The Ten-Cent Trap

On January 27, Synchrony Financial told Wall Street that its credit-card losses had fallen back "within our target net charge-off range." The company's chief executive said it on the quarter's earnings release — 5.37%, down from 6.45% a year earlier — with the calm of a hospital discharging a patient. Two days later, from Columbus, Ohio, Bread Financial posted its own fourth quarter. Bread runs the credit cards Americans are offered at department-store registers and specialty-chain checkouts — not the sleek metal cards from Chase or Amex, but the ones with a store logo and a credit limit that represents, for millions of borrowers, the most conventional financing they can get. Its headline number: a net charge-off rate of 7.4% on roughly $18 billion in card loans. For every hundred dollars Bread lent, seven dollars and forty cents were gone.

Management's take, in the annual report filed two weeks later: "Credit metrics improved year-over-year, driven by disciplined credit risk management." The word disciplined was doing considerable work. It meant Bread had already tightened who it would approve, already trimmed its risk appetite — and the loss rate was still $7.40 on the hundred. This was as good as it got.

Two companies. Forty-eight hours. Two percentage points of losses and an ocean of scale between them — Synchrony's $103.8 billion portfolio is nearly six times Bread's. But both numbers, it turns out, obscure a far deeper fracture in American consumer credit, one that runs directly into the path of a presidential proposal to cap card rates at 10%.

Here is what that fracture looks like: Buried in the Federal Reserve's own data — public, free, updated quarterly, accessible to any congressional staffer with a browser — is a pair of statistics that splits the card market into two economies. At the 100 largest U.S. banks by assets, card charge-offs run about 4%, manageable and trending stable. At every other bank, they have exceeded 8.5% for 10 consecutive quarters, the longest such streak in 40 years of federal records — more than triple the prior record, including the worst of the 2008 financial crisis. The aggregate charge-off figure that policymakers and journalists cite — roughly 4% — reflects almost entirely the big-bank number, because the top 100 hold an estimated 97% of all on-balance-sheet commercial bank card loans. Plaintext reviewed rate-cap and charge-off coverage from more than a dozen outlets over the past year, including Bloomberg, Reuters, the Associated Press, CNBC, and Forbes. We found no reporting on this sustained divergence or its implications for the rate-cap debate. The full list and methodology are in the evidence appendix.

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The data lives in FRED, the Federal Reserve Economic Data portal run by the St. Louis Fed. Two time series, tracking credit-card charge-offs by bank size, have run since 1985. For most of those four decades the lines moved in rough parallel. They split in early 2023. The non-top-100 line crossed 8.5% in the second quarter and never came back — peaking at 9.55% in early 2024, dipping to 8.61% by mid-2025, ticking up to 8.87% in the most recent quarter. Ten consecutive quarters above the threshold. The prior longest run: three quarters, during a brief spike in 2003. The highest single-quarter reading in the entire 40-year record — 10.28%, in the fourth quarter of 2001 — was a one-time shock that reversed immediately. What is happening now is not a spike. It is a plateau.

Throughout those same 10 quarters, top-100 banks ran charge-off rates between 3% and 4.6%. The ratio between the two groups never dropped below 2.05-to-1 and climbed as high as 2.80-to-1. Always more than double.

For anyone who remembers 2008, the current pattern is disorienting — because during the financial crisis, the dynamic ran the other way. Large banks had lent aggressively to overextended borrowers; their card charge-off rate peaked at 10.64% in the fourth quarter of 2009. Non-top-100 banks topped out at 8.39% the same quarter. Big banks were the crisis. Today the roles have completely flipped. And no recession explains it. Unemployment during the 10-quarter streak stayed between 3.7% and 4.5%. Consumer spending held up. Card balances hit a record $1.28 trillion at the end of 2025, according to the New York Fed. The stress is not broad. It is concentrated — targeted at a specific band of borrowers, served by a specific tier of lenders.

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The timing points to a mechanism. The streak began just as the Federal Reserve's benchmark rate reached its peak of 5.33% in mid-2023, where it sat for more than a year. Most credit cards carry variable rates tied to prime. When the Fed raised rates, minimum payments on revolving balances climbed in lockstep.

For a borrower already stretched — carrying a few thousand dollars on a card from a bank most Americans have never heard of — even a modest jump in the required monthly payment can push a household from current to delinquent, and from delinquent to default. Those borrowers are disproportionately the customers of smaller banks and specialist issuers: among non-top-100 institutions, the cohort includes subprime specialists like Credit One, First Premier, and Merrick Bank — names rarely seen in the financial press. These firms are privately held. Their individual charge-off rates don't appear in any SEC filing. But the Fed's aggregate captures their losses, and the aggregate is severe.

Bread, at 7.4%, sits below its peer-group average. The arithmetic says other non-top-100 issuers must be running charge-off rates above 9%, possibly above 10%, to pull the average up to 8.87%. What those rates actually are is something this data can't tell us. Those numbers live in FDIC call reports, not public earnings releases. The cohort also includes community banks with tiny card portfolios whose losses get folded into the same average — a mix of business models and scales that the Fed's two-bucket taxonomy compresses into a single line.

The Fed began cutting rates in late 2024, and by January 2026 the effective federal funds rate had fallen to 3.64%. But charge-offs lag origination and delinquency by several quarters. Portfolios originated or stressed at peak rates are still working through the system. So far, the small-bank loss rate has barely moved.

Risk mix alone doesn't explain the full gap — large banks aren't immune to subprime borrowers. But scale, data infrastructure, diversification across credit tiers, and access to cheap deposit funding compress the loss rate. Synchrony, despite serving a wide range of borrowers through its retail partnerships, posted 5.37% — consistent with the top-100 cohort's 4.06% average. Size doesn't eliminate risk. It absorbs it differently.

At the aggregate level, none of this registers. The all-bank charge-off rate for the third quarter of 2025 was 4.17%. The non-top-100 rate was 8.87% — a 112% divergence — but smaller banks hold an estimated $27.6 billion in card balances, roughly 2.5% of the commercial-bank total. (Plaintext derived that estimate from quarterly charge-off dollars divided by the quarterly loss rate; the methodology and its limitations are in the appendix.) Their losses barely ripple the aggregate. It is as if a hospital reported that the average patient temperature across all wards was 98.8°F and nobody checked the ICU.

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On January 9, President Trump posted on Truth Social that he wanted credit-card interest rates capped at 10%. Two weeks later, at Davos, he said he would ask Congress to pass legislation for a one-year cap. Senators Bernie Sanders and Josh Hawley have introduced or endorsed cap legislation. Senator Elizabeth Warren has argued existing proposals don't go far enough. The specifics — scope, duration, enforcement mechanism — remain unresolved across what appear to be separate legislative vehicles. But the core idea has broad political appeal: average card APRs stood at 19.7% at the end of 2025, according to Bankrate, and a 10% cap sounds like a gift to every borrower in America.

Put the cap against the math.

A 10% annual rate generates $10 of interest income per $100 of revolving balances. At the non-top-100 charge-off rate of 8.87%, defaults consume $8.87. What remains — $1.13 — is not profit. It is the gross spread over charge-offs, before an issuer has paid a cent for funding, underwriting, fraud prevention, servicing, regulatory compliance, operating overhead, or the capital regulators require banks to hold against losses. Bank analysts commonly cite a need for double-digit percentage-point spreads between card APRs and loss rates to sustain mass-market card lending after these costs — a benchmark Plaintext encountered repeatedly in issuer presentations and research notes, though no single source is definitive. At $1.13, the spread is barely positive.

Card issuers do earn revenue beyond interest. Interchange fees on purchases, annual fees, and in some cases merchant subsidies from retail partners contribute non-interest income. But at issuers whose primary revenue comes from interest on revolving balances — and whose cardholders tend to spend modestly, generating limited interchange — these supplemental streams narrow the gap rather than close it. The pattern across the private-label card sector is that interest and fees on loans dominate the revenue mix, with interchange and other non-interest income playing a secondary role.

Whether the cap would cover total finance charges — interest plus all fees — is pivotal and unresolved. If late fees, annual fees, and maintenance charges fall inside the 10%, issuers cannot restructure their way to viability. If fees are excluded, expect aggressive repricing — and expect regulators to push back. A federal cap enacted by Congress would likely preempt state usury limits for national banks and for state-chartered banks that export interest rates under established interstate banking doctrine. Enforcement would fall primarily to the Consumer Financial Protection Bureau and the prudential regulators — the OCC, FDIC, and Fed — agencies that would also face pressure to police fee workarounds, especially given the CFPB's separate and ongoing effort to cap credit-card late fees.

The gap between large and small banks makes the stakes wildly asymmetric. For a top-100 bank running a 4% charge-off rate, a 10% cap leaves about $6 of gross spread over charge-offs per $100 — sharply below the roughly $16 spread at current average APRs, but potentially survivable at massive scale, with low-cost deposit funding and diversified revenue. For many non-top-100 issuers, a 10% cap at current loss rates would make mass-market card lending uneconomic. None of the proposals in circulation differentiate between a JPMorgan card and a Credit One card. The cap applies uniformly. The pain would not.

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The immediate consequence would not be a wave of bank failures. It would be a quiet withdrawal. Small issuers would stop approving the highest-risk applicants — which, for lenders whose entire model is built around those applicants, amounts to shutting the doors. An estimated $27.6 billion in outstanding balances would need a new home. Depending on average balances, that represents somewhere between 5 and 10 million accounts held by people who, by definition, could not get approved by Chase or Bank of America. These are borrowers that issuers like Bread describe in their filings as having "limited or rebuilding credit histories."

Large banks are unlikely to absorb them. A customer who defaults at a rate above 8% does not become creditworthy because her old bank closed.

The more probable destinations are the financial products that live outside regulated banking: payday loans carrying effective annual rates many multiples of the proposed cap, auto-title loans secured by a borrower's car, buy-now-pay-later plans with their own opaque cost structures — or no formal credit at all. Consumer advocates who have spent decades fighting predatory card rates understand the tension, even as they push for reform. A 25% APR on a revolving balance can trap a borrower in debt for years. But losing access to a 25% card and landing at a payday lender charging several hundred percent is not an improvement. The rate-cap debate, as it has unfolded in public, has not grappled with the question of what happens to borrowers who are currently served — badly, expensively, but served — by the lenders a 10% cap would shut down.

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The Fed will release fourth-quarter 2025 charge-off data in the coming weeks. Nothing in the trend suggests the streak will break. Bread guided investors to expect loss rates above 7% for all of 2026. The federal funds rate, while lower than its peak, remains well above the near-zero levels that prevailed before 2022.

The legislative proposals have not moved to a vote. Trump framed the cap as temporary — one year — but temporary caps, once borrowers feel the relief and lawmakers feel the applause, have a way of persisting. The next data point won't come from a press conference or a Truth Social post. It will appear, quietly, in a FRED time series that almost nobody reads. Two economies, one statistic, and a policy debate built on the wrong number.