To address cost-of-living concerns, the White House’s proposal for a 10% APR cap on credit cards faces a steep climb in Congress. Despite the legislative gridlock, would the interest rate cap save the economy or trigger a localized liquidity crisis for those who need it most? Our North America Economist Marcos Carias explains what’s at stake.
Key Takeaways
- A cap on credit card interest rates would need a level of congressional support that does not seem to be there at the moment.
- A 10% cap would significantly reduce the profitability of the credit card business. Contrary to some of the prevailing narratives, it’s not guaranteed that a widespread consumer recession would follow.
- However, it would hurt spending for the riskiest credit card users, and the top line for the kind of firms that serve them (discount retailers, fast food chains, budget apparel, low-cost telecom, used car dealerships and auto repair shops).
Affordability concerns are Republicans’ primary political vulnerability heading into the November midterm elections. A December poll shows that the economy is the first concern for voters and that the main economic issue remains the cost of living. Searching for solutions to upend the affordability narrative, the White House is pushing for a one-year, 10% cap on credit card interest rates, known as annual percentage rates (APRs).
Will it happen? And what happens if it does?
An uphill battle in Congress
With no existing laws granting the executive or regulatory agencies price-setting authority in this market, the initiative would need congressional support. Two recent pieces of legislation were proposed in early 2025, backed by Sen. Bernie Sanders (I-VT), Rep. Alexandria Ocasio-Cortez (D-NY), Sen. Josh Hawley (R-MO), and Rep. Anna Paulina Luna (R-FL). Both pieces of legislation have stalled after being submitted to the relevant congressional committees, suggesting the idea lacks wider bipartisan support. In reaction to President Donald Trump’s initial announcement, both Republican majority leaders (Rep. Mike Johnson and Sen. John Thune) were unusually blunt in dismissing the idea. One would be ill-advised to bet against the President’s pull within the Republican coalition, but this one looks tough. A watered-down policy (a higher flat cap, or a tiered system) could stand a better chance of passing.
There’s also the possibility that the banking industry might want to extend an olive branch to the administration and do a voluntary gesture for consumers. White House top economic advisor Kevin Hasset floated that “banks could voluntarily issue some type of ‘Trump cards’ for people with insufficient access to credit,” and CBS News recently reported that Bank of America has a new 10% APR credit card in the works.
The debated link between an APR cap and a potential consumer recession
Credit cards account for 57% of all consumer lending in the U.S., and are currently funding around 5% of monthly consumer spending. The average APR is around 21%, and at no point has it gone under 11.8% since data started being collected in 1996 (see chart below). The banking industry has been vocal in warning that millions of households would be cut off credit, posing a risk to the wider economy. Academic research, in contrast, claims that margins are wide enough to absorb even a 10% cap without widespread disruption. We’re not going to get into the weeds of this very wonky debate, but curious readers are welcome to go down that rabbit hole in the annex at the end of this post.
The truth is probably somewhere between these two discourses: a non-trivial share of poorer users would lose access; while the remaining wealthier users would retain access at lower rates. For a given rate cap, there is obviously some credit score below which issuing a card doesn’t make financial sense. But for the economy, the “how much, how many” question is incredibly important. Would it be 5% of users that lose access? 10%? 20%? The U.S. consumer market is notoriously K-shaped. Conservative estimates put the share of consumption of the wealthiest fifth at 35%; the highest at 50-60%. That means that if you drop the riskiest borrowers, you lose some spending at the lower end of the distribution but get more spending from everyone who remains. And that’s before we account for merchant discounts (the 1-3% fee charged to retailers for each transaction), meaning that there’s a subset of users that are profitable even if they generate little-to-no margin on interest. As a rule of thumb, policies that hit poorer households but help everyone else tend to end up as net positives for the economy.
The social price of lower interest rates
Notwithstanding this nuanced assessment of economic impact, we highlight the risk of social unrest that could result from such a precarity shock to poor households. For the poorest 10% of users, credit card balances are equal to 85% of their monthly household income. This tier would therefore face an acute liquidity shortage that the social safety net and informal lending (buy now‑ pay‑ ‑later, pawn shops, loan sharks), cannot properly absorb.
If implemented, the APR cap would reinforce polarization between outperformers and laggards in the retail sector, increasing the population of vulnerable firms. While headline retail sales growth has remained broadly resilient, additional spending largely went to the best performing players including Amazon, Walmart, and Costco. Though demand remains resilient, it is becoming increasingly hard for the weaker firms to stay competitive. An APR cap would threaten firms that stand to lose when lower income households are squeezed and have little to gain from modest improvements among average consumers, including discount retailers, fast food chains, budget apparel, low-cost telecom, used car dealerships and auto repair shops.
Annex: Would the credit card business survive an APR cap? A literature review:
- There’s no shortage of commentary from the financial industry warning about the devastating effects the APR cap would have on consumer demand, including a piece by the American Bankers Association (ABA) arguing that “74%–85% of open credit card accounts nationwide would be closed or have their credit lines drastically reduced.”
- Brian Shearer, a researcher at the Vanderbilt Policy Accelerator and a former senior official at the Consumer Financial Protection Bureau, published a paper claiming the industry can remain profitable across most borrower tiers if it adjusts what it deems are bloated budgets for marketing and reward programs. Another paper by economists at the Universities of Pennsylvania and Columbia, and the Federal Reserve Bank of New York estimates the industry’s return on assets at 6.8% (four times that of the broader banking sector), a figure in line with those of Shearer’s.
- The ABA published a direct rebuttal of Shearer’s paper, accusing its methods of overstating the profitability of the credit card business. Shearer subsequently published a rebuttal of that rebuttal on his substack.
Marcos Carias is a Coface economist for the North America region. He has a PhD in Economics from the University of Bordeaux in France, and provides frequent country risk monitoring and macroeconomic forecasts for the U.S., Canada and Mexico. For more economic insights, follow Marcos on LinkedIn.
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