The January 20 date that President Trump initially proposed to start a 10% cap on credit card interest rates may have come and gone without any action, but the topic is still on the minds of industry leaders and watchers—and politicians.
On February 13, speaking to Bloomberg Radio, White House trade advisor Peter Navarro called for lower rates, leading Newsweek to note “the administration has not backed down on its push for more affordable credit.” Earlier in the month, in a rare display of agreement with the President, Vermont Independent U.S. Senator Bernie Sanders renewed his own call for a cap in a Fox News website article—albeit saying it should be permanent and not for the one year the president proposes.
Meanwhile, financial industry leaders and watchers continue to weigh in on the potentially negative consequences of a cap for consumers, with some saying chances of any binding requirement or legislation are remote. Despite some well-known figures on both the left and right supporting a cap, the conventional wisdom goes, winning a vote is quite another thing.
Amid the continued debate, ProSight reached out to a couple of industry thought leaders for their takes on the likelihood of a cap—or something like it—taking hold and for some context regarding the proposal.
One was Jill Cetina, Executive Professor and Associate Director of the Commercial Banking Program at Texas A&M’s Mays Business School and a former vice president of supervision for the Federal Reserve Bank of Dallas.
Cetina said she wasn’t so sure that a possible cap is dead. “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,’” Cetina said. The cap proposal is part of the larger conversation, she said, about a lack of affordability—one that is likely to dominate this year’s Congressional campaigns. Calls for affordability measures could grow louder if inflation picks up as companies move to pass more tariff impact through to consumers, she said.
There is already a measure of popular support for a cap, according to a poll cited recently by The Hill. It found that overwhelming majorities of Democrats (88%), Republicans (79%), and Independents (78%) are in favor of limiting credit card interest, which has been hovering in the low 20+ percent range the last few years, according to the St. Louis Fed. Writing in a Financial Times piece, former FDIC Chair Sheila Bair held that banks can afford to cut rates substantially without cutting back on credit for most customers.
The markets, at least briefly, have seemed to assess the chance of a cap at non-zero: Following President Trump’s call for one on January 12, stock in top credit card issuers was punished. Values dipped again after Navarro’s comments.
Arthur Angulo, an advisor at Ludwig Advisors and former leader of the risk function at the New York Fed’s financial institution supervision group, said support for a cap is likely not deep enough to overcome political realities. “I don’t think it’s going anywhere,” Angulo said, noting a Senate bill co-sponsored by Sanders and Republican U.S. Sen. Josh Hawley of Missouri has not gotten traction since it was introduced a year ago. Angulo said he could not see enough Republicans aligning in favor of a cap.
Another big question about a cap, if it ever became reality, is whether it would include only charges on cards going forward or existing balances too. Some have theorized it would be the former, but Angulo said there would not be much political punch to a measure that did not affect debt that’s already on the books.
“I would expect the administration’s perspective would be that it should apply to existing balances as well,” Angulo said. “Otherwise the impact’s going to be fairly muted.”
What about a possible voluntary move by financial institutions to cap rates—not at 10% but perhaps a higher percentage—to head off possible legislation? Angulo said he did not think that was likely, either.
“I think it’s a slippery slope and my sense is I think the banks will hold firm,” he said. “They’ll count on the fact that legislation won’t go through Congress. That’s not a certainty, but that appears to be the way it may end up.”
Cetina and Angulo both believe a cap could ultimately harm the consumers it was intended to help.
“What the banks will do is they’ll reduce or eliminate credit to borrowers with lower credit quality,” he said, noting that credit restrictions will have a far lower impact on people who “tend to pay off their balance every month.”
Charging a higher rate allows card issuers “to expand the credit envelope” to include consumers with lower credit scores and lower income, Cetina said. The issuers “earn enough” from higher interest to offset credit losses that are more likely as they expand the envelope. The process also “allows some low FICO borrowers to rebuild their credit history through having a credit card.”
“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,” Cetina said.
“Another potential unintended consequence of this policy could be to curtail credit availability to small businesses” that rely on credit cards, she said.
A cap could also drive consumers who have lost credit card access to payday lenders and other businesses that are not bound by a cap, and may charge in excess of the rate leading card issuers charge, she said.
