Through the first two weeks of 2026, President Donald Trump and his administration have been very busy. The midterm elections are in November, and concerns about affordability remain top of mind for consumers. One such initiative recently proposed by Trump is a one-year, 10% cap on credit card interest rates, which would be significantly lower than the national average.
Trump has said the cap will go into effect on Jan. 20, although he has provided few details on exactly how it will be carried out or enforced. Trump's potential credit card interest rate cap could come with some unintended and unwanted consequences.
Understanding why credit card lenders charge such high interest rates
It's understandable why consumers are frustrated with the high annual interest rates on overdue credit card balances, given the skyrocketing cost of living in recent years. Many people live paycheck to paycheck and are now unable to purchase a home until they are much older. Getting caught with too much debt can start a vicious cycle that's hard to escape.
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Consumers don't pay interest on credit card balances if they pay their balances outstanding on time, typically once a month. It's only once a consumer misses a payment that they are then subject to a high annual percentage rate (APR) on their credit card balances. The average rate on credit cards at commercial banks in the U.S. was slightly less than 21% as of November 2025, according to the Federal Reserve. So once a person misses a payment, they are hit hard right away.
However, there is a reason credit cards charge such high rates. Let's take a look at Capital One (COF 2.77%), one of the oldest credit card lenders, which extends credit to a range of borrowers on the credit spectrum.
In the third quarter of 2025, the yield on the company's total $440 billion loan portfolio was 13.83%. This also includes other types of loans, such as mortgages, personal loans, and auto loans, which can lower the total yield. Also, keep in mind that consumers with high FICO scores typically receive lower APRs, while those with low FICO scores receive higher ones.
Capital One also doesn't earn that entire 13.83% because there are associated costs and risks. For instance, the company must fund those loans with deposits that it pays a yield on. The cost of Capital One's total interest-bearing liabilities was 3.55%. Capital One's net interest margin (NIM), which reflects the difference between the interest the company earns on loans and other assets and the interest it pays out on liabilities, came in at 8.36% in the third quarter of 2025.
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That is a fantastic margin. Most commercial banks have margins in the 3% to 4% range and still manage to generate solid returns for investors. However, investors tend to assess risk-adjusted returns, which take into account loan losses. Loan losses in credit card lending are higher than in other lending categories.
For instance, Capital One reported a net charge-off rate, or loan losses unlikely to be repaid, of 3.16% in the third quarter of 2025. This is during a period when the credit environment in the U.S. has been quite benign since the pandemic. Loss rates are typically higher.
This doesn't mean the credit card companies are scraping by. They have made extraordinary profits in recent years. However, the business is inherently risky and can be quite cyclical. For instance, credit card stocks tend to take a hit during a recession because consumers struggle financially, resulting in higher losses during this period. As a result, investors demand higher risk-adjusted returns to account for this risk.
Speaking on the condition of anonymity, an expert on large banks told CNBC, "We cannot offer products at a loss; there's no scenario where we would take our entire portfolio to 10%... It's not a stretch to suggest this will very quickly tank the economy."
Why an interest rate cap could hurt the economy
Credit card companies price APRs based on risk. The riskier a borrower is, the higher the APR, as these borrowers are more likely to default on their loans. If 4% or 5% of a loan portfolio goes into default, the returns on the rest of the portfolio need to be high enough to make up for these losses. It is challenging to strike a balance between providing equal access to credit for all consumers and maintaining responsible lending practices.
On one hand, you want everyone to have fair access to credit. On the other hand, excessive risky lending can put a company out of business, as seen during the Great Recession in 2008, when banks issued mortgages to almost anyone and everyone without properly checking their credit profiles or requiring a down payment. We all saw how that ended, and one could argue that banks have still not recovered from a reputational perspective.
That's why, if this 10% interest rate cap goes into place, credit card companies are very likely to limit their lending, as the returns simply won't be high enough to generate good risk-adjusted returns. The major credit card lenders in the U.S. include Capital One, American Express, JPMorgan Chase, Bank of America, and Citigroup, among others.
If all these major institutions limit credit card lending, it could significantly affect economic growth, potentially even tipping the economy into recession. Remember, more than two-thirds of the U.S. gross domestic product is powered by consumer spending.
Implementing and enforcing a 10% interest rate cap may also prove challenging for the Trump administration, as controlling market forces can be difficult. With the Trump administration preparing to roll out this initiative so quickly, it certainly could have unintended consequences.
