Trump wants to cap credit card interest. Can he?

President Trump says he wants to cap credit card interest at 10%. What it could mean for Americans' credit card debt.

Christopher Palmer, associate professor of finance at the MIT Sloan School of Management.

Alexa Rosenbloom, director of the Consumer Protection Clinic at the Legal Services Center of Harvard Law School.

The version of our broadcast available at the top of this page and via podcast apps is a condensed version of the full show. You can listen to the full, unedited broadcast here:

Part I   

MEGHNA CHAKRABARTI: Okay. If you have a credit card, find it and take a look at it. Okay, obviously if you're driving, don't do that right now. But the reason why I'm asking you to do this is do you know what your current interest rate is on that card? So I'll give you a second to think about it.

Actually, I had to think about it for quite a while before I remembered what mine was. Now, if you don't know, do you know where to find what the interest rate is? Or how about this. Do you know if there's any legal limit to how high that interest rate can go?

It's a really interesting question because it turns out that at the federal level, there is not. There is no federal law capping credit card interest rates, except if you're active duty military, and we'll talk about that in a minute. Meaning for everybody else, technically your interest rate could go as high as the issuing bank wants, at least according to the federal government. Okay, so what about at the state level?

Now sure, there are a lot of different state level anti-usury laws, but they have some giant loopholes and exemptions and small print that render most of those state laws when it comes to credit card interest rates, kind of toothless, which all leads to an average credit card interest rate in the United States today in the 20% to 22% APR range, meaning if you carry a balance, you're playing 22% of year on that balance just in interest.

So that is almost a double of what it was a decade ago, which is really interesting. Double from 10 years ago. So maybe it doesn't come as a surprise that some Democrats for a while have been calling for a federal cap on credit card interest rates. But what has surprised folks is that recently, President Donald Trump also joined that cause.

Now here he is on the campaign trail in 2024.

DONALD TRUMP: And while working Americans catch up, we're going to put a temporary cap on credit card interest rates at 10%. We have no choice.

CHAKRABARTI: And here's Trump again on January 13th of this year.

TRUMP: I think that people that are paying 28% interest should be protected. We're talking about for a one-year period, but when you have a bank, whether it's Jamie Dimon or anybody else, charging people 28%, 32%, 30%, 31%, one case 35%, no, I'll help those people.

CHAKRABARTI: The president dropping Jamie Dimon's name there, he happens to be the CEO of JP Morgan, and he is not happy. He says that a 10% cap could actually harm consumers because the banks would be forced to put stricter limits on who qualifies for a line of credit.

Now, then there's also the fact that while President Trump says he wants to help consumers, it was only a few months ago that he sought to defund the federal agency in charge of protecting consumers, the Consumer Financial Protection Bureau.

Just last month, a federal judge ruled that the Trump administration must continue to seek funding for the CFPB. Today we're going to look at how the Trump administration's proposed interest rate cap, how it might work, what would be done to realize it, the pros and the cons of the federal government stepping in to reduce interest rates on your credit cards. And joining me now is Christopher Palmer. He is a professor at the MIT Sloan School of Management.

Professor Palmer, welcome back to On Point.

CHRISTOPHER PALMER: Good to be back. Thanks.

CHAKRABARTI: Okay, so just to be 100% sure that I'm not misleading anybody, there is no federal law right now capping credit card interest rates.

PALMER: Correct.

CHAKRABARTI: Why?

PALMER: In general, it's an important product and we want people to have access to it. And anytime you have a price control is fundamentally designed to improve the affordability of something, but in basically every single situation where you try to lower prices by artificially having a cap on those prices, access to that good goes down. Whatever that good is, whether it's parking places or whether it is parking spots, or whether it's credit cards. And so the worry about having a credit card cap is that it would reduce credit access for people.

The worry about having a credit card cap is that it would reduce credit access for people.

CHAKRABARTI: Okay. But now a lot of people would say, we have the opposite problem, that with these high interest rates and relative ease that most Americans can get a credit card, we have a credit card debt crisis. What is it, more than a trillion dollars? Something like that now.

PALMER: Yeah. $1.24 trillion of outstanding credit card debt. And I think one in five Americans have had credit card debt they've been rolling for more than a year.

So there's a lot, actually it's more than 50% that have it more than a year of people that have credit card debt. So there's a lot of people that are rolling credit card debt, and they're paying those high interest rates that you were talking about.

CHAKRABARTI: Do you think that's a problem? Because again, in the media it's talked about as a crisis like that the Americans should not have so much credit card debt. And I don't know actually know how it compares to, say, people in other countries when maybe the whole credit card structure is totally different.

PALMER: There's a bunch of things going on there. Certainly, we have a rewards culture and equilibrium in our market where we are incentivized to use our credit cards. Other countries don't have such a strong rewards program, and so a lot of Americans use credit cards because they get the rewards. Even if you look at countries that also have rewards programs, we still have a lot of credit card debt.

There's some good reasons for that though. It's important to remember that credit cards are valuable to people. You can get in trouble with a credit card, but it can also be there exactly when you need it because you have to pay for a flight last minute to be able to go help an ailing parent, or you need to fix your car so that you don't lose your job and you can still commute.

There's a lot of emergencies that credit cards are really well suited for.

CHAKRABARTI: Okay. What I'd love to do in this first part of the show, professor, is really get down and dirty with how the interest rates work.

Excuse me. First of all, we talked about no law at the federal level. Could that change? We'll get to that. But at the state level, I mentioned there are things like anti-usury laws, but that there are loopholes in them. Can you describe how you see the landscape of state laws?

PALMER: Yes. So one thing to think about, I remember when my wife and I got our first credit card in college.

It was from Citibank and it was from Citibank, South Dakota. And we're like that's random. Why is it from South Dakota? And that's not a coincidence because South Dakota doesn't have any of these usury laws. There's no cap on interest rates in South Dakota. So the way the state laws work is that anyone can make a loan in any state using the regulations of their home state.

So if I make you a credit card loan from South Dakota, even though you live in Massachusetts, or even though you live in Florida, or even though you live in Tennessee, the South Dakota regulations are going to apply, I'm preempted from the state laws as a national bank or as a bank that's chartered in South Dakota.

CHAKRABARTI: So can I just ask, with that one loophole, I guess that's what we call it. We should call it. Does every bank basically do some version of that?

PALMER: Yeah. Why would you incorporate your bank and lend from a state that had really strict lending laws if you wanted to be able to make all sorts of loans? And so there's several states that have relatively loose lending laws and you see the preponderance of loans being made from those states.

CHAKRABARTI: Okay. Do the anti-usury laws though are they more effective in non-credit card loan situations?

PALMER: A lot of loans are more local. So personal loans are more local. That's becoming less so with FinTech. But if you're going to go to a bank and it's going to be a local bank and you're going to get a personal loan from them, that's going to often be subject to your local usury laws.

CHAKRABARTI: Okay. So you get some protection there. But I suppose I'm asking you to dive into the minds of lawmakers in 50 different states. So forgive me for asking you the impossible, but the one loophole you talked about earlier, why does that, what state would allow that if they're trying to protect the consumers in their state to just put a loophole in the size of Jupiter saying it doesn't apply to you if you're incorporated somewhere else?

PALMER: It was the National Banking Act that set up this preemption set of rules. And I think the intuition was they wanted people to be able to have, like you said, a competitive lending environment where credit was flowing and people were able to access the credit that they needed.

And if everyone had to say, okay, I've gotta pull out the handbook for lending in every single state before I operate in that state, you were gonna have some states where it was just very hard to operate and people there weren't gonna get very much credit, and banking wasn't really gonna expand in that state.

So that was the rationale.

CHAKRABARTI: I see. Okay. So then I guess it really is essentially up to a card issuer to decide person to person what the interest rate will be.

PALMER: Yeah. So we do have some limits on that. So the card act, for example, doesn't regulate the level of interest rates, but does say you can't wait and then see that someone got into trouble with their credit card and then jack up the interest rates.

You can't reprice. So that kind of took away this repricing risk. So that was one thing that helped consumers. We also think that competition disciplines this, so you can go onto bankrate.com, you can go onto NerdWallet, you can figure out what are all of the posted interest rates for cards, and if someone couldn't just get away with charging a ridiculously high interest rate, if those people could access a much lower interest rate from a competing card.

CHAKRABARTI: Okay. So the card act, just it's the Credit Card Accountability, Responsibility and Disclosure Act, yes? From 2009. So that's quite a while ago. So do you, not to get too actuarial on you, professor, but how is it that the companies go about deciding, they're looking at Professor Palmer and they're like, okay, he wants a Chase Bank card. How would they figure out what they want to charge you in interest?

PALMER: The interest rate they're going to give me is going to be a spread over the prime rate, and the prime rate itself is a spread over the federal funds rate. So it's all pegged to what interest rates are in the economy.

CHAKRABARTI: So we're blaming this on the Fed.

PALMER: Part of it has to do with the Fed fighting inflation, that raises the federal funds rate, that immediately passes through into credit card rates. So that is part of it, of the story here. Why you mentioned at the top that credit card rates are so much higher today than they were a long time ago.

Part of that is because the federal funds rate is at 3.5%. Because the Fed is still trying to fight inflation.

CHAKRABARTI: Okay so the Fed has its prime rate, then there's like expanding spreads from there.

PALMER: Exactly.

CHAKRABARTI: Keep going.

PALMER: And those expanding spreads are going to be based on my riskiness. So they're going to look at my credit application and their first thing they're gonna look at is my credit score.

And the higher credit score I have, the lower the spread to the prime rate that I'm going to have on my credit card interest rate. And that means that every time I miss a payment, every time I have anything that adversely affects my credit score, it's gonna raise the interest rate that I get on future credit cards.

CHAKRABARTI: Yeah. You know what's interesting though, even that narrower spread for people with excellent credit, it seems pretty broad to me. I was just looking at it today and I was, I said this is on Investopedia, for example, that for people with over 800 of a credit score, so like pristine, the spread can still be between what, 19% and 22% or 23%.

That's a lot.

PALMER: Yeah, and that comes from several things. One of the things that comes from is the Card Act itself. So if I can't wait to say, I can see that you miss payments all the time, I would really like to increase your interest rate. If I have to do that ahead of time, because I'm not gonna be able to reprice the loan, I have to start at a higher level.

So the Card Act itself offers a bunch of consumer protections, but has this unintended consequence that rates are going to have to be higher in the first place. The Card Act also has all these fee caps, and if credit cards aren't going to be able to get compensated for the risk that they're taking by having higher late fees and by adding in a bunch of fees, then again, that's going to put pressure on interest rates.

Part II

CHAKRABARTI: I'd actually like to take a little bit of time to talk through in more detail, some of the federal level efforts that have actually gone by, will return to, or  have been successful. Let's start with Dodd-Frank. Because I think that's actually what the Card Act is related to, is that right?

PALMER: What Dodd-Frank did, was the Dodd-Frank Act created the CFPB and assigned the CFPB with the authority and the responsibility of enforcing the Card Act. So that gave an agency of the federal government primary responsibility for thinking about the Card Act and making sure that it's followed.

CHAKRABARTI: So going after companies when they aren't following it, clawing back money, maybe even issuing some regulations. Regulations and making sure that when you get your credit card statement, every credit card statement has the same box at the top that says what your minimum payment's going to be and how long it would take you to pay back this debt if you only pay back the minimum payment.

And all of those disclosure regulations are made and enforced by the CFPB.

CHAKRABARTI: Right at the top of your monthly statement.

CHAKRABARTI: Okay. Now there was also this push to, you had mentioned it before, but it's worth going into it in detail, about if they couldn't directly regulate interest rates on credit cards.

There's all these associated fees, right? I'm thinking of maybe overdrafts aren't for credit cards, but for personal bank accounts. But are there associated fees for credit cards as well?

PALMER: Absolutely. Missed payments, late payments, all sorts of things.

CHAKRABARTI: And are those fees, have they come down because of the CFPB?

PALMER: They've come down and penalty APRs have gone away, where you used to like, oh, you missed your payment and so therefore you're going to pay this higher interest rate forevermore as long as you have this card. And so the Card Act and the CFPB supervision of credit card issuers enforces that. There is not this like proliferation of fees, that you can't just make up a fee and that fees have to be somewhat reasonable relative to the economic loss to the card issuer from you not paying back your credit card loan.

CHAKRABARTI: Okay. Then let's talk about the president's recent call for a 10% cap. Do you think it's a good idea?

PALMER: It's just fundamentally bad economics, to be honest. Anytime you have a price control, it has unintended consequences. Sometimes they're subtle. In this case, they're not subtle to see. We have lots of countries, lots of places where we've studied the effect of a cap on interest rates, and we see all sorts of unintended consequences.

We have lots of countries, lots of places where we've studied the effect of a cap on interest rates, and we see all sorts of unintended consequences.

And I'll tell you the most important one by far is credit access. Credit access goes down. So the average credit card interest rate, like you said, at the top is ... to 20% right now. And this is a proposed cap of 10%. So even there's very few credit cards today that have an interest rate that's that low, so you're restricting the interest rate that a vast majority of credit cards have applicable to them.

And so what that does is it reduces the incentive for anyone to want to make a credit card loan, to approve an application, to give someone a credit limit increase, to develop a new product that targets a new demographic that hasn't been served by credit cards in the past.

All of those incentives go away and it becomes harder to get access to credit cards.

CHAKRABARTI: Okay, I gotta ask you. What's the evidence for that? Because when I heard Jamie Dimon say essentially the same thing, I was like, sure, they're saying that just so like it's a scare tactic so that folks in Washington finally step back and say, okay, no. We don't want to like completely cut off access for millions of people.

PALMER: Sure. I can see the problem with listening to a credit card issuer complain about the unintended consequences, but there was a World Bank study in 2014 that looked at this around the world. They found that actually in some way, shape, or form, lots of countries have experimented with capping interest rates. And a very common finding is that it reduces credit access.

And it reduces credit access, especially for the riskiest consumers, the most vulnerable consumers who need access to credit cards the most, because they don't have their own savings or because their income is volatile, or they might face a higher risk of unintended shocks and unexpected expenditures that their family can't insure them against. And so in those situations, they need a credit card. And those are exactly the type of households that are harmed and don't end up having credit access when there are these sorts of caps.

CHAKRABARTI: Okay, now. Professor Palmer, we've talked before, so you know that I am definitely on the side of intelligently regulated, but free flows of credit and the things that they allow people and businesses to do, squarely on that side.

But on the other hand, I'm thinking, I don't know of an investment that I can make that would basically guarantee a 10% return. And these credit card companies, these banks, are saying, whoa if we don't get 29.99% is basically a guaranteed long-term return. Then we can't do anything, like we cannot take that risk.

Come on. Because like individuals are asked to take that kind of risk all the time and their expected return is, you're lucky if on the stock market you get 6%. And I'm saying this because this is my shout out for credit unions. Because I have two credit cards, one from a very major bank and the other from a credit union that I belong to, not-for-profit, member owned.

Credit union. And my interest rate on that card is less than 10% and they're happy with it. So there is a profit motive here that's driving a lot of this, isn't there?

PALMER: There undoubtedly is. Profit is what brings people to make any kind of investment. But the important thing to recognize with credit card loans and their inherent riskiness is that there is no collateral that's associated with it.

If you default on your car loan that you pay a nice 5% or 6% interest rate on because you took it out a few years ago. I can come and repossess your car, and I can sell that at a used car auction and get my money back, or at least a big chunk of it relatively quickly. If you stop paying back your mortgage, there's collateral there.

There's a real house that somebody will buy and I'll be able to recover a lot of the principle that I lost and made a credit card is completely unsecured. There's no collateral. It's short term. I am just hoping based on the information I have in your credit report, that you're going to keep paying it back, but I have no guarantee you could declare bankruptcy and you could try to wiggle out of that debt.

CHAKRABARTI: Okay. That's an interesting point and a fair one. So perhaps instead of capping a rate or maybe in exchange for accepting a rate cap. Would there be, is it a smart or stupid idea to say we're going to say student loans, you can never fully discharge it. Like the payment responsibility will go to your next of kin.

Would that be workable for short-term credit, like credit cards?

PALMER: I think bankruptcy ends up playing an important role, not just in the credit card lending market, but as a social safety net, is that someone ends up having a series of shocks that were debilitating to them and they need a fresh start.

And so if you said to them, just student loans, we want to bring down credit card interest rates by having credit cards also be not dischargeable, then you'd be crippling people and anchoring, like tying a chain around their leg when they just need a fresh start, they need to get back on their feet and they'll be okay.

CHAKRABARTI: Yeah. Okay. So let's take a minute to listen to the consumer's perspective here. We reached out to Alexa Rosenbloom, who is the director of the Consumer Protection Clinic at Harvard Law School, and she has represented many borrowers, mainly those who have defaulted on their credit card payments, and she's represented them in court.

ALEXA ROSENBLOOM:  We represent a lot of people who are working for, they are, or were employed, but low wage workers. Some of them are no longer working because of disabilities or age. Most of the people we represent are lower income working class folks. Whether they meet the federal poverty guidelines may not in every instance, but they're not wealthy individuals who could pay their debts.

These are people who truly cannot afford to pay these debts.

CHAKRABARTI: For those in the worst-case scenarios, lack of regulation, as we've been talking about, affects every stage of the debtor's default process.

ROSENBLOOM: There's a lot of predatory lending that still happens across the country. The problem in collections is there's a ton of these cases, there've been reports, and it's well documented, that consumer debt collections have overwhelmed state court dockets.

There's a lot of predatory lending that still happens across the country.

Alexa Rosenbloom

CHAKRABARTI: But without oversight from regulatory agencies like the Consumer Financial Protection Bureau, there aren't a ton of reliable or low risk options for subprime borrowers.

ROSENBLOOM: I wish I could say that there were better options out there. There are not a lot that I can think of. We need better lending products for folks. We need access. Unless we're going to have a better safety net system, we need more resources.

CHAKRABARTI: So that's Alexa Rosenbloom, director of the Consumer Protection Clinic at Harvard Law School.

Christopher Palmer, in an ideal world, we would be able to come up with a solution that didn't curtail business too much, but also as Alexa said there, provide products to those higher risk, to those higher risk consumers. Why haven't even banks themselves moved in that direction more?

PALMER: I just want to underscore what Alexa said, that the credit card market does not operate in a vacuum. And if you try to limit people's access to credit cards, one of those important unintended consequences could be pushing them towards even worse products. So that could be pushing them towards subprime personal loans that have much higher interest rates.

It could be pushing them towards payday loans and title loans that have APRs that are in the hundreds, and that looks pretty terrible compared to a credit card. Now you start to think that a credit card's a pretty good option, and so that's an important thing to keep in mind, is that any restrictions that we try to place on the credit card market means that if people need credit access because they're in a pinch, they desperately need access to some financing for something, it may push them into something that's even worse and even more expensive.

CHAKRABARTI: So I guess that makes me wonder why instead of a across the board cap. And we will also, we'll talk about previous attempts in Congress to do. Could Congress, could the CFPB say banks for potential customers who have poor credit, we're gonna ask you, we're gonna require that you actually offer them cards, you can still offer them cards, but with a lower interest rate. But at the same time, the credit line by regulation would have to be smaller.

So I'm trying to, like, find solutions that are less just heavy handed. So if you're a high risk person, yeah, you could still get that credit card. You don't have to pay 25%, 29%, you have to pay 10%, but your credit limit's gonna be $1,000.

PALMER: I think these credit products; these credit builder products have existed over time.

Where it's look, let's give you a little bit, let's take a chance on you and see how you do and give yourself a chance to prove yourself. And if in fact, you show us a good payment history than we'll give you a higher and higher credit limit. And that does work to first order. That does happen, but maybe what we don't have right now is someone who's willing to say, I'll give you a really small credit limit because you're an untested, unproven commodity.

But I'm going to give you also an affordable interest rate right now. You also get a high interest rate and a low credit limit, and as you prove yourself, then both of those things improve.

CHAKRABARTI: I'm thinking that what Alexa's also pointing to there is we're not just, in terms of people who get underwater with their credit card payments.

We're not just talking about people with terrible credit. More and more every year we're talking about middle class earners. And because the incomes have, speaking of interest and inflation, their incomes haven't been able to keep up with just general inflation. That they more often than they would want to have to resort to their credit card. Not for that airplane ticket to go visit grandma, to buy food for the next month. There's a deeper problem with income inequality in America that's also contributing to this.

PALMER: Absolutely. There's a structural problem that we're often using credit cards to try to paper over and borrow our way out of.

And the structural problem is things like having a social safety net that's not as robust as we would like. So a huge fraction of people fall into expenditure shocks, including health care shocks, like you were mentioning. That's crippling. Or I'm going to lose my job if I can't commute to work or whatever.

And the stats from the Federal Reserve in the Making Ends Meet survey finds that there's a high fraction of Americans that don't know where they would come up with $500 or $1,000 in a pinch. And so that entire population is going to have to rely on something like a credit card to do it. And if you try to fix this by fixing the credit card problem, you're not really getting at the underlying structural problems of people having high income volatility and not being able to protect themselves with their own savings against those kind of shocks.

CHAKRABARTI: And especially in the United States, we're talking about having to put health care payments on your credit card sometimes or prescription drug payments. Or if you're no longer earning income and you're just on social security, for example, that doesn't fully make ends meet for millions of retirees and they have to lean on their credit cards.

And then the only reason I'm pointing this out is I love like learning from comparisons between the United States and other countries. And on this one, it seems like it's so much apples and oranges that maybe the comparison is, doesn't teach us much. Because in other countries, those very expenses I just talked about, health care, more food assistance, et cetera, they are covered by a more robust safety net.

So there's no need to turn to a credit card to pay your doctor.

PALMER: And people will point to that. The first thing you say is, why do we have more credit cards and more credit card debt in the United States? It's because of rewards. And then you start to look at other countries that also have rewards and you ask how come they also have rewards, but they don't have the same credit card debt that we do.

And a lot of it comes down to they have medicine system, health care system that allows them to not be on the hook for these sorts of things, and it does seem like it comes down to these structural things. I'll also point out that there's some good aspect to the fact that we have credit card debt.

It means that we have access to that credit and we have this when we need it. And the exact population that we're talking about that is going to be hard up and not have any savings and is going to need to suddenly pay for something to be able to make ends meet and keep going and stay solvent. That population is also inherently risky to lend to.

And so in other countries, they might not be able to get a credit card loan, and they might be in a much worse situation. When we're lending to those people, it's going to be an expensive proposition. It's a risky proposition and so it would be nice to say, let's just have a product for them that is really affordable.

But when you're making a risky investment, you need to be compensated for that risk, for that to be a prudent investment for you to make.

CHAKRABARTI: It sounds like the real way to quote-unquote solve the credit card interest rate problem is very complicated actually. Because we're talking about different stratas of American life. And he reason I point that out is because then I think, okay, what's doable in Congress?

Saying I'm fighting for a 10% or 15% cap. That makes for a great sound bite, right? I'm just wondering if how much of this effort you think is not necessarily realistic, but just more political or is it actually like decent low hanging fruit to aim for?

PALMER: I think that a price control always makes for a great copy and it always makes for great sound.

And so anytime you say we're going to do rent control, we're gonna do a cap on credit card interest rates, we're going to have any kind of price control, it sounds really good. It sounds immediate, it sounds fast, it sounds bipartisan, but that's really just on the surface level. As soon as you have basic Econ 101 and you understand the consequences of having a price control and how much it distorts the market and probably makes a shortage of the very thing that you are trying to make more affordable, then you start to realize that when the rubber meets the road, this is not actually going to help anyone.

CHAKRABARTI: I hear you on that. I really do. But then I also think these banks, they are wealthier than some nations. They are serving their shareholders, primarily and more than anything else. Also, when we let them get out of control, they cause things like the housing crisis. So there must be some kind of regulatory brake pedal that the federal government can press that makes American life a little less extreme on either side.

PALMER: But there's the irony in dismantling and trying to defund the CFPB is that the CFPB works as that brake pedal to take wealthy credit card banks that might be wealthy in part because of abusive or predatory practices, call them out, take them to court, and force the Card Act and force the fair lending laws that we have in this country.

And so it's a little bit of policy whiplash to say, let's limit this on one hand, but then with the other hand, let's try to cap interest rates.

Part III

CHAKRABARTI: We're going to look back in time a little bit here. Because the idea, as we've discussed, of capping credit card interest rates isn't new. It's something that representative Alexandria Ocasio-Cortez from New York, and Senator Bernie Sanders from Vermont and other Democratic lawmakers from around the country have been talking about for years.

In fact, his representative Ocasio-Cortez talking about a 15% cap back in 2019.

OCASIO-CORTEZ: What happens when everyday banks start to charge higher and higher interest rates? Essentially your credit card becomes a payday loan. And this is not anything radical because we had these laws for a very long time in red states.

We had 'em in blue states, we had them in half of the United States, had usury laws until 1978 when they were repealed. And ever since then, it's given a blank check for credit card companies and for big banks to charge extortion level interest rates to the poor.

CHAKRABARTI: That's Alexandria Ocasio-Cortez in 2019. Now, she said something there with contrast a little bit with what we were talking about earlier.

So Professor Palmer help explain that. She said states had to usury laws until 1978, but half of them, or they were repealed ... in 1978. What is that? What is she talking about there?

PALMER: So prior to 1978, we had restrictions on interstate banking.

So you couldn't have branches that were in multiple states and everything was just basically then subject to the state that you were in. And when we repealed that and people started to be able to open up branches that were across state lines, with that deregulation, all of a sudden it allowed people to do this practice that we talked about.

Via the National Banking Act, of being able to export the lending regulations that apply in the state where you were chartered, even if you're making loans in another state.

CHAKRABARTI: Okay. Now about 2019, that was also the year that she and Senator Bernie Sanders proposed what was then called the Loan Shark Prevention Act, and that would've capped credit card interest rates at 15%.

That obviously didn't go anywhere. It did not pass. But Ocasio-Cortez and actually Senator Bernie Sanders and Senator Josh Hawley, a Republican, are all now back with different versions of a 10% rate cap. And you know what, I think it's interesting that representative Ocasio-Cortez says, okay, we're talking about banks going down from 25% to 10% and how horrible that would be for the banks, but she's argued that, something that you said a little earlier, that the banks are borrowing from the Fed and that federal interest rate is much lower.

What is it now? Three-ish percent. So even from three to 10%, that's still a 7% jump. The banks are gonna make money. And so if the cap were even temporary, like for example Sanders and Holly, their bill says a 10% cap for five years. That the bank has, banks have the assets, they have the liquidity to cover their quote-unquote losses over that period of time. And what do you think?

PALMER: I think it's easy to say that a bank should just take on risk when you're not the one that's taking on the risk. And so that 7% spread is probably not going to be enough to compensate them for all the regulation that they have, the capital that they have to hold to pass banking regulations.

For them to be able to fund the rewards programs that we have, for them to not be able to do repricing and to not be able to charge excessive fees and still make a uncollateralized credit product that people could, that they might have to charge off and send to collections and sell for pennies on the dollar or that people discharge in bankruptcy.

It's not clear to me that a 7% spread over the federal funds rate is going to compensate them for that. It's also not clear that when a bank is borrowing to fund credit cards, that they're doing that at the federal funds rate. They're doing that at a spread over the federal funds rate, so it's not even that full 7% that they're going to get.

CHAKRABARTI: We keep talking about banks taking on risk. Individuals are taking on risk too, right, when they get a credit card.

PALMER: This is important to remember. It's also important to realize that the more you limit credit card interest rates, the more attractive it is to borrow money on a credit card. And so if you're fundamentally worried that people have too much credit card debt.

Making credit card debt even more attractive to people, might exacerbate some of these problems. Might not exacerbate the problem of someone that has to use their credit card to fix their car so that they keep their job, but it might exacerbate the problem of someone who has impulse control. We say time inconsistent preferences where current them wants to be able to spend like there's no tomorrow and future them is going to have to pay the consequences.

Those people would have an even easier time to spend now, knowing that the interest rate is lower, it could perversely lead to over borrowing if people are, to the extent that people are able to keep accessing credit.

CHAKRABARTI: One thing I haven't mentioned, and maybe a lot of our listeners are thinking about this, is that if possible, you can avoid paying any interest if you pay your balance off every month. And so there are ways to manage it, but again, American life is so complicated and we keep using the word spread.

There's such a spread of income as well that I think having a credit card while giving you essential access to credit in times of emergency, for example, also just leaves you open to the kinds of things that representative Ocasio-Cortez and Senator Sanders, Senator Warren, and now President Trump and Senator Hawley are all talking about.

PALMER: And we do have some of these regulations that are supposed to protect consumers in this way. So before you make a credit card to someone who's under, a credit card loan to someone who's under the age of 21, for example, they have to have a co-signer or to be able to demonstrate that they can independently pay that.

Credit limits themselves are supposed to be pegged to underwriting that scores you as being feasibly able to pay this. So we don't just go out and give a $20,000 credit limit to someone who is never in a million years going to be able to come up with the income to close that debt.

CHAKRABARTI: Yeah. So in the case of the co-signers, is it pegged to the co-signers ability to pay?

PALMER: Yes.

CHAKRABARTI: Okay. So you could be 18-year-old and carrying around a credit card that actually has a pretty high credit limit if your parents can pay it.

PALMER: If they agree and if they have the capacity to pay.

CHAKRABARTI: Okay. Alright, so let's get back to President Trump here. He made the latest round of headlines by saying, literally, he said, I want a 10% cap by January 20th. Which was yesterday. Literally nothing happened. So again, now we're doing Civics 101. Can the president of the United States unilaterally set interest rates for credit cards?

PALMER: Probably not. This would be a very tall order to do this.

CHAKRABARTI: You said probably.

PALMER: I'm not a legal expert, so you'd have to talk to a political scientist or a legal expert who would tell you this, but these are private contracts that people have written, so it would be a tall order for the president to be able to rewrite private contracts and say, I'm just gonna revise all of these things that have happened. That would likely take an act of Congress and still might be challenged.

CHAKRABARTI: Okay. So then Congress is working on it, right? Because let's talk about this Hawley-Sanders bill, which is again, 10% for five years.

It's interesting that it's not a longer term bill, actually. So even just talk to me about that five-year period. You mentioned this before, but would that provide any breathing room for people at all?

PALMER: So I think the theory here, not having read their justification for this, the theory of making it short term is that there's some people that might be in somewhat of a debt trap, where they can't even close, they can't even pay off the interest, so they just keep spiraling down.

The debt keeps compounding and they're basically never expecting to pay this off. And there's some interesting survey evidence from bank rate, I believe, that says that something like 20% of people who are in long run credit card debt are worried that they'll never ever be able to pay this off. So the idea is perhaps that if you turn the heat down and you give these people breathing room, that they might be able to get on their feet and they might be able to recover.

So maybe that is the intuition behind it being temporary. That notwithstanding, I think I could see two really perverse consequences of even a temporary cap. So the first is just policy uncertainty. Anytime someone makes an investment under uncertainty, they're thinking about the risk. And if we have one of these price caps that's temporary and then it expires.

I'm not so sure I want to make another credit card loan. Knowing that something like this has happened in the past and could happen in the future, where even though I wrote a contract with a consenting adult, it's gonna be rewritten by the government. So that's one is this policy uncertainty, that people would have.

The other problem with it being even temporary is this structural problem. There was a famous experiment that Sendhil Mullainathan and Dean Karlan and Ben Roth did and they did it in India and the Philippines, and they took people who were in this kind of debt trap, they can't even cover their interest.

And instead of capping their interest rate, they just forgave it entirely. And what they found was that after a short time, most people were back in debt. It wasn't just that people needed a one-time breathing room and then they could get on their feet, it's that their problems were more long-term, structural, fixed, that you couldn't just fix by forgiving their debt.

CHAKRABARTI: Okay. So again, like I think we're just, that's a great example of how you can try at one thing, but if you don't get to those deeper structural challenges that people have, that even something like reducing interest rates is not going to really help people in the long run.

PALMER: You're treating symptoms.

CHAKRABARTI: Got it. By the way, I had thought earlier, okay, you've got the most influential Republican in the nation, President Trump, who has very, I'd say, like an iron fist around the Republican party. What he says they do. And so now saying repeatedly, let's get a cap.

Let's get a cap, let's get a cap. Telling banks you must put a cap in. And I thought for a while, hey, maybe that actually might be the kind of encouragement, let's say, that Congress needs to pass something if that were to ever happen.

But then over the last few days, I've been looking at what other Republicans have been saying, and specifically how Speaker Mike Johnson, just about a week ago he said that Trump's cap could, quote, have negative secondary effects. So signaling, I think, to the financial industry that under his House leadership, that it's not going to go very far. Would you agree with that?

PALMER: Absolutely. And those negative secondary effects would be credit access, number one.

It could be fees going up in other ways of credit card issuers recovering this. It could be people being pushed into more expensive products. It could even lead to over borrowing, like we talked about. It could increase prices. The prices that you pay at the grocery store could be higher if credit card issuers compensate themselves and try to deal with the fact that, okay, we can't be compensated for risk through the interest rates. Let's increase the swipe fees that merchants pay every single time they run a credit card. That increases their costs. They pass that on to prices.

CHAKRABARTI: Yeah. Okay. We've got about five minutes left and there's a couple quick things I wanna go through to wrap up. First of all, at the very top of the show, I had mentioned that there is one group that is exempt from these really high rates, and that's active-duty military, and that was through an act or maybe even two acts of Congress.

Do a lot of members of the military take advantage of that?

PALMER: Okay, so there's two acts in particular that help members of the military. One is the Military Lending Act, and one is the SCRA, the Service Members Civil Relief Act. Interestingly, the MLA does not apply to credit card. So it's a cap on interest rates of something like 36%.

And when the Department of Defense was given the freedom and flexibility to choose whether they wanted this to apply to what credit products, they decided they did not want it to apply to credit cards because they were worried about this credit access channel that we've talked about, they were worried about exactly what we're talking about, that if you had a cap on credit cards made to service members, that people in the military would not be able to get credit card loans, and they thought that it would be valuable for people in the military to be able to have access to credit card loans.

The second one, when you're on active duty and you're deployed, reduces your credit, your interest rate on any loan product to 6%.

People often don't know about that and often don't take advantage of that. And there's an interesting paper by Rich Patterson in the Journal of Economic Psychology with Bill Skimmyhorn, where they looked at whether people take advantage of this and they often don't know how, don't realize that their interest rates were above this and that they would benefit.

CHAKRABARTI: So as a service member, you would be the person that'd have to initiate the process to get that rate reduced.

PALMER: Correct.

CHAKRABARTI: Okay. So even some troubles there. Okay. And we have also had, we had a couple of comments from listeners that I wanna wrap up with. This first one is about fees associated with credit cards. And On Point listener Scott lives in Oregon City, Oregon, and here's what he has to say.

SCOTT: My concern is that the loss the credit card companies face as a result of this will only manifest itself in higher transaction fees to the businesses that accept these credit cards. This fee, of course, will be passed on to the consumer through higher retail prices, and then we all end up paying more to give the appearance that credit card interest rates were held in check by the president.

Is this simply optics for the current administration, knowing that this will trickle down to all consumers and not just the consumers that carry a balance on their credit cards? 

CHAKRABARTI: You basically already answered this question, right? That there's every chance that companies would just pass on the fees.

PALMER: Yeah. When you pay cash at a store, you're already subsidizing the rewards that somebody else is earning by paying with a credit card. Because if you think about it, you're paying a higher price. Stores are not allowed to charge people differential prices based on whether you're paying cash or credit card.

And so prices are already higher because of this. This would probably just exacerbate that.

CHAKRABARTI: For everybody. Wow. Okay. That doesn't seem very fair. Alright, and here's one more. This is On Point listener Cameron, who lives in Massachusetts.

CAMERON: While the cap on credit card fees reflects a well-intentioned effort to ease financial pressures on consumers, it does not address the core of the problem.

Credit cards are a voluntary option, and consumers knowingly agree to the associated interest rates and fees.

CHAKRABARTI: So here's where we come down to an argument that we've also, a lot of people hold for things like student loans, and that is you signed the piece of paper that put you in this contract with the company.

And so therefore you have a personal responsibility to hold up your end of the contract, your end of the bargain. If you sign for a credit card that has a really high interest rate, that's on you. You should have checked before. And I think in the American context, that is a really important thing to discuss because you've said it, no one's forcing you to get a credit card.

Shouldn't we actually expect more individual responsibility for people who decide to carry one?

PALMER: For the most part, I'm very sympathetic to this argument that it comes down to fairness, and it comes down to people knowing what they're getting into. And so as long as people have disclosures that are intelligible and they can read them, and they can understand them, and they know what they're getting into, then that's great.

For some people that do get into trouble with credit card debt and were not informed or didn't have the advantages to be able to understand that situation, or they had a series of bad shocks, we ought to have some way to provide relief for them. Having a universal cap is not a particularly well targeted way to provide relief for those people.

CHAKRABARTI: Okay. About the disclosures, it's been what, more than 10 years? Actually, for half her career, I'd say that Senator Warren has been talking about disclosures that she's been saying like they're more complicated. Some lawyers can't even read them, and that's true. The fine print is super fine and it's many pages long.

I don't know if we've made a lot of progress on that front. Shouldn't it be easier for people when they're looking at a credit card contract to see five bullet points, really, what risk they're taking on.

PALMER: That's exactly why at the top of your credit card statement, despite the fact that yes, it has very small, fine print on multiple pages, that, what's called the Schumer box at the top does say very specifically, here's your minimum payment.

This is the penalty. If you don't pay the minimum payment, this is what happens. If you only pay the minimum payment from now forever, it'll take you 10 years to pay off this debt. Those terms are blunt, they're standardized. You can't put them in yellow print. You have to have black font, like this is all of our efforts to make sure that people understand the situation they're in.

The first draft of this transcript was created by Descript, an AI transcription tool. An On Point producer then thoroughly reviewed, corrected, and reformatted the transcript before publication. The use of this AI tool creates the capacity to provide these transcripts.