What are usury laws and maximum interest rates?
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- Usury laws set limits on the amount of interest lenders can charge on loans
- With credit cards, in particular, there is no maximum interest rate, but the CARD Act does offer various protections and provide more transparency when it comes to rates
- If you’re dealing with high interest rates, you can try to negotiate with your issuer, seek out a balance transfer card with a lower interest rate or even consider credit counseling
If you are one of the many Americans that carry a balance on your credit card, you should keep an eye on your card’s interest rate to manage how much you pay your issuer for the privilege of using the card.
What you may not know is that, on a federal level, there is no maximum interest a credit card company can charge. However, cardholders can find a bit of security in the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) and usury laws, which set interest rate limits on a state-by-state basis.
Is there a maximum interest rate for credit cards?
The short answer to this question is “no.” However, the longer answer is “it’s complicated.”
For one, the CARD Act, signed into law in 2009, provides card users with protections and greater disclosures relating to billing statements, interest rates, due dates and penalties for credit cards.
The CARD Act made it so that card issuers have to be more transparent about introductory interest rates, mandating that they be offered to the consumer for at least six months. The CARD Act also obliges card issuers to give cardholders at least 21 days’ notice before a bill’s due date and 45 days if their interest rate or fees will increase. Another big change the CARD Act made was that card issuers have to get a cardholder’s permission to process a transaction that takes the cardholder over their spending limit in a way that would incur a fee.
The CARD Act definitely offers cardholders a bit more security, but it doesn’t control interest rates or how high they may reach. What it does is oblige your card issuer to notify you at least 45 days ahead of time that a change will come. This notification will give you the option to cancel your card if you are not agreeable to the rate increase. That said, you can always ask your issuer for a lower interest rate. It’s important to note, though, that this may trigger a hard inquiry into your credit report and there are no guarantees that the rate will be lowered.
The CARD Act does, however, require card issuers to review interest rate increases (including those initiated because of a change in a consumer’s credit risk or change in market conditions) every six months and reduce a cardholder’s rate if it is appropriate. Also, this rate review does not extend to increases in your rate due to penalties.
What is an usury law?
Usury refers to the practice of charging a very high interest rate that is deemed unreasonable. Usury law sets a limit on the amount of interest that can be charged on different kinds of loans. Most states have usury laws, however, national banks can charge the highest interest rate allowed in the bank’s home state — not the cardholder’s. So while you may live in Arkansas where the maximum interest rate is 17 percent, your card issuer can charge you a higher amount if it has its headquarters in a different state with a higher maximum rate. And if your issuer is based in a state like Maine, which has no usury laws, you have even less protection.
In some circumstances, a national bank can even take recourse to the higher interest rate of a state where it has branches, rather than using the rate in the state where it is based, irrespective of the state where the consumer lives. According to Christopher L. Peterson, a professor of law at the University of Utah in Salt Lake City and usury law expert, “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.”
How do usury laws impact maximum interest rates?
Each state has a different approach to usury law and the maximum interest rate than lenders can charge. Usury law may not always apply to maximum interest rates for different types of loans.
For instance, if you’re in South Carolina, the legal maximum rate of interest is set at 8.75 percent, but at 18 percent for credit card debt. However, usury law is not always so black and white. Many states defer to contract law instead of usury law. For example, in Hawaii the usury law sets the interest maximum at 10 percent, but a written contract can override that maximum. This is also the case in other states, including Arizona, Utah and Texas.
Another bit of fine print to check for is exemptions, since credit card lending may not be bound by usury laws. For example, in California the maximum annual interest rate on consumer loans is 10 percent, however, the law states that banks and similar institutions are exempt. This is also the case in Florida, Minnesota, and New Jersey, among others.
And then there is Colorado where a rate above 45 percent is deemed usurious for non-consumer loans. However, the rate for consumer loans is capped at 12 percent unless they are “supervised loans,” which includes credit card debt, made by a “supervised lender.”
If you want to know what the usury law is for your state, the Conference of State Bank Supervisors offers state-specific information. Just keep in mind that your card issuer is not obliged to follow the usury law for your home state.
Protections for military personnel
There are also laws that protect those serving in the armed forces, and their dependents, from high interest rates. The Military Lending Act caps credit card interest rates at 36 percent for those who enjoy this law’s protections. Pending legislation, called the “Veterans and Consumers Fair Credit Act” seeks to extend that protection to all consumers. And the Servicemembers Civil Relief Act caps interest rates on any credit card debt incurred by an active servicemember prior to entering military service at 6 percent.
What to do about high interest rates
If you are dealing with a high interest rate, there are some things you can do to help ease your burden. For starters, you can talk to your issuer to try to negotiate a lower rate. If this doesn’t work out, there is also the possibility of transferring your balance to a card with a lower interest rate. Just remember that balance transfers are great tools, but they aren’t magic. A repayment plan and budget go hand-in-hand with balance transfers. If you want help figuring out your repayment plan, you could use Bankrate’s credit card payoff calculator and home budget calculator to crunch the numbers.
If trying to figure out how you’ll pay off your high-interest debt seems out of your reach, you can also seek help from a debt counselor. There are debt management organizations out there that can step in to negotiate on your behalf with your credit issuer, many of which are non-profit groups. The National Foundation for Credit Counseling is a good resource to find debt management services in your area. And there are other steps you can take to better manage and get out of debt, including consolidating the debt.
The bottom line
If you are a cardholder carrying a balance, it is in your interest to keep an eye on the finance charges you are paying your card issuer. There is no federal regulation on the maximum interest rate that your issuer can charge you, though each state has its own approach to limiting interest rates. There are state usury laws that dictate the highest interest rate on loans but these often don’t apply to credit card loans. If you are facing the burden of high rates, you could negotiate with your lender or take other steps to better manage your credit card debt.