Credit card issuers flock to states with no usury laws
By Lucy Lazarony • Bankrate.com

In the profits-at-all-costs credit card industry, finding a consumer-friendly issuer is tough.

Only a handful of states continue to press pro-consumer guidelines on card issuers within their borders. The banks that do issue credit cards in those states tend to be small, regional players.

The overwhelming majority of credit cards in the United States come from a handful of national issuers. Not surprisingly, they have flocked to lender-friendly states such as Delaware and South Dakota, which impose no limits on what cardholders can be charged. Even if you don't live in Delaware of South Dakota, those states' rules likely apply to you.

That's because national issuers can "export" credit card fees and rates based on laws in their home state to cardholders in other states. For example, holders of First USA Visa cards in California would have their credit cards' rates and fees governed by the laws of Delaware, the company's home state.

Still, a few states are sticking by their consumer-friendly credit card laws. Benefits range from lower interest rates to more lenient payment guidelines to an earlier notification of changes in a credit card's terms -- such as a rate or fee increase.

Strict rules in Arkansas, Maine
Looking for a low-rate credit card? Check out Arkansas banks. They can charge only 5 percent more than the federal discount rate at the time of the credit card contract. With the federal discount rate now at 4.5 percent, the priciest interest rate on a new card from an Arkansas-based issuer is 9.5 percent.

If you're tired of worrying if that payment is going to get to the issuer on time, look into cards from issuers in Maine and Iowa. In Maine, a customer has 15 days past a bill's due date to get a payment to the issuer before a late fee is imposed. Iowa-based issuers give customers 10 days of leeway after the payment due date. Iowa law also caps late fees and over-the-limit fees at $15.

Ready to chuck that old credit card for one from an issuer in a consumer-friendly state? It may be difficult. A lot depends on where you live. Most of these "good" states are short on national credit card issuers so their cards may only be available to people who live nearby. A few issuers in "good" states do offer deals to customers nationwide, although they usually require squeaky-clean credit records. Be sure to compare these national offers here at Bankrate.com by clicking the links below.

It's not surprising that all the big issuers -- including First USA, MBNA America and Bank of America -- are based in states such as Delaware, South Dakota and Nevada, which have credit card laws friendlier to the lenders. These states have lifted caps on credit card fees and rates, so issuers based there may charge any rate or fee as specified in the card-holder agreement. They may also increase any rate or fee as long as they give customers proper notice.

"They can charge basically what they feel the market will bear," says Michael E. Staten, director of the Credit Research Center at Georgetown University.

Taking off the caps
To add to this confusion, even some more consumer-friendly states such as Iowa and Wisconsin have lifted caps on interest rates. Here's why.

"The bottom line is state interest-rate caps apply primarily to state chartered banks and credit unions but do nothing to prevent national banks from marketing their cards in those same states," says Will Lund, director of the Maine Office of Consumer Credit Regulation. "For that reason, state chartered banks view themselves at being at an unfair advantage in terms of issuing profitable or competitive cards."

Because of the ability of banks to export interest rates from their home state, the largest credit card issuers can ignore state interest rate caps. States such as Wisconsin scrapped interest rate caps a few years ago when it became clear that cards with interest rates well above the cap were flooding the state anyway. When Wisconsin dropped its cap, out-of-state credit card companies accounted for more than 90 percent of its credit cards.

"The vast majority of credit cards were not affected anyway," says Paul Egide, one of the directors at the Wisconsin Department of Financial Institutions.

Look homeward for best deal
What's a consumer seeking a credit card with reasonable interest rates and low fees to do? If a deal from a national lender from a consumer-friendly state isn't available, shop locally.

"You might be able to get a better rate from a local bank if you also have substantial other balances and accounts in that institution," says Gwen M. Reichbach, director of National Institute for Consumer Education at Eastern Michigan University.

A local bank may also be willing to waive annual fees on a credit card for a bank customer.

"These are questions consumers should be asking," Reichbach says.

Some states, including New York, Iowa and Minnesota, provide consumers with free surveys listing credit card rates available in their states.

To receive a copy, New York residents should call the New York State Banking Department at 1-800-518-8866. The New York survey is also available online. Iowa residents may call (515) 281-8478 or send e-mail. In Minnesota, residents may view the survey online or call (651) 296-5273 to request a copy.

Local institutions more tolerant
Experts point out that local banks and credit unions may be less likely to jack up interest rates or fees and may be more forgiving when it comes to late payments. The nation's largest issuers slap customers with late fees as high as $29 if payments arrive one day late. By contrast, many credit unions accept payments within 10 days of the due date without imposing fees.

"We have found large late fee and large over-the-limit fees are more common with large, centralized, out-of-state national banks," says Maine's Lund. "An institution that has to look its customers in the eye may be more reluctant to charge these fees."

That's not to say many people out there can't be perfectly happy with a credit card from a large, national issuer. Companies such as First USA and Capital One boast some of the best deals on interest rates for people with good credit.

"The national issuers are very good at pricing people based on their specialized profile," says Frank Martien, a senior associate at First Annapolis Consulting, based in Linthicum, Md. "You may do better with national issuer and pick up a 9.9 rate. Just make sure you don't do anything wrong."

-- Posted: March 15, 1999