Credit card rate caps are a socialist trap that will crush working-class Americans

At the World Economic Forum in Davos, President Donald Trump called on Congress to cap credit card interest rates at 10%, a policy which Sen. Bernie Sanders already proposed through legislation. There is little doubt these policies are popular — for now. But popularity is no measure of wisdom. 

As someone who served as chief economist at the Office of Management and Budget during President Trump’s first term, I find President Trump's turn to the Sen. Sanders economic playbook especially disappointing. That administration’s economic success when I worked in it was built on many free-market principles: deregulation, competition and respect for price signals. Those policies expanded access, lowered costs and delivered strong growth. Embracing price controls now is a rejection of that record. It is borrowing directly from the socialist playbook that Trump once ran against.

Price controls on credit have a long and dismal history, and the Americans who would suffer are lower-income borrowers with imperfect credit histories who need access to credit the most.

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The frustration driving these proposals is real. Millions of Americans feel squeezed by inflation, high prices and stagnant wages. But bad policy piled on top of economic pain only makes things worse.

Credit card companies price their products based on risk. When lenders can't charge rates that reflect actual default risk, they stop lending to higher-risk customers.

Consider what a 10% interest rate cap would mean in practice. The average credit card APR currently hovers around 20%, but that masks enormous variation. Prime borrowers enjoy rates as low as 14%, while subprime borrowers pay 25% or more. These higher rates reflect reality: some borrowers default at rates five times higher than others. A 10% cap doesn't eliminate this risk. It merely prohibits lenders from pricing it into their offerings. 

The result? Millions of Americans would find themselves shut out of the credit market entirely.

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The American Bankers Association estimates that at least 137 million cardholders could lose access to their credit cards from such a cap. These are often the very people who most need access to credit to handle emergencies, smooth consumption between paychecks or build credit histories. Price controls would drive them toward payday lenders, pawn shops or unlicensed loan sharks who charge truly unconscionable rates beyond the reach of regulation.

We've seen this movie before. Interest rate caps in the 1970s decimated consumer credit availability until a Supreme Court decision allowed interstate banking. France's strict usury laws have created a permanent underclass denied legal credit. Japan's 2006 rate caps led to the collapse of the consumer finance industry and drove desperate borrowers into the arms of organized crime.

Even the notion that these policies would curb "excessive" profits doesn't survive scrutiny. Credit card issuers operate on thin margins despite high nominal rates because default rates consume much of the spread. JPMorgan Chase's credit card division posted a return on equity of 27% in recent years — healthy but hardly obscene by financial industry standards, and a reflection of the genuine risks involved.

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The better solution is to promote competition and financial literacy, not price controls. Removing regulatory barriers to new entrants, requiring clearer disclosure of terms and encouraging alternatives like credit-builder loans and secured cards would also expand access rather than restrict it.

The first Trump administration understood this. It trusted markets to work — and they did. Replacing that approach with interest caps and fee ceilings doesn’t make the economy more compassionate. It makes it smaller, tighter, and less accessible for the people who can least afford it.

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Politicians promising to "fight" credit card companies with rate caps are really fighting arithmetic. The laws of economics, like the laws of physics, remain unimpressed by legislative declarations. The poor and those who are financially struggling will learn this lesson the hardest, discovering too late that a credit card with a 25% rate they can obtain beats a 10% rate card they cannot.

The road to financial exclusion is paved with popular intentions. Let’s pave the way for economic growth instead, and do so with market-oriented solutions that have already proven effective.