Trump’s proposed credit card cap exacerbates Americans’ debt. Does this help?

Credit card debt is a heavy burden for millions of Americans.

Selena Cooper, 26, is one of those facing the strain. A former paralegal for the Social Security Administration, he was left without a steady income when the US government shut down a few months ago. He lost his job permanently after Christmas.

Cooper first missed his credit card payment in October, when his paychecks stopped. Since then, she said her debt on her three credit cards has accumulated to $6,000.

Last month, his card issuer Capital One and American Express notified him that they were raising his interest rates due to late payments. The rate on his Capital One cards doubled to 16%, while his Amex one jumped from 10% to 18%, he said.

Credit card rates have caught the attention of US President Donald Trump. Last week, he it is proposed to terminate them at 10% for a year from 20 January – an idea that Cooper says “will help a little, but it still won’t get out of my debt”.

Cooper, who lives in Columbia, South Carolina, now relies on his photography business for income. “It will pay off small bills — but not my credit card debt,” she said.

Credit card interest rates have been rising in recent years. They averaged about 22% in November, up from 13% a decade ago, Federal Reserve data showed. 37% of adults carry a credit card balance, and total US credit card debt is over $1tn.

“It shows that consumers feel pinched, they will continue to feel pinched,” Susan Schmidt, portfolio manager at Exchange Capital Resources in Chicago, told the BBC.

“I think the Trump administration is trying to find a way out of this.”

Trump’s proposal, which was one of his campaign promises, was met with swift criticism from bank executives, who said a cap would destroy consumers’ access to credit. Banks may cut credit limits or close risky accounts.

Interest charges are a source of income for banks and other big lenders, worth $160bn by 2024, according to the Consumer Financial Protection Bureau – an agency largely dismantled by Trump last year.

Banks are already pushing to protect this income, arguing that a rate cap could backfire to the detriment of consumers. JP Morgan hinted at the possibility of legal action.

“People are going to lose access to credit on a broader and broader basis, especially people who need it,” Jeremy Barnum, JP Morgan’s chief financial officer, warned on the company’s earnings call on Monday.

Jane Fraser, the chief executive of Citigroup, also pushed back against the proposal on Wednesday and warned of a “serious impact on access to credit and on consumer spending across the country”.

Some analysts and economists agree that a cap, by itself, may not benefit consumers like Trump and lawmakers across the political aisle.

“A 10% cap may not be the right solution because people who are already in trouble, that’s not necessarily going to help them,” said Schmidt of Exchange Capital Resources.

Benedict Guttman-Kenney, an assistant professor of finance at Rice University, said banks may respond by limiting how much they lend to people with low credit scores, who are considered higher-risk borrowers. Those are the people most at risk of losing access to credit cards, he said.

Banks, he added, may also try to recoup their profits elsewhere, such as raising annual fees or late fees.

“It’s not clear that people are going to get better,” Guttman-Kenney said. “They still pay the same amount of money.”

But he noted that some bank expenses are “bloated”, meaning they have room to cut costs to maintain their margins. They could, for example, cut how much they spend on marketing, he said.

And a recent Vanderbilt University study found that Americans could save nearly $100bn a year in interest costs if a 10% rate cap were implemented.

“It’s something people can see, they can sense, they can feel it,” said Brian Shearer, a researcher at Vanderbilt’s Policy Accelerator and the study’s author.

“It only affects their household budgets.”

Shearer questioned a key argument put forward by bank executives and their lobbyists: that any reduction in rates should lead to a reduction in lending. He points to the banks’ strong margins in the credit card market.

Interest payments, he added, do not account for much of the income banks make on credit cards.

“No policy is without some pros and cons,” Shearer said. “To continue lending, banks have to reduce rewards to some extent, especially for people with low FICO scores (credit scores).

“However, the savings from interest, even for people who lose some rewards, outweigh the lost rewards.”

Morgan, 31, who asked that only his name be used, is also among those struggling to pay thousands of dollars.

Since May, she has been using her Discover card to pay for the care of her two-year-old daughter, while unemployed. She said she decided to send her daughter to daycare because she needed independence, due to struggles with her mental and physical health.

Those payments left him with $6,700 in credit card debt.

Morgan’s husband works in the military and pays for other family expenses. Through a service member benefit program, he got an interest rate of almost 3% on his credit card. If she’s forced to pay an average 27% interest rate, sending her daughter to daycare isn’t an option, she said.

“I’m losing sleep over $6,700, but I have a little bit of room to do that because once I get a job, I can pay it off,” Morgan said.

So Trump’s proposal to cap credit card rates at 10% struck him as a “step in the right direction”.

“I hope it actually comes to fruition,” he said. “It’s one of the few things he’s done that puts people before businesses.”

The idea to cap credit card rates has been floating around lawmakers for years, and it has garnered bipartisan support.

Senator Josh Hawley, a Republican, and Senator Bernie Sanders, a Democrat, last year introduced a bill that would cap credit card interest rates at 10%.

Democratic Senator Elizabeth Warren said in a statement that she spoke with Trump this week and “told him that Congress could pass legislation to cap credit card rates if he really fought for it”.

“If he really wants to get something done, including capping credit card interest rates or lowering housing costs, he’ll use his leverage and pick up the phone,” Warren said.

However, there are obstacles ahead. Taking on Congress could prove challenging, despite some support on both sides of the aisle.

House Speaker Mike Johnson this week distanced himself from the rate cap proposal, citing “negative secondary effects” and a pullback in lending as a result. “This is something we have to be very deliberate about,” Johnson said at a press conference.

And the banks are willing to continue to push hard against it.

“If the Trump administration is going to back down, I think it will be because of bank lobbying,” said Shearer, of Vanderbilt.

“This is their cash cow. They’re not going to let it go easily.”