this “ will affect even those consumers who consistently pay off their balances.”
