Changing the law or pressuring regulators does not change the underlying economics.
Interest rates are not arbitrary numbers set to frustrate consumers. They are prices, and like all prices, they carry important economic information.
The price of any good reflects underlying demand and supply conditions — such as consumer preferences, input costs, and the availability of substitutes and complements. While many factors determine prices, consumers do not need to figure them out individually. They can simply observe the price and decide whether the marginal benefit of that good exceeds the marginal cost.
The same logic applies to interest rates, which are prices as well. They reflect borrower risk, the availability of substitute or complementary credit products, and banks’ own input costs such as labor, technology, risk-monitoring, and regulatory compliance.
Trying to cap an interest rate is an attempt to ignore the economic information and forces that prices convey.
Credit cards are unsecured, meaning there is no collateral (i.e., assets) backing up this credit. Unlike mortgages or auto loans, there are no assets that lenders can reclaim if a borrower defaults. If a credit card borrower does not pay, the bank cannot repossess the goods purchased. Moreover, credit cards are highly cyclical. Borrower defaults rise during economic downturns, and these losses are not easily diversifiable for banks because they tend to occur simultaneously.
Some politicians, including President Trump, have recently described high credit card interest rates as abusive. But the empirical research does not support this claim. Banks do not earn excessive returns on credit card lending. Research from the Federal Reserve and University of Pennsylvania economists in July 2025 estimates that the default risk premium embedded in credit card lending is roughly 5.3 percentage points per year, while excess returns are between 1.17 and 1.44 percent. Most of the interest rate is therefore compensating lenders for expected losses, not excess profit.
There has been coverage suggesting that banks could absorb an interest rate cap by cutting marketing budgets or reward programs. While issuers do have some flexibility along these margins, they do not have much, nor does it resolve the fundamental problem that arises with a cap — some consumers will be priced out of the product. Interest income allows lenders to cover defaults in an unsecured product. Once a cap prevents banks from pricing for that risk, lending to high-risk consumers becomes unprofitable.
As a result, lenders will reduce or eliminate access for higher-risk borrowers, and credit card products will shift toward much safer borrowers — those least likely to carry balances or pay interest at all. This effect would extend beyond the riskiest borrowers to include many middle-risk consumers whose expected losses also exceed what a capped rate can cover. Revolving credit then becomes a less accessible and less economically viable product.
Importantly, when borrowing becomes less available to high-risk consumers, it is not as if the demand for credit falls to zero. Instead, high-risk and middle-risk borrowers will turn to nonbank lenders via installment loans that have higher interest rates and weaker disclosure requirements. In practice, this means shifting credit away from regulated bank products and toward less transparent alternatives.
As it currently stands, credit card interest rates are set through private contracts operating within a highly regulated financial system. The Truth in Lending Act requires clear disclosure of APRs (annual percentage rates), fees, and interest rate calculations.
A nationwide interest rate cap would require congressional legislation. Absent that, a president can exert administrative pressure through regulators such as the Federal Reserve, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and Federal Deposit Insurance Corporation. These agencies could require higher capital buffers for banks with large revolving credit portfolios, mandate stronger disclosures, or issue supervisory guidance that alters pricing incentives. This pressure would push banks toward a similar outcome, with lower rates emerging through credit-rationing rather than reduced underlying risk.
But changing the law or pressuring regulators does not change the underlying economics. Credit card interest rates are not predatory; they reflect the inherent risk in a product that has no collateral and lends to a wide range of borrowers. When policymakers suppress that signal and force a price cap, markets adjust. A nationwide cap would lower borrowing costs for some borrowers who retain access, while the cost would be higher via lost access, tighter limits, or reliance on more expensive forms of credit for those with higher- and middle-risk profiles.
This is not hypothetical. Federal Reserve research shows that after the CARD Act of 2009 restricted banks’ ability to reprice balances and charge certain penalty fees, banks pulled back from subprime credit card lending, pushing affected borrowers toward riskier alternative credit products.
A first-semester economics class teaches students that prices are not arbitrarily set. They signal risk, allocate scarce resources, and determine who is served in the market. Ignoring that reality does not eliminate risk. Those basic principles apply just as much to credit markets, and policies that ignore them come with predictable consequences.