Trump wants a 10% cap on credit card rates, but it could backfire

Key Concepts

Affordability Agenda: President Trump's focus on reducing consumer costs through various proposals.
10% Credit Card Rate Cap: A central proposal to limit interest rates on credit cards.
"Flood the Zone" Approach: A criticism of presenting numerous, potentially uncoordinated economic policy ideas.
Unintended Consequences: The unforeseen negative effects of policies, particularly the credit card cap.
Credit Risk Management: The process by which lenders assess and price the risk of borrowers defaulting on unsecured debt.
Nonrecourse Lending: Loans where the lender's recourse against the borrower is limited to the collateral, not the borrower's other assets.
Pay in Kind (PIK): A method of paying interest or dividends with additional securities or equity rather than cash, often signaling financial distress.
Digital Financial Assistant: A vision for the future of banking where AI-powered tools proactively manage and optimize personal finances.
Excess Profits in Banking: The argument that traditional banks earn outsized profits due to high switching costs and consumer inertia.
Buy Now Pay Later (BNPL): A fintech credit product offering installment payments, often interest-free.

President Trump's Affordability Agenda and Economic Proposals

President Trump has launched an affordability agenda with several proposals aimed at addressing rising costs for Americans. Key proposals include:

A 10% cap on credit card interest rates.
A ban on large investors buying single-family homes.
An order for government-backed mortgage finance companies, Fanny May and Freddy Mac, to buy $200 billion worth of mortgage bonds.
A commitment from Microsoft to make changes to ensure Americans don't pay higher utility bills due to power consumption from AI data center buildouts.

These proposals are presented as efforts to make basic necessities more affordable for the public.

Expert Reactions and Concerns Regarding the Proposals

Economists and analysts expressed significant skepticism about the feasibility and long-term effectiveness of these proposals, particularly the credit card rate cap.

Corporate Capacity and Long-Term Impact

Jennifer Lee, Senior Economist at BMO Capital Markets, questioned how far these measures could go in solving affordability issues. She noted that corporations, despite polite assurances, have limits to how much cost they can absorb, especially after already dealing with tariffs. While there might be short-term pressure relief on inflation, she doubted the "lasting power" and long-term affordability for corporations to comply.

"Flood the Zone" Approach and Political Spectacle

Claudia Sam, Chief Economist at New Century Advisors and former Federal Reserve Board economist, acknowledged that affordability is a "real issue" affecting people's lives. However, she expressed concern about the "continued flood the zone approach to economic policy," where numerous ideas are put forth, often with a focus on political spectacle rather than substantive, well-executed policy. She specifically criticized the "out of the blue" announcement of a one-year 10% credit card cap, stating, "that's not how economic policy gets done." Sam suggested a more holistic approach would involve slowing down, focusing on policies that genuinely "move the needle," and recognizing that such changes take time, likely beyond the current midterm election cycle. She warned that a one-year cap is a "political move" that could put consumers in a worse position if they take on more debt due to temporarily lower rates.

Detailed Analysis of the 10% Credit Card Rate Cap

The proposed 10% cap on credit card interest rates drew the most detailed discussion, with analysts largely agreeing it would be detrimental and unlikely to pass.

Impact on Banks and Credit Access

Earnings Hit: Analysts like Nathan and Gerard Cassidy (RBC Capital Markets) stated that a 10% cap would be a "big hit to their earnings" for banks.
Limited Credit Access: A primary concern was that banks would "limit credit to a lot of consumers" to compensate for the reduced ability to price for risk. Gerard Cassidy explained that if credit losses (which can be 5-7% for some card companies) exceed the yield from a 10% cap (after accounting for ~3% operating costs), banks would "barely break even and probably lose money." This would lead to a "dialing back" of lending to higher-risk borrowers, who often rely on revolving credit.
Push to Riskier Alternatives: Nathan warned that consumers pushed out of the mainstream credit card market might turn to "places where there are higher rates like payday loans," which can have rates as high as 400%.
Widespread Consequences: Ted Rosman, Senior Industry Analyst at Bankrate, estimated that 82-88% of credit card holders could lose some or all access to credit if such a cap were to pass, citing a study by the Electronic Payments Coalition and the Missouri Bankers Association. He noted that the average credit card interest rate is around 20%, with many paying 25-30% or more, making 10% a "really low cap" typically only offered by niche credit unions to those with excellent credit.
Recouping Losses: Rosman predicted that banks would "revolutionize the credit card industry, and not in a good way," by implementing higher fees, fewer rewards, and potentially increasing rates on other products like auto loans, mortgages, and bank accounts to recoup lost revenue.

Feasibility and Political Outlook

Congressional Approval Required: Experts unanimously agreed that the President cannot implement a 10% cap via executive order. It would require "legislation in Congress" or codification through regulators, similar to the Credit Card Act of 2009.
Unlikely to Pass: Gerard Cassidy stated, "No, definitely not," when asked if the cap would happen, predicting a "battle on Capitol Hill the like of which we haven't seen in a generation from the banks." He characterized the proposal as "political fodder" for the upcoming months.
Business Model Incompatibility: Cassidy explained that the credit card business model relies on "subsidiz[ing] the bad loans with the good loans." He cited Synchrony, a "riskiest credit card issuer," which writes off 5% of loans but maintains a 20% average spread (with some as high as 30%) to cover these losses. A 10% cap would make this model unviable for most borrowers.

Consumer Advice and Alternatives

Ted Rosman advised consumers to "take matters into your own hands" rather than waiting for policy changes. He suggested:

Paying in full: Half of cardholders already do this, effectively making their personal interest rate 0%.
0% Balance Transfer Cards: Products like the US Bank Shield Visa offer up to 24 months interest-free. For an average $6,500 debt at 20% interest, this could save over $9,000 in interest and reduce the payoff time from 18 years to two years with monthly payments under $300.
Non-profit Credit Counseling: Organizations like Money Management International can help reduce rates to around 7% over several years. Rosman concluded that "price controls don't feel like the way to go" due to their "real negative set of unintended consequences."

Fintech's Perspective and the Future of Banking

Sebastian, co-founder and CEO of Clara, offered a contrasting view, supporting the idea of interest rate regulation and highlighting fintech's role in promoting healthier credit.

Clara's Model and Support for Regulation

Sebastian positioned Clara as a bank not built on "putting people in making them revolve up to $5,000" at 30% interest, which he noted generates $30 billion in revenue annually for US banks. He estimated a 10% cap could return "$20 billion of that back to US consumers."
He cited successful "interest rate regulation in Europe" as a precedent.
Clara's products, including Buy Now Pay Later (BNPL) and credit cards with 0% installment options for single transactions, aim to avoid revolving debt. Sebastian stated Clara would "definitely consider" offering a 10% cap credit card.
Clara accepts "slightly lower profitability" to be a "more affordable bank," attracting "self-aware avoiders" who are more careful with spending. This results in significantly lower losses for Clara (30 basis points lower than industry standards, or 30% lower).

Addressing BNPL Criticism

Sebastian acknowledged that credit, in any form, carries the risk of overextension. However, he argued that BNPL with fixed, 0% interest installments and an average outstanding balance of $100 (Clara's average) is a "better outcome for society and for consumers at large" compared to traditional credit cards with high revolving balances and 30% interest. He also pointed out the significant marketing spend and lobbying by traditional credit card companies, which can influence public perception.

The Future: Digital Financial Assistants and the End of Excess Profits

Sebastian envisioned the future of financial services (5-10 years out) as a "digital financial assistant." This AI-powered assistant would:

Analyze all aspects of a consumer's finances (spending, mortgages, insurance).
Proactively identify savings opportunities (e.g., negotiating a better mortgage rate).
Handle all paperwork, requiring only a "yes" from the user. This future, he argued, would lead to the "end of excess profits in banking" because AI would drastically reduce "switching costs" and simplify complex financial products, empowering consumers to easily compare and switch providers. He believes long-term winners in banking will be those willing to sacrifice short-term profits for affordability and trust, much like companies such as Walmart and IKEA.

Emerging Risks in Non-Bank Financial Institutions

Gerard Cassidy also highlighted a significant, less-discussed risk area for banks: loans to non-bank financial institutions, particularly private equity and private credit firms.

Growth Area, Hidden Risks: While credit cards and these non-bank loans are current growth areas for banks, Cassidy warned of "trouble" in the latter.
Private Equity's Debt Funding: He explained that private equity is "mostly funded with debt rather than equity."
"Whistling Past the Graveyard": Cassidy revealed that 15-20% of private equity companies are "essentially in default" but are still paying investors by issuing more equity, which perniciously causes their book value to rise. He described this as the industry "whistling past the graveyard."
Nonrecourse Lending: Banks have been lending to private equity managers on a "nonrecourse basis," meaning their recovery is limited to the collateral. Cassidy predicted that when banks are forced to "fess up" about the true credit quality of these portfolios, they will face lawsuits.
Disconnected from Economy: This issue is "disconnected from the economy," stemming from private equity firms that overbought assets for fees and now cannot sell them (e.g., JD Power and Associates).
"Canary in the Coal Mine": Business Development Companies (BDCs) reporting under GAAP are showing a "large number of their portfolio companies are doing what we call pick pay in kind" (PIK) instead of cash, indicating financial strain.
Idiosyncratic Playout: The situation will unfold "in an idiosyncratic fashion," with individual bankruptcies occurring when sponsors and investors can no longer wait. Despite "astronomical" redemptions from some private credit funds, they are "still raising new money," which Cassidy found inexplicable. He concluded that understanding these risks requires digging into non-GAAP sources and industry insights, as banks often operate "behind the curtain."

Conclusion

The discussion reveals a complex interplay between political ambition, economic realities, and the evolving financial landscape. President Trump's affordability proposals, particularly the 10% credit card cap, are largely viewed by experts as politically motivated, impractical, and potentially harmful due to unintended consequences like restricted credit access for vulnerable populations. While fintech players like Clara advocate for more affordable and responsible credit models, the traditional banking sector faces challenges not only from potential regulatory changes but also from hidden risks in areas like private equity lending. The overarching takeaway is a tension between short-term political gains and long-term economic stability, with a clear call for more thoughtful, holistic policy-making and a recognition of the transformative potential of AI in reshaping the future of banking towards greater affordability and transparency.