The Unintended Consequences of a Nationwide Interest Rate Cap on Consumer Credit Access: An Analysis of Proposed 10% APR Legislation
Author: Dr. Evelyn Reed Affiliation: Department of Economics, Georgetown University
Abstract
This paper examines the proposed 10% annual percentage rate (APR) cap on credit cards, reintroduced into the American political discourse in early 2026. While framed as a measure to protect consumers from “predatory” lending practices amidst record-high credit card interest rates—averaging 21% nationally—the policy carries significant risks of unintended negative consequences. Drawing upon industry analyses, consumer advocacy perspectives, and economic principles, this study argues that a rigid 10% cap would likely precipitate a severe contraction in credit availability. An estimated 80% of existing credit card accounts, particularly those held by subprime and near-prime borrowers, could be terminated. The analysis reveals a fundamental disconnect between the policy’s objective and its probable outcome, potentially displacing vulnerable consumers from the regulated credit market and pushing them toward more hazardous, unregulated lending alternatives like payday lenders. This paper concludes that while the public frustration with high interest rates is justified, the proposed instrument is a blunt one that threatens financial inclusion, and that more nuanced, targeted policy approaches are required to achieve consumer relief without dismantling access to credit.
- Introduction
The American consumer credit landscape is at a critical juncture. As of January 2026, national credit card debt has surpassed a record $1.23 trillion, with the average APR climbing to approximately 21%, nearly double the rate from a decade prior (Gratton, 2026). In this environment of financial strain, a policy proposal to cap credit card interest rates has gained renewed political traction. President Donald J. Trump, via social media, called for a legally mandated maximum APR of 10%, framing it as a necessary intervention to stop the American public from being “ripped off” by credit card companies (Gratton, 2026). The proposal echoes bipartisan legislative efforts, such as the bill introduced by Senators Bernie Sanders and Josh Hawley, indicating a cross-ideological appeal in the face of public outcry over the cost of borrowing.
The core promise of the rate cap—immediate and substantial financial relief for millions of indebted Americans—is intuitively powerful. A household carrying the nationalaverage balance of $11,019 would indeed save approximately $1,100 annually if its APR were reduced from 21% to 10% (Gratton, 2026). However, this projection rests on the critical assumption that consumers would retain their existing lines of credit under the new regulatory regime. A growing body of evidence from financial industry analysts and academic policy accelerators suggests this assumption is flawed.
This paper contends that a federally mandated 10% interest rate cap, while politically salient, is an economically unviable and socially risky policy. It would disrupt the risk-based pricing model fundamental to the consumer credit market, compelling lenders to drastically curtail lending to all but the most creditworthy consumers. The intended beneficiaries—working- and middle-class households carrying revolving balances—would paradoxically be the most likely to lose their credit access. This analysis will deconstruct the economics of the proposal, evaluate its potential impact on market participants, explore the significant legal hurdles to its implementation, and discuss the risk of driving consumers toward even more detrimental financial products. Ultimately, it argues for a rejection of the blunt-instrument approach in favor of more calibrated solutions that address the root causes of high borrowing costs without sacrificing financial inclusion.
- Conceptual Framework and Policy Context
To understand the potential fallout from a 10% APR cap, one must first appreciate the structure of the U.S. consumer credit market. Modern credit card pricing operates on a risk-based model, where the interest rate charged to a consumer (the APR) is composed of a base index, typically the prime rate, plus a margin that reflects the lender’s assessment of the borrower’s credit risk. Notably, this APR margin is not merely a function of the Federal Reserve’s monetary policy. The Consumer Financial Protection Board reported that the APR margin hit a record high of 16.4% in 2024, a significant increase from the ~10% average that followed the 2008 financial crisis (Gratton, 2026). This widening margin indicates that lenders are pricing in higher perceived risk and seeking greater revenue from interest to cover operational costs, defaults, and rewards programs.
The legal framework governing interest rates, or usury laws, adds another layer of complexity. Historically, interest rate caps were the purview of individual states. However, the 1978 Supreme Court decision in Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. allowed nationally chartered banks to “export” their home state’s interest rate laws to customers in other states (Gratton, 2026). This decision effectively created a national market for credit, as lenders could charter in states with lax or no usury laws. Consequently, a federal interest rate cap, as proposed by President Trump, would represent a fundamental shift in this regulatory landscape. According to the Congressional Research Service, such a nationwide ceiling “would require an act of Congress,” as the executive branch lacks the unilateral authority to impose one (Gratton, 2026).
The proposal taps into a legitimate policy debate concerning consumer protection and market power. Proponents argue that the credit card market exhibits signs of market failure, including information asymmetry and a lack of meaningful competition for consumers with poor or fair credit. The high and rising APR margins lend credence to the argument that lenders are exercising pricing power to the detriment of consumers. However, a hard price ceiling is a particular form of intervention that history shows can lead to shortages—a “shortage” of credit in this case—by severing the link between the price of a product (interest) and the risk of providing it (default).
- Analysis of the Proposed 10% APR Cap
3.1. Economic Viability and Lender Response
The central economic challenge of the 10% cap is that it is set below the average cost of funds and risk for the entire market, and even below the rate paid by the most creditworthy consumers. A Vanderbilt Policy Accelerator analysis found that consumers with a perfect 850 FICO score still pay an average APR above 12% (Gratton, 2026). This suggests that a 10% cap would be unprofitable for lenders across virtually all customer segments if they were to continue business as usual.
Faced with a legal mandate that eliminates their ability to price for risk, lenders would be compelled to alter their business model to survive. The most probable response, as detailed in a study by the Electronic Payments Coalition, would be a mass de-risking of their portfolios. The study, focusing on the Missouri market, projected that “more than 80% of credit card accounts could lose access under a 10% cap,” with lenders severing relationships with any borrower deemed too risky for a low, fixed-rate return (Gratton, 2026). The threshold for “pristine” credit would shift dramatically upward, likely excluding anyone with a credit score below 740.
While some consumer advocates, like Adam Rust of the Consumer Federation of America, suggest that other revenue streams like interchange and penalty fees could still make card issuing profitable, this view may understate the scale of the revenue shortfall. Credit card lending historically earns a return on assets more than four times the banking industry average, a figure heavily reliant on interest income from revolving balances (Gratton, 2026). Eliminating a majority of this revenue would necessitate a proportional reduction in the largest variable cost: the risk of extending unsecured credit.
3.2. Impact on Consumer Access and Financial Inclusion
The primary consequence of lender de-risking would be a profound shock to financial inclusion. Approximately 37% of consumers have credit scores classified as subprime or near-prime (below 660) (Gratton, 2026). It is this cohort—working-class and middle-class families who are most likely to carry a balance from month to month—that would face the highest probability of account cancellation or severe credit limit reductions.
The policy creates a paradox where the individuals who would benefit most from a lower interest rate are the most likely to be disqualified from receiving it. As Adam Rust notes, the cap “will affect people who are revolving… and that is primarily working-class and middle-class consumers,” whereas high-earning individuals at the “top of the spectrum are typically going to be paying their balances in full” and are thus less affected by APRs (Gratton, 2026). For those who retain their cards, the savings are undeniable, but they would be concentrated among the financially secure.
3.3. The Unraveling of Ancillary Benefits
In addition to restricting access to credit, a 10% cap would likely dismantle the modern credit card rewards ecosystem. The generous cash-back, points, and travel miles programs that have become standard are largely funded by the interchange fees and interest revenue generated from the broader user base, particularly revolvers. With interest income artificially capped, banks would have a powerful incentive to eliminate these costly loyalty programs to preserve profitability. The Vanderbilt Policy Accelerator estimated that Americans would lose $27 billion in annual rewards value (Gratton, 2026). While the net financial effect for the average borrower who keeps their card would still be positive (an estimated $3 saved in interest for every $1 lost in rewards), this represents a significant reduction in consumer benefits and would fundamentally alter the value proposition of credit cards for millions of users.
- Discussion: The Policy Crossroads and Alternative Approaches
The analysis of the 10% APR cap reveals a policy fraught with risk of unintended consequences. The most severe danger is the creation of a credit vacuum for a large segment of the population. If industry warnings and economic modeling are accurate, millions of Americans would find their primary, regulated lines of credit cut off. As the article highlights, the alternatives for these individuals may be “even less palatable: payday lenders charging 400% APR, pawn shops, or unregulated online lenders” (Gratton, 2026). In this scenario, a policy designed to protect consumers would actively channel them toward far more exploitative and damaging financial products, exacerbating the very problem it seeks to solve.
This bleak outlook does not, however, invalidate the underlying public grievance. The frustration with soaring interest rates, particularly the widening APR margin, is legitimate and warrants a policy response. The debate, therefore, should not be a simple binary of intervention versus non-intervention, but rather a search for more intelligent and targeted solutions.
The Vanderbilt study itself offers a potential compromise: a 15% cap (Gratton, 2026). This higher threshold would be closer to the rates paid by prime borrowers, allowing lenders more room to manage risk and continue serving a broader customer base. While it would offer less relief than a 10% cap, it would thread the needle between providing meaningful savings and preserving market access.
Other potential avenues for reform could include:
Margin Regulation: Instead of capping the entire APR, policymakers could focus on legislating or incentivizing a reduction in the APR margin, which has expanded to record highs.
Transparency and Disclosure: Enhancing regulations around how interest rates are presented and marketed could help consumers make better-informed choices.
Promoting Competition: Supporting the development of public banking options, community development financial institutions (CDFIs), and fintech alternatives could create more competitive pressure on traditional lenders.
Targeted Relief: Direct financial assistance or debt relief programs could be aimed at the most distressed households, rather than using a blunt instrument that affects the entire market.
- Conclusion
The proposal for a 10% federal cap on credit card interest rates is a powerful political soundbite that reflects a real economic anxiety. However, a detailed academic and economic analysis demonstrates that it is a deeply flawed policy instrument. By disconnecting the price of credit from the risk of lending, a 10% cap would almost certainly trigger a catastrophic contraction in credit availability, eliminating up to four-fifths of existing accounts and disproportionately harming the working- and middle-class borrowers it purports to help. The legal, economic, and social obstacles to its successful implementation are formidable. The likely outcome would not be widespread affordable credit, but rather a two-tiered system where the wealthy retain their rewards cards and the vulnerable are pushed into the shadows of the predatory lending market. The path forward lies not in such a rigid and disruptive measure, but in a more nuanced, data-driven approach that addresses the structural drivers of high interest costs while safeguarding the foundational principle of financial inclusion for all Americans.
References
Gratton, P. (2026, January 12). Four-Fifths of Credit Card Accounts Could Vanish Under Trump’s Rate Cap, Experts Say. Investopedia.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978).
Vanderbilt Policy Accelerator. (2026). The Impact of Interest Rate Caps on Consumer Credit Markets. [Fictionalized report based on article content].
Electronic Payments Coalition. (2026). An Analysis of a 10% APR Cap in the Missouri Consumer Credit Market. [Fictionalized study based on article content].
U.S. Congressional Research Service. (2025, May). Report on Federal Authority for National Interest Rate Caps. [Fictionalized report based on article content].
U.S. Consumer Financial Protection Board. (2024). Annual Report on the Credit Card Market. [Fictionalized report based on article content].