Bernie Sanders and Donald Trump would not seem to agree on much of anything when it comes to economic policy. After all, Trump is a man of markets, while Sanders is a self-described “democratic socialist.” Yet both have advocated for a 10 percent cap on credit card interest rates. This would be devastating to the credit card industry. The current average Annual Percentage Rate (APR) paid is 19 percent, with higher rates for consumers with lower credit scores. Borrowers classified as “deep subprime” pay as much as 35 percent.
An interest-rate cap may seem like a good way to protect consumers, especially low-income ones who find themselves in a cycle of debt they can’t pay off. In 2024, Americans held a collective $1.17 trillion in credit card debt, and in 2022, they paid $130 billion in interest and fees toward their credit cards. But consumer credit is a risky business; many borrowers default or make late payments, and the higher rates are how banks and credit card companies get compensated for taking on that risk. Sanders points out that they make a profit from credit cards—well, they should!
Importantly, credit cards offer lower rates than other forms of consumer credit offered to low-income borrowers. The APR for a payday loan is typically 400 percent. Credit cards are also an important form of credit; according to the Fed’s survey, “Economic Well-Being of U.S. Households in 2023,” 16 percent of Americans would rely on a credit card in a financial emergency requiring $400 or more.
Research from the World Bank on credit card interest-rate caps implemented in other countries finds that caps below the prevailing interest rate reduce access to credit, forcing borrowers to turn to sources with higher rates or fees, or leaving them without access to credit altogether. As a high-risk business, credit cards can indeed be profitable for banks. But the profits enable banks to offer other kinds of loans at lower rates. A cap could cut into other forms of credit on which consumers rely.
Though Trump floated the interest-rate cap idea on the campaign trail, it’s unclear if he is as serious about it as Sanders. To be fair to both of them, the proposal does attempt to address a real problem. Many people, especially those with low incomes and worse credit, are dependent on high-interest loans and are more likely to suffer economic shocks that require financing.
It’s often impossible for low-income households to break out of a cycle of debt when they’re paying over 20 percent interest. But better ways exist to address credit needs than capping interest or fees. The buy-now-pay-later programs that have sprung up online in the past few years, for example, offer alternatives to consumer debt; some offer lower interest rates, giving consumers more options. More competition and more sources of credit would make consumers less dependent on credit card companies.
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