What are usury laws and maximum interest rates?

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One of the biggest factors in how your credit card bill is calculated is your interest rate. If you are one of the many Americans that carry a balance on your credit card, interest rates can be a deciding factor in how much you’re able to spend.

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 CARD act and usury laws, which set 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.”

This is because of the Credit Card Accountability, Responsibility, and Disclosure Act, otherwise known as the CARD act. The CARD act was signed into law in 2009. The law was put in place to protect credit card users by making some key amendments to regulations dealing with 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 cardholder 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, however, 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 every six months and reduce a cardholder’s rate if it is appropriate. The key there being if the issuer deems it appropriate, and the rate review excludes increases in your rate due to penalties.

What is usury law?

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 cardholders. 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 they are located 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-state banks can also “import” the rate of an out-of-state competitor with a location in that state. 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.”

Usury laws in different states

Each state has a different approach to usury law. If you are a credit card holder in Kansas, the maximum interest rate is set at 15 percent. If you’re in South Carolina, the maximum rate is set at 8.75 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. For example, in California the maximum interest rate is set at 12 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 which has set the maximum interest rate to a whopping 45 percent, making their usury law not so helpful to cardholders looking for lower rates.

If you want to know what the usury law is for your state, there are databases that offer state-specific information. Just keep in mind that your card issuer is not obliged to follow the usury law for your home state.

What to do about high interest rates

If you are dealing with higher interest rates, there are some things you can do to help ease the 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 can use Bankrate’s credit card payoff calculator or balance transfer calculator to help. And to help get your budget set up you can use Bankrate’s 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 great resource to find debt management services in your area. And if you’re looking for further reading, check out these seven steps to get out (and stay out) of debt.