President Donald Trump has proposed a plan to cap credit card interest rates at 10 percent for one year. This sounds simple, but it creates big tension between consumers, banks and Wall Street.
First, how the credit card business works. Banks give people credit cards and allow them to spend even if they do not have money right now. If customers do not pay the full bill on time, banks charge high interest. This interest is a major source of profit.
Investors like this business because it earns steady money, even when the economy slows. Rewards like cashback and airline miles are also paid from these profits.
Trump’s plan could help people struggling with debt, since current average rates are close to 20 to 30 percent. Lower interest means lower monthly bills. Supporters say this could save families a lot of money every year.
But the Banks and Wall Street are worried. If profits fall, banks may stop giving cards to risky customers, cut credit limits, or reduce rewards. That could hurt spending and economic growth. Apart from that even the reduced interest rates cuts profits, thereby ending banks and investors in loss.
So the tension is mainly between consumers needing relief and banks and investors protecting their biggest profit engine. If this decision hits the Wall Street as worried, the share markets also would suffer.