Trump Cards
The Economics of a Credit Card Lender
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“[I]t is a vanity to conceive that there would be ordinary borrowing without profit; and it is impossible to conceive the number of inconveniences that will ensue, if borrowing be cramped.” — Francis Bacon, 1625
Even as he hounds the highest-ranking officials at the Federal Reserve, Trump appears to have absorbed the work of their staff. Last week, the president announced a proposal to cap credit card interest rates at 10%, attacking the 20% to 30% rates that he says “festered unimpeded” under his predecessor. It comes three months after Fed researchers published a paper that asks: Why are these rates so high? Its authors point out that while spreads over the Fed Funds benchmark rate cluster in the low single digits across most kinds of loans, on credit card loans they stretch as high as 18%.
Such high rates make credit cards a profitable business. There are around 580 million cards in circulation in the US, with three-quarters of American adults holding at least one. In 2023, they accounted for $6 trillion of purchase volume, equivalent to 70% of retail spending. Not all of that accrues interest – around 40% of account holders pay off their balance in full each month – but the balances that revolve generate substantial earnings for lenders. At the end of November, outstanding credit card debt stood at $1.3 trillion. According to the Fed, interest on that debt makes up around a sixth of banks’ total interest income, despite comprising less than 5% of assets. Even after accounting for defaults, rewards programs and operating costs, credit card lending earns more than four times the banking sector’s overall return on assets.1
No wonder bank executives are pushing back on a price cap:
“People will lose access to credit… that’s a pretty severely negative consequence for consumers and frankly, probably also a negative consequence for the economy as a whole,” said JPMorgan’s CFO Jeremy Barnum.
“If you make these products unprofitable, that [$6 trillion] spending will be drastically reduced – and that’s British understatement,” said Citigroup’s UK-born CEO, Jane Fraser.
“You will see unintended consequences,” said Bank of America CEO Brian Moynihan.
It’s a position they’ve been in before. In 2009, the Credit Card Accountability Responsibility and Disclosure (CARD) Act restricted card companies’ flexibility to change rates on existing borrowing and extended the time consumers had to pay. It’s one of the reasons credit card rates are as high as they are today. “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger,” Jamie Dimon said at the time. “And my guess is, over time, it will all be repriced into the business.”
It was. The spread between upfront card rates and the Fed Funds rate rose from around 10% prior to the Act to 14% afterwards. More recently, a now abandoned regulatory proposal to cap late payment fees led to another run-up in credit card spreads to their current level of around 18%.2
Even before the current crop of bank executives took on their jobs, the industry has faced pressure to cap rates. Interest rates were initially fixed at 18% at the birth of the market in 1958. “There was no black magic involved,” writes Joe Nocera in his book, A Piece of the Action, “The bank just assumed that if a one-month grace period and a monthly interest charge of 1.5% (which amounts to 18% a year) was good enough for Sears, with its fifty years of credit experience, then it was good enough for Bank of America.”
But some in authority were not happy. At a hearing on unsolicited bank credit cards in 1967, the chairman of the House of Representatives Banking Committee, Wright Patman, railed that “what with skimming off up to 7% of each sale from the merchants, plus up to 18% interest from the card user, it’s like taking candy from a baby for these big bankers.” Patman would be pleased to see that the 7% discount rate has come down; the 18% interest charge, not so much.
Patman’s mantle has been taken up many times since. Last year, senators Bernie Sanders and Josh Hawley introduced a bipartisan bill to cap credit rates, echoing much of the language Patman used 60 years earlier. Now Trump is weighing in, reprising a pledge he made on the campaign trail.
To see how the industry got here and why a cap would break the model, read on.