A cap on credit cards?

In early January, President Trump called on credit card issuers to lower their rates to 10% by January 20. That date has now passed, and, subsequently, the president has called on Congress to legislate lower rates for cardholders.

The announcement was a surprise to many, particularly banks with large credit card platforms. One thing remains true: there appear to be more questions than answers surrounding the proposal right now.

On the one hand, a cap on rates might appear to benefit borrowers by reducing credit card expenses. On the other, it could also result in a sharp reduction in credit availability to a large portion of the population, as banks decline to lend to consumers who don’t have “super prime” credit ratings.     

The outlook for ABS

If enacted, a rate cap would also result in lower portfolio yields for credit card asset-backed securities (ABS) since those yields are primarily driven by borrower interest payments.  All else equal, reducing gross yields on portfolios could cause excess spreads to fall between 10-15%. This in turn would result in significantly less protection against losses but would still be above the 0% threshold for prime credit card master trusts.

Sub-prime credit card pools would be impacted much more significantly, and we believe that a 10% interest cap would not allow for this segment of the market to cover their losses.

Our view is that a cap on credit card interest rates could have two significant outcomes. First, it could affect bond ratings for prime credit card deals; and, second, it could result in bond impairments for sub-prime credit card deals.

This is not to say that credit card issuers would be helpless – and we view them as having several options designed to protect ABS investors. These include strategies such as discounting receivables, adding subordinate bonds, and issuing letters of credit. Several of these approaches were used during the Global Financial Crisis to maintain credit ratings and help protect investors from adverse outcomes on their positions – so there is a precedent.

As things stand, we are yet to see any discernable impact on pricing within the credit card ABS market following President Trump’s announcement. Dealers are quoting spreads as being little changed, and the market appears to be taking a “wait and see” approach. Additionally, it appears that secondary market trading has been orderly as bonds are reflecting the risk-on tone that’s been so pervasive throughout other credit markets at the start of 2026.  

Scenarios for the credit card industry

This is not the first time the credit card ecosystem has faced pressure, however. Similar interest rate proposals have surfaced before, as recently as last year, without ever gaining much traction in the legislature. Even so, bipartisan support may provide more influence this go around.

Here’s how we think things might play out if the proposals pass:

1. Assuming a one-year interest rate cap at 10%, the average yield on credit card portfolios would effectively be cut in half for most banks, significantly reducing the product’s profitability. The impact would be most severe for the pure-play credit card lenders, while diversified banks, where credit cards are a much smaller part of the overall loan book, will feel a more manageable impact. Even for those most exposed, we believe a one-year limit would be survivable. Bank capital is healthy enough to absorb losses and, while banks derive a significant share of income from loans, they also generate income from securities portfolios and various fee sources to supplement the overall business.
2. A longer-term limit, however, would create a more significant problem and likely require a substantial change to the credit card operating model. Today, credit losses range from 3-5% of total loans for most lenders but have reached north of 10% during the Global Financial Crisis. Once you factor in funding, customer acquisition, and operating costs, there’s not much, if any, margin left to justify the business. 

To make the math work, then, banks would need to curtail lending to riskier borrowers, focus more on high transactors, and find ways to increase fees elsewhere. With roughly two-thirds of credit card balances, or $660 billion worth of loans, revolving month-to-month, this would cause a significant impact to banks and consumers alike. 

To relieve some pressure in the interim, we may see banks lean more heavily on existing tools, such as promo rates. It’s already very common for issuers to market reduced or 0% introductory teaser rates to attract new customers. Perhaps we’ll begin to see issuers pick a card in their lineup and extend a promo rate of 10% for the next 12 months? Assuming the underwriting criteria are unchanged, this may be the best olive branch for the industry to offer.

Conclusion

For now, we too are in a “wait and see” mode. If it were so easy for rates to come down, we suspect competition—abundant in this space—might have led to that result already. Still, rates have risen sharply in recent years—from less than 12% in 2014, to under 15% as recently as 2022, to more than 20% today, according to the Federal Reserve. We plan to closely monitor both the market development and individual exposures.