President Trump wants to cap credit card interest at 10%: the pros & cons for borrowers

HOUSTON – President Trump has proposed capping credit card interest rates at 10% for a year. Financial experts say the idea comes with pros and cons.

Trump credit card cap proposal

What we know:

The president’s proposal could help consumers save billions of dollars and pay off debt faster. But financial experts say it could also make it harder for consumers with lower credit scores to get credit cards.

MORE: Trump wants credit card interest capped

Pro: Fast payoff

By the numbers:

Let’s break it down.

If you’re carrying a credit card balance of $5,000 and paying 24% interest, then $100 in interest is being tacked onto your balance every month.  If you make $150 monthly payments, it would take you 4 years and 8 months to pay it off, totaling $3,322 in interest.

If the interest rate is 10%, your monthly interest would be reduced to $42 per month.  That could help borrowers pay off the debt faster. Making the same $150 monthly payments, it would take 3 years and 4 months to pay off, and total $882 in interest.

Con: Limits credit card access

The other side:

However, people with lower incomes and lower credit scores can pay rates up to 36% because they are considered riskier borrowers.

Some credit card analysts say a 10% cap on rates could lead banks not to issue credit cards to consumers with lower incomes and credit scores.

“This is unsecured debt. It’s not backed by an underlying asset, like a home or a car. If you miss a couple of car loan payments, they’re going to repossess the car, not that anybody wants it to come to that.  But at least there’s some kind of stored value that they can take back. Credit card lenders have limited recourse. They can ding your credit. They could potentially sue you or try to garnish your wages, but that’s a hassle. And credit card debt is actually the easiest to have discharged in a bankruptcy,” explained Ted Rossman, Senior Industry Analyst with Bankrate.

The American Bankers Association warns that having limited access to credit cards “would only drive consumers toward less regulated, more costly alternatives,” such as payday loans or Buy Now, Pay Later loans.  

Morgan Stanley analysts say having less access to credit cards could also hurt the economy because it could reduce consumer spending by 5%.

‘Attack your debt’

What you can do:

Meantime, Rossman suggests looking at other ways to help pay down credit card debt.
    
“Get a 0% balance transfer, you know.  Sign up for the US Bank Shield Visa to have no interest for 24 months.  Really attack your debt that way.  If you owe an average of $6500, according to TransUnion, and you make 24 installments of less than $300 a month, your debt free, interest free,” suggested Rossman.

Or he suggests working with a non-profit credit counselor that can get you a reduced interest rate while you pay off the debt.

Could the interest cap happen?

What’s next:

Experts say President Trump would not be able to cap rates using an executive order.  It would have to be passed by Congress, though some Democrats already support the idea.  

Last year, Senator Bernie Sanders (D-Vermont) proposed a bill to cap credit card rates at 10%.