Earlier in this newsletter, we examined consumer credit risk in credit cards and auto loans. Now, attention turns to a related policy question: whether a federal cap on credit card interest rates could reshape that landscape.
The January 20 date President Trump initially proposed to begin a 10% cap has passed without action. But the issue remains active. On February 13, White House trade advisor Peter Navarro called for lower rates on Bloomberg Radio, prompting Newsweek to report that “the administration has not backed down on its push for more affordable credit.” Vermont Independent Sen. Bernie Sanders has also renewed his call for a cap, though he favors a permanent measure rather than a one-year limit.
The politics are unsettled. Jill Cetina, executive professor at Texas A&M’s Mays Business School and a former vice president of supervision at the Federal Reserve Bank of Dallas, said she would not dismiss the possibility that a cap could advance. “The chances of this type of policy moving forward are uncomfortably high because the number of banks that are involved in credit cards is fairly concentrated, so the industry is unlikely to come together and say ‘wait a minute,’” she said. A recent poll cited by The Hill found strong bipartisan support for limiting credit card interest.
Arthur Angulo, an advisor at Ludwig Advisors and former leader of the risk function at the New York Fed’s financial institution supervision group, sees the outlook differently. “I don’t think it’s going anywhere,” he said, pointing to limited traction for related Senate legislation.
Scope matters. If a cap were enacted, would it apply only to new charges or to existing balances? Angulo expects the latter. “I would expect the administration’s perspective would be that it should apply to existing balances as well,” he said. “Otherwise the impact’s going to be fairly muted.”
Potential unintended consequences loom large. Both Cetina and Angulo caution that a cap could narrow credit availability. Cetina said higher rates allow issuers “to expand the credit envelope” to lower-FICO borrowers and “earn enough” to offset credit losses. “If we cut the interest rate, an action banks may take is to narrow the envelope of borrowers who are able to benefit from having access to credit cards,” she said. She also warned of potential impacts on small businesses and the possibility that consumers could turn to nonbank lenders not bound by a cap.
For now, no legislation has advanced. But as affordability dominates campaign discourse, the debate over a credit card cap remains very much alive.
