Credit cards trump state usury law

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Dear Credit Card Adviser,
I live in Arkansas. My credit card company recently raised my rate to 22 percent. I thought that Arkansas’s usury law prohibits interest rates from exceeding 17 percent. How is this legal?
— John

Dear John,
You’re right about the usury limit. According to Article 19, Section 13 of the Arkansas Constitution, the cap on interest rates for consumers is 17 percent.

The trouble is it doesn’t apply to credit card issuers — not to banks, savings and loan institutions or credit unions, according to the Arkansas attorney general’s office. Not even Arkansas-chartered banks.

Why, you ask? Here’s a brief history lesson:

The 1978 Supreme Court decision Marquette National Bank v. First of Omaha Service Corp. concluded that national banks, such as Bank of America and Citibank, can charge the highest interest rate allowed in the bank’s home state, regardless of where the borrower lives. This means that credit card issuers located in states with liberal or nonexistent usury laws, such as Delaware and South Dakota, can “export” the lack of an interest rate cap to customers in states with usury laws in place. These companies can ignore the “Natural State’s” 17-percent constitutional limit.

Next, section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, or DIDMCA, gave state-chartered banks the same rate-exporting powers. The law allows all federally insured banks, including state-chartered banks, to charge out-of-state customers the highest interest rate permissible in the state, territory or district where the bank is headquartered.

Federal law delivered the death blow for Arkansas’s usury limit in 1999. President Clinton signed the Gramm-Leach-Bliley Act into law, a section of which permitted local Arkansas banks to charge the greater of the state usury limit or the rate charged by an out-of-state bank with a branch in Arkansas.

“All our in-state banks could now basically import the rates of competing banks and now force that rate down the throat of consumers,” says Ken Clark, a Certified Financial Planner based in Little Rock, Ark.

“For all intents and purposes, the usury law in Arkansas with regard to credit cards has basically disappeared,” he says.

Residents of other states don’t fare any better. After the DIDMCA became law, state legislatures across the country passed wild-card parity statutes that allow local state banks to charge whatever rate out-of-state banks charged in their state.

“In effect, what that really meant is that there are virtually no interest rate limits that are applicable to any type of bank, anywhere in the country, anymore,” says Christopher L. Peterson, a professor of law at the University of Utah in Salt Lake City, and usury law expert.

The National Credit Union Administration sets the usury limit for federally chartered credit unions at 18 percent, no matter where the credit union is located.

Long story short: Your 22 percent interest rate may not feel fair, but it is not illegal. Use our credit card comparison tool to find more attractive offers.

Read more articles by the Credit Card Adviser and brows through our experts list of best 0%APR credit cards.