The Case for Capping Credit Card Interest Rates

Two weeks ago, President Donald Trump shocked the banking industry by announcing his support for capping credit card interest rates at 10 percent for one year. When markets opened the next trading day, the stocks of the largest credit card issuers (Capital One, Citigroup, and JPMorgan Chase) and credit card networks (American Express, Mastercard, and Visa) fell by as much as 10 percent. The New York Times’ Andrew Ross Sorkin described the banks as preparing for “battle.” JPMorgan’s CFO, Jeremy Barnum, said “everything is on the table” to fight the administration’s “weakly supported” attempt to “radically change” their business. 

The reaction was strong for a reason. Credit card lending is lucrative. Approximately 80 percent of American adults own a credit card, collectively owing over $1.2 trillion in debt. While some always pay their balances, many carry debt at an average interest rate of 20 percent or higher. In 2024, banks earned $160.2 billion in credit-card interest. Those fees could cover a month of groceries for every U.S. household. 

Bankers argue that a cap, in JPMorgan CEO Jamie Dimon’s words, will “be an economic disaster.” Citigroup CEO Jane Fraser warned that “a vast majority of consumers and businesses would lose access to credit cards.” Bank of America CEO Brian Moynihan echoed these concerns. Even House Speaker Mike Johnson—not one to challenge the president—cautioned that Trump “probably had not thought through … the negative secondary effect” of reduced lending. 

But the credit card market does not appear to be well-functioning or competitive. Credit card profit margins have almost doubled over the past two decades. At the World Economic Forum in Davos, Switzerland, Trump called on Congress to pass legislation capping rates. It should take this charge seriously. 

Why are Interest Rates so High? 

First, you are not imagining that credit card interest rates have soared. According to the Federal Reserve, the average interest rate was 14 percent from 1995 to 2020. Today, it is 22 percent. 

One of the leading causes is the Federal Reserve. In response to inflation, the Fed began raising rates in 2022. Bank funding costs have increased accordingly. Between 2009 and 2022, the bank prime rate (a proxy for bank funding costs) averaged 3.25 percent. By 2025, it was 7-7.5 percent. If the Fed had not hiked rates, banks presumably could have lowered their rates by 4 percent (from 22 percent to 18 percent). 

But this only explains part of the increase consumers are seeing. The current bank prime rate is similar to pre-2008 levels, but credit card interest rates are far higher now than they were then. The spread between credit card rates and the bank prime rate has also widened across all types of borrowers. From 1995 to 2008, the average spread was 7.5 percent. From 2009 to 2017, it was 10.2 percent. But in the last eight years, it has steadily risen. In Q4 2025, the average spread reached 14-15 percent. This 4-5 percentage point increase exceeds the impact of the Fed’s rate hikes. So higher credit card rates are more than just a cost-of-capital story. 

One explanation is higher credit risk and potential losses. Since credit cards are unsecured, these loans are riskier than loans for businesses or real estate. 

But this explanation is not persuasive. The American Bankers Association (ABA) notes that the number of subprime accounts has grown, but the percentage of subprime accounts has remained roughly constant. For example, at Capital One in 2013-14, 31-32 percent of its credit card portfolio had FICO scores below 660, approximately the threshold for subprime borrowers. In 2023-24, 31-32 percent of its credit card portfolio still had FICO scores below 660. 

Perhaps borrowers have become riskier and are defaulting more often, regardless of their FICO scores. Indeed, delinquency rates have risen in recent years. But if one extends the timeline, today’s delinquency rates are not dissimilar from pre-2008 averages when credit card rates were closer to 15-16 percent. While credit card debt write-offs have also increased, it remains below 5 percent, similar to pre-2008 averages. Profit margins have also grown by a similar magnitude across risk tiers, including prime borrowers, even though they continue to have low delinquency rates.  

An alternative explanation for higher rates is limited competition, as the ten largest card issuers represent 83 percent of the market. The return on assets for large credit card-issuing banks is almost three times that of banks without credit card programs. A recent Federal Reserve Bank of New York report found that return for credit cards was five to six times higher.  

The Bank Policy Institute claims the market is competitive because market concentration is not excessive. Yet, as the Consumer Financial Protection Bureau (CFPB) observed, smaller banks and credit unions have long offered much lower credit card rates. If credit card users shopped based on rates, one would expect these lower-cost lenders to gain market share over time. 

The problem is that consumers cannot easily shop for cards based on rates. Banks set individual rates based on a borrower’s characteristics. Most borrowers don’t know their actual rate until they apply for a card, and it is inconvenient and uncommon to apply for multiple cards at once. As the CFPB also notes, “credit card pricing often includes a mix of interest rates, late fees, balance transfer fees, annual fees, cash advance fees, and foreign transaction fees,” making it even harder to determine the real cost. While some third-party websites—such as Bankrate and NerdWallet—list interest-rate ranges, they’re so broad that it is difficult to determine what a consumer will actually pay. Nor are these websites neutral; some receive kickbacks from banks. 

Furthermore, consumers often select cards based on other terms, such as annual fees and rewards like cash back and airline miles, rather than rates. The Federal Reserve Bank of New York report notes that banks have increased their marketing budgets to advertise these features. (See the ad campaign for the Chase Sapphire Reserve card featuring Hailey Bieber.) Increases in marketing budgets were correlated with rising margins. So competitive pressures, to the extent they exist among banks, may be manifesting in higher marketing and reward costs to win over customers, which banks can recoup through higher margins. 

While many have expressed reasonable skepticism about this explanation, rising margins suggest that the disciplinary forces of competition have not been effective here.  

What to Do About It? 

If the problem is the market, perhaps we could foster more competition. For instance, under President Biden’s administration, the CFPB developed a comparison tool that listed average rates by FICO tier, location, and anticipated spending. But in 2025, the Trump administration killed it as part of their broader destruction of the CFPB. Congress could also amend the CARD Act to require clearer rate disclosures, although this might reduce banks’ abilities to tailor prices to individual customers. Congress could further promote smaller banks and credit unions so they can expand their credit card lending. 

Still, there is no guarantee that such solutions will work. Banks already deviate from free-market principles in significant ways, including through access to deposits at below market rates and backstops from the Fed and FDIC. Instead, Trump has proposed capping interest rates. As my colleague, Brian Shearer at the Vanderbilt Policy Accelerator, has shown, credit card rate caps could generate tens of billions of dollars in savings for borrowers.  

The natural follow-up question, of course, is what the second-order effects would be. For instance, if banks are overly conservative about credit losses—whether due to heightened risk aversion following the COVID-19 pandemic or to changes in accounting conventions—capping rates may lead them to reevaluate their conservatism. If the market is too uncompetitive, capping rates may force banks to cut costs and/or lower profit margins without reducing their lending. Yet, if the cap is set too low, lending to some borrowers with the lowest FICO scores will become unprofitable.  

Bankers argue that the latter outcome is most likely. JPMorgan’s Dimon has warned that a rate cap would “remove credit from 80 percent of Americans.” But banks earn money from borrowers through more than just interest—for example, through account, interchange, and late fees. And they incur reward and marketing costs, even at lower FICO score tiers, that can reach 4 to 5 percent of loan balances per year. In theory, banks may adjust these variables before deciding whether to lend, because additional income streams make lending profitable across FICO-score tiers. As Shearer’s analysis shows, under a 10 percent cap, cuts to rewards and marketing costs could offset reduced net interest income for most FICO-score tiers. And under a 15 percent cap, roughly equivalent to the average historic credit card rate between 1995 and 2022, banks need not make this trade-off for most customers. 

Nonetheless, some banks may decline to lend to some borrowers—especially those with the lowest credit scores. The question is how many will be excluded, given how low interest rates are set. If access to credit is deemed socially essential, we could offset this unprofitability through government subsidies or public-utility-style regulation that cross-subsidizes these costs. Such regulation would require banks to reallocate profits from more lucrative activities to cover the shortfall. Society takes this approach in other markets where profit-based firms have little incentive to maximize service. Alternatively, the solution may lie outside the banking system, such as through stronger social safety net programs. 

The effectiveness of a cap—and the trade-offs—depend on its level and whether the above effects dominate. This is ultimately an empirical question, but also a judgment call. Recall, similar accusations were once leveled against minimum wage proposals, but empirical studies showed that many of the feared consequences never materialized.  

The important takeaway is not that some magical silver bullet exists and that policymakers have overlooked it. Instead, we should not be content with the status quo; we should aim higher. High credit card burdens strain millions of American households. There is a reason why four-in-five Americans—including a majority of Democrats, Independents, and Republicans—support a credit-card-interest-rate cap: The current laissez-faire approach has not worked. With the 2026 midterms and 2028 presidential election looming, Congress should treat this issue seriously and thoughtfully, but also with the urgency it deserves. 

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