Credit card companies sidestep usury laws
For hundreds of years, societies all
over the world have protected borrowers by limiting interest rates
charged by lenders.
But in today's credit card market, American borrowers are on their
Less than half of all U.S. states bother to cap credit card interest
rates, and few credit card issuers are based in these states anyway.
Most major credit card issuers are based in states without usury
laws and without interest rate caps on credit cards. Banks and credit
card issuers based in these states can charge any interest rate
they wish -- as long as the rate is listed in the cardholder agreement
and the borrower agrees.
And thanks to a 1978 U.S. Supreme Court decision, these the-sky's-the-limit
rate policies dominate the credit card business.
State of interest rates
In Marquette vs. First Omaha Service Corp., the Supreme
Court ruled that a national bank could charge the highest interest
rate allowed in their home state to customers living anywhere in
the United States, including states with restrictive interest caps.
"It's whatever is agreed to in the contract," says Michael
Donovan, a consumer attorney and partner at Donovan Searles in Philadelphia.
"They can export rates to other states and override state
When it comes to credit card interest rates, the law in a lender's
home state rules. It doesn't matter what kind of rate cap exists
in a customer's state.
A funny thing happened after the Marquette ruling. Major credit
card companies began relocating to states with liberal or no usury
laws. New York-based powerhouse Citibank moved its credit card business
to South Dakota in 1981.
"Citibank went to South Dakota, not because South Dakota was
a banking center but because it had that particular law," Donovan
In 1982, the four largest banks in Maryland relocated their credit
card operations to Delaware because of that state's lender-friendly
credit card laws. Other states with lender-friendly credit laws
include Georgia, Illinois, Nebraska, Nevada, Rhode Island and Utah.
To hang on to the credit card business, many other states loosened
state usury limits.
In the early '80s, most states capped credit card interest rates
between 12 percent and 18 percent. Today's caps are in the 18-percent
to 24-percent range.
Hawaii and the District of Columbia cap credit card interest rates
at 24 percent, which isn't much of a cap at all. Missouri caps card
rates at 22 percent. And Colorado, Indiana, Kentucky, Oklahoma,
Tennessee and Wyoming allow credit card interest rates up to 21
"The unmistakable dynamic is in the direction of deregulation,"
says Mathew Street, associate general counsel at the American Bankers
Association. "The states have moved in the direction of raising
the caps or removing the caps."
The low-rate state
One exception is the state of Arkansas. Arkansas' state constitution
has kept a tight lid on interest rates for more than 125 years.
Amendment 60 to the constitution, approved in 1982, caps interest
rates at 5 percent above the federal discount rate. Because of this,
Arkansas banks offer some of the lowest credit card rates in the
"It's a wonderful thing for our consumers," says Todd
Turner, a consumer attorney based in Arkadelphia, Ark.
Every time banks and businesses tried to change the amendment,
consumers voted them down.
"The banks and the chambers of commerce wanted it changed,"
Turner says. "The common folk in Arkansas don't want it changed
because it protects them."
But all that may be changing, thanks to the Gramm-Leach-Bliley
Financial Modernization Act, which the U.S. Congress passed in 1999.
A section of the act allows state-chartered banks to charge interest
rates equal to those charged by other banks operating in their state.
Needless to say, out-of-state lenders with branches in Arkansas
charge interest rates beyond the state's interest rate limit. So
much for that 128-year-old constitutional cap.
"The banks are going to be increasing interest rates because
they are going to be able to offer the prevailing rate of their
competitors," Turner says.
So far, only a handful of Arkansas banks have increased credit
card rates. Simmons First National bumped up the interest rate on
its variable rate card from 7 percent to 8.95 percent in December
2001, according to Bankrate.com research. Pulaski Bank and Metropolitan
National Bank have kept their rates as low as ever.
So, is there an upside to the deregulation of the credit card industry
for consumers? You bet -- more credit choices. The lifting of state-imposed
interest rate limits made it easier for credit card issuers to offer
cards to customers from all over the country. And that's what has
"The bottom line is it's become a competitive
marketplace," Street says. "Issuers have customers everywhere,
and customers can choose cards from issuers everywhere."
With this increased choice in credit cards comes increased
consumer responsibility. In many cases, there's no law stopping
an issuer from charging you a super-high interest rate or an interest
rate higher than you deserve.
The only person who can insure that you get a good card rate is
you. The best advice is to build a strong payment history and keep
your credit as clean as possible.
"The main thing is to keep your nose extremely clean no matter
what," says Linda Sherry, editorial director at Consumer Action,
a consumer advocacy organization based in San Francisco, Calif.
"Avoid late payments."
You can bet a credit card issuer will up your interest rate if
they see something on your credit report they don't like. Don't
give them a reason. Pay your credit and other bills on time, every
month. Here are some tips on avoiding
credit card late fees.
Let's say your credit record has improved since you applied for
your card. There's a good chance you qualify for a lower rate. But
no card issuer in the world is going to knock down your rate unless
you ask. So call and ask. Have other lower rate credit card offers
in hand when you call.
If your issuer won't lower your rate, transfer your balance to
a lower rate card. This
article by Bankrate.com will show you how.
Always be on the lookout for a better card deal. Study the offers
that come in your mailbox. Search online. The Bankrate.com credit
card search engine can help you locate the best deals from issuers
from around the country.
"Pull out all the stops," Sherry says.
"Beg, borrow and steal to get a good rate. You have to do it
because they're not going to offer you one proactively."