President Donald Trump roiled the financial services sector this past week with his declaration that credit card interest rates would be capped at 10%. Of course, this would probably take an act of Congress and is unlikely, but the statement highlighted Trump’s lack of understanding when it comes to markets and his attempt at price fixing – something more in line with Socialist Senator Bernie Sanders.
Posting on Truth Social, Trump declared that beginning January 20th, he is calling for a one-year cap on credit card rates of 10%:
Price fixing has a long history of failure, including with credit card rate caps. Markets always win, and credit card issuers use a risk-based pricing model, meaning that capping interest rates would compel them to cancel cards and credit lines for individuals with bad credit or low credit scores. Who would win in this scenario? Check cashing businesses, pawn shops, and loan sharks. Who loses? Obviously, the less affluent.
Former Republican Senator Pat Toomey, who served as the Chair of the Senate Banking Committee and is widely respected for his financial acumen, posted on X:
“Gov’t capping credit card int. rates at 10% won’t help consumers. It will restrict lending, raise costs, and reduce choice. If lenders can’t be compensated for the risk of unsecured lending, they will stop lending. And consumers will have to turn to more expensive alternatives.”
Trump supporter Economist Stephen Moore, formerly at Heritage and now at America First Policy Institute, declared:
“Price controls on credit cards NEVER work. Nixon and Carter tried, it was a disaster. Capping rates at 10% may sound popular, but it risks cutting access to credit for millions of Americans who rely on it for emergencies.”
He added:
“The #1 rule of economics: don’t control prices. Politicians never learn. A 10% credit card interest cap won’t work. Let the market do its job!”
Moore previously served as a Senior Economic Adviser to President Trump.
According to Grok, the Federal Reserve data shows that in 1968-1980, interest rate ceilings led to lending contractions of up to 25%, limiting loans to subprime borrowers and spurring unregulated alternatives like payday loans. A 2023 CFPB analysis anticipates a potential 15-20% drop in credit approvals for those with scores below 620, thus exacerbating financial exclusion.
Has anyone defended the credit card cap besides avowed socialists and market neophytes? The Sunday Times ran an article in which the CEO of Klarna, a BNPL provider, anticipated expanding its offerings as a better alternative to loan sharks.
In the end, the market will win, and it is better to let competition determine which credit service consumers use, rather than market controls that undermine efficiency and harm those the policy naively claims to help.