Testing a 10% Cap: A Historical Lens on Credit Card Profitability and Access

President Donald Trump's January 9 proposal to cap credit card interest rates at 10% for one year is a stark intervention into a market that has seen its average rate fall to 23.79%. The idea of a rate ceiling is not new, but its plausibility hinges on a historical lesson: when regulators squeeze rates below a bank's cost of capital, the industry often finds a way out.

The most direct precedent is the 1980s standoff between Citibank and New York state. Facing double-digit inflation and state usury laws that capped rates at 12%, Citibank CEO Walter Wriston famously warned that the bank would leave the state. "You are lending money at 12 percent and paying 20 percent," he explained, "You don't have to be Einstein to realize you're out of business." His threat was credible because of a legal loophole-the Marquette Bank decision-that allowed national banks to export rates from their home state. When New York refused to budge, Citibank did indeed relocate its credit card operations, a move that underscored the industry's ability to circumvent local caps through national banking law.

This historical episode highlights a key vulnerability in the current proposal. The 10% cap, if implemented, would likely fall well below the cost of capital for many issuers, especially given the current inflationary environment. The market response could mirror the 1980s: tighter credit, reduced card availability, or a shift in operations to jurisdictions with more favorable rules. The proposal's one-year duration and lack of a clear implementation mechanism suggest it may be more of a political signal than a binding law, but its economic logic would still pressure the system.

A more structural historical comparison lies in the 1970s, before national networks like Visa and MasterCard emerged. During that era, state-level interest rate caps were a common, if patchwork, feature of the regulatory landscape. These caps averaged around 18%, a figure that sits between today's 23.8% average and the proposed 10%. The industry adapted by creating a national infrastructure that eventually allowed banks to bypass state laws. The current proposal, therefore, tests whether a similar regulatory arbitrage is still possible in a highly integrated, national market. The historical record suggests that while caps can be imposed, they often lead to market adjustments that may not align with the original consumer affordability goal.

Profitability Under Pressure: The Margin Math

The proposed 10% cap would force a direct and severe squeeze on issuer revenue. The math is straightforward. Credit card rates are typically set as the Prime Rate plus a profit margin. With the Prime Rate currently at 7%, the industry's standard markup of 12 to 13 percentage points results in an average rate near 20%. A 10% cap would require issuers to absorb a loss on existing high-rate balances, as they would be forced to charge less than their cost of capital.

The financial penalty for non-compliance is explicit. The Senate bill, which mirrors the proposed policy, states that creditors who knowingly violate the cap forfeit the entire interest of the debt. This creates a powerful disincentive for issuers to simply ignore the law. Yet, it also means that for any balance carried beyond the cap, the bank would receive no interest income at all-a scenario that would quickly undermine profitability.

Industry warnings point to the likely market response. If the cap is enforced, issuers may respond by tightening credit standards, reducing credit limits, or restricting access for cardholders, particularly those who roll over balances and are the most profitable segment. This mirrors the historical pattern where regulatory pressure led to market adjustments that shifted risk away from the regulated entity. The 1980s Citibank example showed a shift in operations; today, the response may be a shift in customer base and product design.

The Credit Access Trade-Off

The potential for a credit crunch is a direct consequence of the proposed cap. Household credit card balances grew to $1.23 trillion in Q3 2025, a key source of consumer spending. A 10% rate ceiling would force issuers to reprice a significant portion of this debt, likely triggering a defensive tightening of credit standards. The historical precedent is clear: when rates are squeezed below cost, banks have found ways to circumvent the pressure. As Citibank did in the 1980s, they could shift operations to jurisdictions with more favorable rules, as the Marquette Bank decision enabled. This regulatory arbitrage suggests a credit crunch is likely, but it may be more about shifting access than eliminating it entirely.

The impact would fall heaviest on consumers with lower credit scores, who currently pay an average APR of 27.39%. These borrowers are the most vulnerable to a cap, as they represent the highest-risk, highest-cost segment for issuers. If the profitability of this group evaporates, banks may simply restrict access or reduce their credit limits. This mirrors the historical pattern where regulatory pressure led to market adjustments that shifted risk away from the regulated entity. The 1980s standoff showed a shift in operations; today, the response may be a shift in customer base and product design.

The broader economic implication is a potential slowdown in consumer spending. Credit cards are a vital tool for smoothing consumption, and a sudden tightening could dampen economic activity. While the proposal aims to improve affordability, its mechanism-forcing a rate cut that may not cover costs-risks making credit less available for those who need it most. The market's historical adaptation through national banking law suggests a severe restriction on credit card access is unlikely, but a more selective, less accessible market is probable.

Catalysts and What to Watch

The proposal's path from political statement to binding law hinges on concrete legislative or regulatory action. President Trump's January 9 call for a one-year cap did not specify how such a cap would be implemented, and there is no clear executive pathway to impose a nationwide rule. The most direct legislative vehicle is S.381, the 10 Percent Credit Card Interest Rate Cap Act, which was introduced in February 2025. While that bill has a sunset date in 2031, its existence provides a blueprint. The key catalyst will be whether Congress, particularly the Senate Banking Committee, moves to advance a similar bill in response to the administration's push. Watch for formal hearings, markups, and votes as the primary signal that the proposal is gaining legislative traction.

Market reactions are already underway. Since the president's post, bank stocks have been hammered, with major credit card issuers like Capital One and Citi seeing notable declines. These moves reflect investor concern over the profitability squeeze. The next watchpoint is the tone and substance of official statements from these institutions. Publicly, they are dancing around the topic, but private lobbying efforts and strategic planning will be critical. Look for any hints of operational shifts, such as changes in credit limit management or product design, as early signs that issuers are preparing for a potential new regulatory reality.

Leading indicators of a market response will be found in credit metrics. The $1.23 trillion in credit card balances at the end of last quarter represents a massive pool of debt that would be subject to the cap. A tightening would likely first appear in new account approvals and credit limit increases. Monitor the Federal Reserve's delinquency rate on credit card loans for signs of stress. A rise in delinquencies could signal that tighter standards are pushing more borrowers into default, validating the industry's warnings about credit access. Conversely, a stable or falling rate might suggest the market is adjusting through other channels, like reduced balance growth, without a major credit crunch. The data will tell whether the proposal's economic logic is being tested in practice.