Credit cards are a convenient and safe way to make purchases, but they come at a cost. There are interest rates, annual fees, late payment fees, cash advance fees, balance transfer fees, foreign transaction fees, returned payment fees, the list goes on. These extra costs add up over time. Data from the Federal Reserve shows that U.S. credit card has increased over time and is now over $1 trillion. According to consumer intelligence company J.D. Power, 53 percent of current cardholders are carrying card debt, which is up from 51 percent the previous year.
Trump has made affordability a top priority for his domestic policy in 2026. One aspect of affordability that Trump has eyed is credit cards. On January 9, Trump used Truth Social to announce his support for a credit card interest rate cap at 10 percent, which is even lower than what Bernie Sanders' 15 percent proposed in 2018. The following Tuesday, January 13, Trump said that he was in favor of the Credit Card Competition Act (CCCA), which includes a cap on credit card swipe fees. Three days later, the Senate reintroduced the CCCA. While capping credit card interest rates and swipe fees sound appealing or helpful on the surface, the truth is that they have unintended consequences for consumers and the credit market.
Credit Card Interest Rate Caps Cannot Cap Economic Reality
President Trump's proposal to cap credit card interest rates at 10 percent for one year is rooted in affordability concerns. The Competitive Enterprise Institute (CEI) does a fine job at analyzing the empirical evidence and explaining how Trump's premise is based on a fundamental misunderstanding of how credit card markets work. Interest rates on credit cards are not arbitrary price gouging or profiteering by the "greedy credit card companies." They are the price of risk and operation costs for unsecured lending. Setting an artificial ceiling below the market rate does not make credit magically cheaper. It reduces availability by making lending to higher-risk borrowers unprofitable. CEI cites examples across borders and across time illustrating where interest rate caps constrained credit supply, showing that lenders retreat from offering loans when a price ceiling binds. This will mean fewer credit cards, reduced access for lower-income and subprime consumers, and unintentionally harming the everyday American that Trump claims that he is helping.
Moreover, CEI points out that those who manage to keep their credit cards still pay in the form of higher fees, lower rewards, and reduced credit limits. This will parallel what happened with the Durbin Amendment's cap on debit card interchange fees, which resulted in higher checking account fees and lower rewards for consumers. An interest rate cap will punish consumers with the real potential of pushing Americans towards riskier alternatives, whether that is payday loans, pawn shops, or loan sharks.
Forced Routing Won't Solve Credit Card Woes
The 2026 Credit Card Competition Act (CCCA) continues the approach of earlier versions of the CCCA by requiring large credit card issuers to allow merchant to route transactions over multiple networks, inching at leas one network outside of Visa and Mastercard. The premise of this bill is to encourage competition to loosen the grip of the "Visa-Mastercard" duopoly, which arguably exists. According to the most recent market data, Visa and Mastercard account for about 90 percent of the market measured in purchase volume. While this aims to increase competition and put downward pressure on swipe fees, the bill does not impose a hard federal fee cap like the Durbin Amendment does for debit cards.
Regardless of the market concentration, this forced routing is not a solution to the problem. Fortunately (or unfortunately, depending on how you view it), this forced routing has been proposed and scrutinized in the past, which gives more to say about the proposal. As International Center for Law & Economics (ICLE) Senior Scholar Julian Morris points out, this routing scheme would incentivize merchants to reroute transactions to the lowest-cost network, regardless of rewards or security. This would explain why a research paper from the University of Miami shows that if implemented, small businesses will lose access to $700 billion in access to revolving credit and $1 billion in rewards (Chakraborty, 2024).
This is plausible because we already saw with the Durbin Amendment's debit card interchange fee cap what happens, as CEI illustrates in its analysis. Rather than lower consumer prices, the cap primarily benefited large retailers while banks recouped lost revenue by charging higher fees and reducing free or low-cost banking services, all of which harmed the consumers that this was meant to help. Research from ICLE details historic examples of these price controls beyond the United States, including Australia, the European Union, and Spain prior to joining the European Union (Morris et al., 2022).
The CCCA's forced routing mechanism is different than a hard cap, but it is an example of using federal power to try to engineer lower prices with price controls in a complex market, damn the unintended consequences. If this passes, do not be surprised if there are higher credit card fees, lower credit access, lower cash back rewards, and lower rewards points.
Two Different Policies, One Failed Approach of Price Controls
In the 2024 presidential campaign, Kamala Harris proposed a ban on price gouging for groceries. Aside from me calling her out on economic idiocy, Trump called her proposed price control Communist and "Soviet-style." He was right to do so because price controls are a staple of a communist economy.
Trump’s critique, however, loses credibility when he embraces that same Soviet-style thinking that price controls work because his intention is to help with affordability. It does not matter whether it is through an interest rate cap or the CCCA's forced routing. Price controls are government meddling that do not eliminate prices, but rather shifts prices and typically does so towards the very customers politicians are claiming to help.
Smaller competitors like Discover, American Express, or fintech networks do not need government mandates to compete. They can grow organically by offering better rewards, lower fees, superior technology, and innovative consumer experiences that attract both banks and merchants. Meanwhile, the government can remove burdensome regulations, whether it is compliance costs for new entrants (e.g., AML, KYC, PCI), adjust risk-weighting rules to better reflect actual credit risk (especially in Basel III in Dodd-Frank), repeal the existing price controls in the Durbin Amendment, and simplify disclosure requirements for merchants. Real competition arises when incentives alight naturally, not when the government attempts to engineer outcomes.
Markets do not become more humane when one political party adopts price controls versus another. And they sure do not stop being destructive when it is targeted at credit cards instead of groceries. Economic reality does not change for an election year, no matter how much politicians wish it would.
No comments:
Post a Comment