Ted Rossman, Senior Industry Analyst at Bankrate, has noted that 90% of Americans could be in financial danger because of President Trump’s proposed 10% credit card rate cap.
More specifically, the analyst argued in a January 16 episode of The David Lin Report that the cap could reduce consumer access to credit, seeing it as a form of political posturing ahead of the midterm elections that is unlikely to become law.
“It’s a bit of midterm election-year posturing. Affordability is Americans’ key concern right now, and the White House is throwing out different policies to address that. It’s well-intentioned, but some of it could backfire,” Rossman said.
The plan, announced late last week, had an immediate impact on bank stocks, sending shares of Citigroup, JPMorgan, and other major lenders down between 1% and 4% in early Monday trading.
Trump framed the cap as a way to ease the affordability crisis facing U.S. households, but Rossman argued the idea risks serious unintended consequences.
Is a debt crisis coming?
The credit-card proposal came in the wake of other populist ideas floated by the Trump administration, such as 50-year mortgages meant to lower monthly payments. Despite the political momentum, Rossman doubts the rate cap can be similarly implemented.
Currently, there is no federal ceiling on credit-card annual percentage rates (APRs). The average rate sits near 20%, while borrowers with weaker credit often pay 25% to 36%. Store cards average about 30%. While the President may try to pressure banks into going lower, no one is going to lower rates to 10% on their own, Rossman reasons, and Congress is not very likely to pass such a law.
“I don’t believe this will end up actually happening. Some of that is a legal argument in that my understanding is that it would take an act of Congress to actually pass this sort of thing. Some say the president may be trying to apply voluntary pressure on the banks. There’s no way they’re going to lower rates to 10% on their own,” the analyst said.
Still, support for the idea has emerged from an unusual bipartisan coalition, including Democrats Elizabeth Warren and Bernie Sanders and Republican Senator Roger Marshall. Likewise, market prediction platform Kalshi shows traders pricing a 31% chance that some form of cap will be enacted this year.
Banks, however, warn that a hard limit could sharply restrict credit availability. Based on the Electronic Payments Coalition data, Rossman notes, no less than 90% of cardholders could see reduced access if rates were forced down to 10%.
There’s a gap between political message and economic reality
Rossman also cautioned that credit-card lending is particularly sensitive because it is unsecured debt.
Unlike a car loan or a mortgage, where there’s an asset you can seize, credit-card debt is the easiest to discharge in bankruptcy, meaning that lenders price in the risk.
Namely, beyond defaults, issuers must cover things such as fraud protection, processing costs, and customer service. At a 10% APR, Rossman says, it ‘just wouldn’t be worth their while.’
Ultimately, the conversation acknowledged that lower rates would save consumers money on interest, but the key takeaway was that the trade-off could be fewer approvals and smaller credit lines.
Featured image via Shutterstock
