Explainer: How Trump's proposed cap on credit card rates could reshape consumer lending

• U.S. credit card balances totaled $1.23 trillion as of Q3, with rates averaging 19.65% compared to just 6% for 30-year mortgages, making cards one of banks' most profitable lending businesses
• Analysts warn a rate cap would make credit card lending unprofitable, particularly for subprime borrowers, forcing banks to tighten lending standards and potentially reducing consumer spending and GDP growth
• The cap could push consumers toward less regulated alternatives like buy-now-pay-later services, pawn shops, or loan sharks, increasing financial risks for already-strained borrowers while benefiting non-bank lenders

Summary: Trump's Proposed Credit Card Rate Cap and Market Impact

President Donald Trump called for a cap on credit card interest rates on Friday, triggering declines in financial stocks from Wall Street to London on Monday. While implementation details were not provided, analysts suggest the measure would require legislation and faces slim approval odds.

Key Data Points

• Current average credit card rate: 19.65% (Bankrate)
• U.S. credit card balances: $1.23 trillion (Q3 2024, Federal Reserve)
• Credit card rates can reach 30%, versus approximately 6% for 30-year mortgages
• Rates significantly higher than other consumer lending products

Market Implications

Negative impacts:

• Banks and card issuers could lose billions in interest income from one of their most profitable businesses
• Analysts estimate the cap could render credit card operations unprofitable, particularly for subprime lending
• Banks likely to tighten credit availability and reduce lending to high-risk borrowers
• Reduced consumer spending could hurt GDP, as restricted credit dampens retail sales
• Financial sector stocks declined following the announcement

Potential beneficiaries:

• Some consumers with existing balances may experience short-term relief from lower interest charges
• Buy-now, pay-later services could gain market share as banks pull back
• Non-bank lenders and alternative credit providers may see increased demand

Risks

Banking industry groups warn the cap will hurt "millions of American families and small business owners." Analysts caution that credit restrictions could push vulnerable subprime borrowers toward less regulated, potentially more expensive alternatives like pawn shops and loan sharks, increasing financial risks for already-strained consumers.