By Jeffrey Frankel
For once, US President Donald Trump put forward a proposal that appears actually to be aimed at protecting the “little guy” from predatory institutions. His call for a one-year, 10% cap on credit-card interest rates echoes those made by many Democrats, including progressives like Senator Bernie Sanders. But given how little Trump has so far done to help workers, including his MAGA constituents, it is worth thinking through the issue afresh.
So-called usury laws, aimed at protecting borrowers from unreasonably high interest rates, have a long history. Judaism, Christianity, and Islam—the world’s three leading monotheistic religions—all condemn usury, and laws against it came to America before the United States was founded. In 1641, the Massachusetts Bay Colony set the maximum legal interest rate that could be charged on a loan at 8%.
Today, most US states have usury laws. But there is no federal law capping credit-card interest rates, and national banks can charge the maximum rate allowed in their home state. As of August 2025, Americans were paying interest of 22.83% on their credit-card balances, on average, even though the going interest rate in the economy is only about 5%.
Meanwhile, populist politicians regularly attack heartless banks, and Democrats fight for protections for consumers of financial services. Former President Joe Biden argued that Americans shouldn’t have to pay “junk fees” of which they were not informed in advance. Senator Elizabeth Warren insists financial contracts must be readily understandable. Just as consumers can’t be expected to figure out that a toaster is faulty based on a technical diagram of its wiring, she argues, they cannot be expected to identify risks buried in complex financial-services contracts.
In 2010, the Dodd-Frank Act established the Consumer Financial Protection Bureau to safeguard consumers from “unfair, deceptive, or abusive acts and practices” by financial-service providers. Republicans, however, have repeatedly tried to reverse this step, arguing that consumer-protection rules “smother the US economic system”.
Few have promised deregulation more vigorously than Trump. And yet, he is advocating a federal cap on credit-card interest rates that would, in theory, prevent issuers from exploiting or gouging customers, especially those most desperate for credit.
For the counter-argument, ask bankers and libertarians. They point out that capping the price of credit, like capping gas price, would reduce the supply and increase the demand. That’s Economics 101. To handle this excess demand, banks would have to ration credit, basing their decisions on factors like anticipated ability to repay or personal connections.
While it is natural for debtors to desire lower interest rates, no one should expect the same quantity of credit to be available at an artificially low cost. So, the logic goes, desperate borrowers should be permitted to pay more to get the credit they need. Better to charge what the market will bear and deliver credit to all who need it than to prevent some households from borrowing at all.
But would a reduction in the supply of credit be such a bad thing? Scandalous as it is to suggest, perhaps regulators would be doing households a favour by preventing them from taking on debts that they will have difficulty repaying. If the rationing excludes high-risk households from loans, all the better.
As of September 2025, Forbes notes, the average credit-card debt per American stood at $6,523, with more than half carrying a balance from month to month. Many will take years to pay off this debt, during which time they will accumulate much larger obligations, including interest bills and penalty dues. If you make a $150 payment on that balance each month over 95 months, at an annual interest rate of 22.83%, you will end up paying an extra $7,688 in interest alone.
Of course, taking on credit-card debt at a high interest rate is reasonable in some circumstances—particularly if the shortfall is temporary. For example, an MBA student might need to cover living expenses for a few more months before taking a well-paying job. But someone whose income is too low to cover their living expenses, and who has no reason to expect this to change any time soon, will probably regret taking out debt at an interest rate of 22% or higher.
One might counter that if a desperate person cannot access bank credit, they might go to an unscrupulous loan shark instead. Even with a high interest rate, credit from a regulated bank is less risky than that. But, by this logic, virtually any protection for borrowers could be deemed inappropriate, and we have already collectively agreed that this is not the case.
Two centuries ago in Britain, desperate people regularly agreed to become indentured servants for a creditor they were unable to repay, in order to avoid being locked up in Dickensian debtors’ prisons. Ultimately, however, debtors’ prisons and indentured servitude were outlawed, and the institution of personal bankruptcy was established as a more efficient and ethical way of resolving unpayable debts.
A libertarian might argue this institutional arrangement limits access to credit for the desperate. But overall, it appears a worthy trade-off. The same is possibly true of interest-rate caps on credit-card debt.
The author is Professor, Capital Formation and Growth, Harvard University, & Research Associate, US National Bureau of Economic Research.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.