Credit cards are the sharpest double-edged sword in the arsenal of Americans’ personal finance.
They can be an essential tool for dealing with financial difficulties, a great way to fund a family vacation, or a means to gain access to luxury airport lounges. However, for many consumers, they can also become an inescapable debt trap.
Similar to Robin Hood in reverse, credit card companies collect interest payments from those who carry a balance and redistribute them as rewards for those who do not.
The sky-high annual percentage rates (APRs) on U.S. credit cards are exacerbating the debt trap for those with a balance. Four years ago, the average APR was less than 15%. By 2024, it had exceeded 21%, and an increasing number of Americans are finding themselves in a certain situation.
On Friday, [information missing] on credit card interest rates at 10%, effective January 20.
This follows Senators Bernie Sanders (I-VT) and Josh Hawley (R-MO) [information missing] last year that would cap credit card interest rates at 10% for five years. During the campaign, Trump supported the idea—despite [information missing] from the banks and credit unions that issue credit cards.
“When large financial institutions charge over 25 percent interest on credit cards, they are not engaged in the business of providing credit. They are engaged in extortion and loan sharking,” Sanders stated in a press release.
The bill aims to curb the profits from credit card lending and provide financial relief for working families. However, if passed, the measure would likely reduce easy access to credit and also undermine the credit card rewards that drive the industry.
The unintended consequences of a credit card interest rate cap
Whenever Congress imposes new regulations on the economy, second- and third-order effects often lead to unintended consequences, experts and industry groups told [publication name missing] last year. By addressing the issue of high credit card APRs, a rate cap could very well end up harming those it was intended to assist.
Credit card interest rates vary significantly based on the unique risk profile of each cardholder. Limiting banks’ ability to charge rates commensurate with [risk] would likely send shockwaves through the industry.
Jennifer Doss, executive editor at Cardratings.com, explains that cards with high APRs enable banks to offer credit to people who might not otherwise qualify. “Credit card companies typically charge higher interest rates to mitigate higher perceived risk,” she said. “Consequently, individuals with lower credit scores generally face higher interest rates.”
John Cabell, managing director of payments intelligence at J.D. Power, adds that rate caps could make it economically unfeasible for issuers to provide credit to people struggling with delinquency.
“If you are forced to cap [APRs for] those with the highest interest rates, it would no longer make sense for the issuer to even offer them a product because it might not even be net positive from a revenue perspective,” he said.
Consumers denied access to credit cards due to interest rate caps would still need access to credit. They could end up choosing payday loans or similar options that carry even higher rates than high-interest credit cards.
“Research clearly shows that when politicians, rather than the free market, dictate prices, consumers ultimately pay the price through limited choices outside the well-regulated banking system,” said Consumer Bankers Association President and CEO Lindsey Johnson.
A cap on interest rates could reduce credit card rewards
Capping card rates would also likely dampen credit card rewards. If you’ve ever redeemed points or miles for a flight or hotel stay, you’ve benefited from high credit card interest rates. That’s because the revenue generated by interest payments on card balances helps power the ecosystem of points, miles, and cashback rewards.
According to Cabell, cardholders who never carry a balance need to understand that their expectation of getting “something for nothing” comes at a high cost to other consumers. “Higher net worth individuals are enjoying all of those perks, at the expense of lower-end consumers who do not benefit,” he said.
Customers who receive the most rewards from credit cards do not pay interest. [Source missing] has found that every year, a staggering $15 billion is transferred from those who carry a balance and redistributed to those who earn rewards.
Credit card payment fees on retail transactions—some of which are as high as 4%—are another source of support for card rewards, and some experts believe swipe fees could have a more direct financial connection to the rewards system. However, a separate bill in Congress is targeting high swipe fees.
The proposed [bill name missing], a bipartisan bill introduced in 2024 by Senators Dick Durbin (D-IL) and Roger Marshall (R-KS), targets the dominance of payments processors [company name missing] and Mastercard—which together received $93 billion in credit card swipe fees in 2022.
The bill would require large financial institutions to allow at least two credit card payment processing networks to be used on their cards—and one of them cannot be Visa or [company name missing]. This would give merchants greater flexibility in choosing payment networks and, it is hoped, reduce the swipe fees.
If both bills were to pass, the reduction in revenue from interest payments and swipe fees would likely be the final blow to credit card rewards programs.
A version of this story was originally published on Feb. 6, 2025.