Trump proposes a 10% ceiling on credit card interest rates. However, specialists caution that these restrictions might negatively impact consumers.

The Double-Edged Nature of Credit Cards in America

Credit cards stand out as both a powerful resource and a significant risk in the financial lives of Americans. They can offer essential support during tough times, help fund family getaways, or provide exclusive perks like airport lounge access. Yet, for many, they also represent a dangerous cycle of debt that can be difficult to break.

In a reversal of Robin Hood’s tale, credit card issuers collect interest from those who carry balances and use those funds to reward customers who pay off their cards each month.

Soaring annual percentage rates (APRs) on U.S. credit cards are making it even harder for those with debt to escape it. While the average APR was under 15% just four years ago, by 2024 it had climbed above 21%. Increasingly, Americans are facing interest rates exceeding 30%.

On Friday, former President Donald Trump proposed a temporary one-year cap on credit card interest rates, limiting them to 10% starting January 20.

This follows a move by Senators Bernie Sanders and Josh Hawley, who introduced legislation in the previous year to cap credit card interest rates at 10% for five years. Trump voiced support for this idea during his campaign, despite strong resistance from banks and credit unions.

Senator Sanders criticized the current system, stating, “When major financial institutions charge more than 25 percent interest on credit cards, they are not providing access to credit—they are engaging in predatory practices.”

The proposed legislation is designed to reduce profits from credit card lending and ease the financial burden on working families. However, if enacted, it could also limit access to credit and diminish the lucrative rewards programs that drive the industry.

Potential Ripple Effects of Capping Credit Card Interest Rates

Experts and industry representatives told Fortune last year that new economic regulations often bring about unexpected side effects. While a cap on high APRs aims to help consumers, it could inadvertently harm those it seeks to protect.

Interest rates on credit cards are typically set according to each cardholder’s risk profile. Restricting banks from charging rates that reflect historic default rates could send shockwaves through the industry.

Jennifer Doss, executive editor at Cardratings.com, notes that higher APRs allow banks to extend credit to riskier applicants. “Credit card issuers usually set higher rates to offset greater risk,” she explains. “As a result, people with lower credit scores are often charged more.”

John Cabell, head of payments intelligence at J.D. Power, adds that interest rate caps could make it financially unfeasible for lenders to offer credit to those with a history of missed payments.

“If issuers are forced to limit APRs for the riskiest borrowers, it may no longer be profitable to provide them with credit cards,” he says.

Those who are denied credit cards due to rate caps may still need to borrow money and could turn to payday loans or similar products, which often come with even steeper costs than high-interest credit cards.

Lindsey Johnson, President and CEO of the Consumer Bankers Association, warns, “History shows that when politicians, rather than market forces, set prices, consumers end up with fewer choices and may be pushed outside the regulated banking system.”

How Interest Rate Caps Could Impact Credit Card Rewards

Limiting card interest rates would likely reduce the value and availability of credit card rewards. If you’ve ever redeemed points or miles for travel, you’ve benefited from the high interest paid by others. The revenue from interest charges funds the points, miles, and cashback programs that many cardholders enjoy.

Cabell points out that those who never carry a balance should recognize that their rewards come at a cost to others. “Wealthier individuals are enjoying these perks, while lower-income consumers, who don’t benefit, are effectively subsidizing them,” he says.

According to Federal Reserve research, about $15 billion is transferred each year from people who carry balances to those who earn rewards.

Transaction fees on credit card purchases—sometimes as high as 4%—also help fund rewards programs. Some analysts believe these “swipe fees” are closely tied to the rewards ecosystem. Meanwhile, another bill in Congress aims to address high swipe fees.

The Credit Card Competition Act, a bipartisan measure introduced in 2024 by Senators Dick Durbin and Roger Marshall, seeks to challenge the dominance of Visa and Mastercard, which together collected $93 billion in swipe fees in 2022.

This legislation would require major financial institutions to enable at least two different payment processing networks on their cards, with at least one not being Visa or Mastercard. The goal is to give merchants more options and potentially lower transaction fees.

If both the interest rate cap and swipe fee bills become law, the resulting drop in revenue could spell the end for many credit card rewards programs.

This article was first published on February 6, 2025.

This story originally appeared on Fortune.com