Americans are drowning in credit card debt. Trump’s proposed cap on interest rates probably won’t help

It's easy to see why many Americans would welcome former President Donald Trump's proposal to cap credit card interest rates at less than half their current level — even if only temporarily.

At $1.14 trillion, Americans' credit card debt is at a record high, according to data from the Federal Reserve Bank of New York. Meanwhile, the average credit card interest rate was 21.5% in May, six percentage points higher than the rates before the pandemic, according to Fed data.

"While working Americans catch up, we're going to put a temporary cap on credit card interest rates," Trump said at a rally last week. "We can't let them make 25 and 30%."

However, his proposal is all but certain to get stalled in Congress, just like similar plans introduced by Republican Sen. Josh Hawley and by progressive lawmakers including Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez.

But in the event that lawmakers approve Trump's measure and it withstands inevitable legal challenges by the credit card industry, you may want to hold off on celebrating.

You may not be able to count on your credit card for purchases The average American has racked up $6,500 in credit card debt, according to Experian data from the third quarter of last year. This means they're paying $116 a month in interest rate payments at May's average rate of 21.5%. But if interest rates were capped at 10%, they'd pay $54 a month in interest rate payments.

In addition to the money saved, this would "dramatically" shorten the length of time it takes people to pay off their credit card debt, Matt Schulz, chief credit analyst at LendingTree, told CNN.

But your ability to access credit in the future could suffer as a result.

"There's no question that with a 10% rate cap, card issuers would put the clamps down on credit while they figure out how to continue making money in this new normal," he said.

The reason: Interest rates are how credit card companies manage the risk that a customer won't pay their credit card bill on time.

Generally, customers with lower credit scores are deemed riskier to lend to. To compensate, lenders tend to charge higher rates compared to borrowers who have a score in the upper range. But if card issuers, namely banks, can't charge the rates they otherwise would because of a cap, they'd have no choice but to stop lending to certain customers, said Schulz, the author of the book "Ask Questions, Save Money, Make More: How To Take Control Of Your Financial Life."

That would disproportionately impact younger, lower-income and less-educated borrowers, who tend to have lower credit scores . These types of borrowers are more likely to rely on credit cards to pay for goods or services in dire situations when they don't have the funds readily available.

Karoline Leavitt, a Trump campaign spokesperson, told CNN Trump's proposal aims to "provide temporary and immediate relief for hardworking Americans who are struggling to make ends meet and cannot afford hefty interest payments on top of the skyrocketing costs of mortgages, rent, groceries and gas." Leavitt did not, however, share details on how the cap could work.

Your favorite credit card rewards could be jeopardized Even if you don't currently have any credit card debt and have a top-tier credit score, you could be left worse off from a 10% credit card fee cap.

That's because the rewards you received could be compromised significantly.

That happened after a 2010 law went into effect that capped the fees banks could collect on debit card purchases to about 21 cents plus 0.05% of the transaction. Banks followed suit by eliminating their debit card reward offerings for customers.

Similarly, banks and credit card companies have threatened to pull the plug on credit card rewards and benefits if restrictions like President Joe Biden's attempt to cap credit late fees at $8 go into effect.

"Certainly, I would think that would be the case with a 10% credit card fee cap," Schulz said, adding that rewards are generally worse for federal credit unions that have an 18% cap on interest versus other credit cards that have uncapped fees.

The main group of people that would come out ahead from the cap would be those who have a really good credit score and carry a card balance "once in a blue moon" and would pay a lower rate to clear it.

But by and large, "the house always wins," he said.