Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version was published in Project Syndicate.
Feb. 19, 2026 — Donald Trump, at Davos in January, proposed putting a 10 % cap on the interest rates that banks can charge on credit cards, a position favored by many Democrats, including progressives like Bernie Sanders. Is it possible that this is an issue where his rhetoric about helping the little guy might be warranted by his actions, unlike with most of his policies?
So-called usury laws have a long history. Each of the three major monotheistic religions has restrictions on usury. In 1641, the Massachusetts Bay Colony set the maximum legal interest rate that could be charged on a loan at 8%. Moreover, populist politicians like attacking heartless banks. Most US states already have ceilings on the credit card interest rate. (The Trump proposal is to tighten that limit, at the federal level.)
The argument is that, if not constrained, creditors will exploit or “gouge” customers, especially those who are the most desperate for loans, who often have lower incomes. The interest cost of credit card balances in the US is currently especially high, at 28%.
At a minimum, Joe Biden was persuasive that consumers shouldn’t have to pay “junk fees” of which they were not informed in advance. Senator Elizabeth Warren was persuasive that financial contracts should not be impossible for a consumer to understand.
Just as consumers cannot 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 complicated financial-services contracts.
Accordingly, the Dodd-Frank Act in 2010 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 measure, arguing that consumer-protection rules “smother the US economic system.” The current Administration has virtually annihilated the CFPB. Consumer Reports calls it now “on life support.”
For the argument against usury regulations, ask a banker or a libertarian. Banning higher interest rates will reduce the supply of credit and increase the demand for it. Econ 101. To handle the excess demand for credit at an artificially low interest rate, banks will have to ration it. They may ration the credit based on anticipated ability to repay, on imperfect proxies for that, or on personal connections. While it is natural for debtors to want lower interest rates, it is an illusion to think that the same quantity of credit would be available at an arbitrarily suppressed cost.
The argument against a government ceiling on interest rates is analogous to the argument against a government ceiling on the price of gasoline. While it is natural for car owners to want lower gas prices, it is an illusion to think that the same amount of gasoline would be available at an artificially low price. A price cap would limit the supply of gasoline, raise the demand, and result in long lines at the gas pump to ration the difference. (Also, in both cases, it is an invitation to corruption in many countries.) If a customer is really desperate, they should be given the option of paying a high price, it is argued. Better to charge what the market will bear, than to artificially prevent some households from borrowing at any interest rate at all.
But there are further layers of subtlety to this debate.
Maybe reduction in the supply of credit, even though an unintended effect of an interest rate cap, is not such a bad thing. Scandalous as it is to say, perhaps regulators are doing households a favor by not letting them get into debts that they will have difficulty paying back. Many a homeowner would have been better off, going into the housing debt crash of 2007, if they had not been given such artificially easy access to mortgage borrowing.
The Trump proposal pertained to credit cards. The average credit card debt per American in September 2025 was $6,523. More than half of households carry a balance from month to month. Many of them will go for years without paying it off and so will accumulate much larger obligations that include compounded interest bills and penalty payments. Even for households where bankruptcy will not be an issue, most would be better off if they avoided the debt in the first place, rather than borrowing at 28% interest — let alone at uncapped higher rates — when the going interest rate in the economy is only 5 %. Another way to say it is that paying off your balance has a guaranteed return of 25 %, far above most investments you can make. The argument may sound paternalistic, but that does not necessarily make it wrong.
This is not to deny that there are certain circumstances where credit card debt may be appropriate. Say, an MBA student needs to cover living expenses in their last months before graduating and taking a well-paying job. Then carrying it on a credit card might make sense, even at a high interest rate. (The same with borrowing to buy a home, as most people do.) But appealing for sympathy for the case of an unfortunate person whose income is too low to meet their living expenses doesn’t help, if the same gap in their finances is expected to persist indefinitely in the future.
The rebuttal to the paternalistic viewpoint is that if the government makes it illegal for a desperate person to borrow (even when willing to agree to a high interest rate), they may go to an unscrupulous loan shark instead. Banks can be regulated to avoid the ills of loan sharking, even if allowed to charge 25 % interest rates. Analogies include the sale and consumption of alcohol, which was made legal after Prohibition failed, but which is regulated in many ways, as it should be.
To illustrate with a more extreme sort of debt, we don’t allow desperate people to agree to sell themselves into slavery to a creditor if they can’t repay a loan. This was common in Britain two centuries ago. See Charles Dickens re “debtors’ prisons.” Many poor workers voluntarily agreed to be indentured servants, populating colonies in America and Australia, even before incurring any debt that they couldn’t repay, which seems less evil a practice than debtors‘ prisons.
Society’s solution was to ban debtors’ prisons and indentured servitude, insisting on the institution of personal bankruptcy instead — a more efficient and ethical way of resolving unpayable debts. A libertarian might still argue that this institutional arrangement limits access to credit by the desperate. But overall, this is a worthy trade-off. The same is probably true of interest-rate caps on credit-card debt.
This post written by Jeffrey Frankel.
