Trump’s 10% Credit Card Rate Cap Could Backfire, Expert Warns
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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The average credit card interest rate is now a whopping 23.79% — a rate that makes it difficult to crawl your way out of credit card debt once you have it. But that rate would be a lot lower if President Donald Trump gets his way.
In a Jan. 9 Truth Social post, Trump stated that he “will no longer let the American public be ‘ripped off’ by credit card companies that are charging interest rates of 20 to 30%,” and proposed that a one-year interest rate cap of 10% go into effect by Jan. 20. However, that deadline has passed, and no major credit card company has complied with Trump’s directive, USA Today reported.
But according to S. P. “Wije” Wijegoonaratna, founder of Aliya Financial Technologies, this is actually a good thing. Here’s why he believes a temporary credit card interest rate cap would actually hurt consumers.
Borrowers May Take On More Debt During the Temporary Rate Cap
It’s important to note that Trump’s proposal was for a one-year interest rate cap — not a permanent one.
“If the credit card rate cap is limited to one year, consumers would be paying half or two-thirds of what they’re currently paying,” Wijegoonaratna said. “That means usage will likely go up because consumers can spend more.”
If consumers spend more — and take on more debt — they’ll have more to pay back when the rate cap period ends.
“Once things reset after a year, rates and payments sharply increase, and there will be a payment shock, with lenders trying to recoup losses and consumers — who stretched to carry balances in the low-rate period — are met with aggressively higher monthly liability,” Wijegoonaratna said.
A Rate Cap Could Make It Harder To Qualify For Credit
Another downside is that banks may become stricter about who qualifies for loans.
“The lower cap may cause banks to tighten underwriting, minimizing losses given the sharp drop in profitability with capped rates — and making it much more difficult for the average borrower to gain access to credit,” Wijegoonaratna said.
Lenders will become more conservative about line sizes for weaker credits, he said.
“Consumers who struggle with access to the credit market — younger consumers, gig and self-employed workers, and those with profiles perceived as ‘thin’ or ‘opaque’ — will be unlikely to gain access at all,” Wijegoonaratna noted.
“The people most at risk are those who need credit the most during periods of stress.”
Consumers Shut Out by Banks May Turn To Riskier Lending Options
Consumers who are denied credit by major institutions will likely turn to fintechs or other alternatives to get the loans they need.
“The downside is that most fintechs don’t have the same customer relationships or risk infrastructure that banks do, which can lead to higher losses and less durable customer value,” Wijegoonaratna said.
“The advantages banks carry over fintechs — like low-cost deposits, cash flow data and long-term customer relationships — can’t be capitalized upon when they lack the operational intelligence to make a footprint, let alone compete, in the lending space.”
In addition, more consumers may rely on credit card alternatives.
“People may gravitate to higher-cost alternatives like buy now, pay later products, which are completely unregulated,” Wijegoonaratna said. “These products typically lack the same consumer protections and visibility into a borrower’s full financial picture. As a result, borrowers may not realize their true exposure and may get themselves into deeper financial trouble.”
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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