How Can Credit Cards Charge Such High Interest Rates?

How can credit card companies charge 30% interest?  Didn’t there used to be laws limiting what interest rates companies could charge?  This is outrageous.

States can and do have “usury laws” limiting the amount of interest that can be charged by lenders.  The problem for consumers is a 1978 U.S. Supreme Court case invoking federal preemption in this area.

In the case of Marquette v. First Omaha Service Corp. case, the Supreme Court held that a national bank may charge the highest interest rate allowed in its home state, nationally.

Credit Card Companies Operate in Friendly States

So, credit card companies can charge customers living anywhere in the U.S. the interest rate in whatever state the lending institution selects as its domicile.

Following that decision, huge New York based Citibank relocated its base of operations to South Dakota, which had more lenient interest rate caps.  Other major lenders with credit card lending as a major part of their business moved to other high interest rate friendly states like Georgia and Nevada.

Read Credit Card Applications: Especially Fine Print

All interest rates, late fees or other costs and charges must be included in a cardholder agreement.  If so, then the national bank may export the higher interest provided for in their home state everywhere else.  Those new to the jaws of credit card lending practices are often shocked.  But, there’s nothing illegal about companies charging 20% to 30% interest.  The only specific requirement under federal and state law mandates full disclosure of the interest rate and all fees and charges.

The only thing more shocking that the exorbitant interest rates the credit card companies get away with is that fact that often consumers, cash strapped and thinking they need of more credit to keep going, sign credit card applications without reading the small print that will swamp them with higher interest, costs, fees and charges.

For the related topic of debt collection abuse, limits on how far debt collectors may legally go: click here.

This article adapted from an article © 2012 Eagle Tribune Corp., appearing in the Derry News column “About the Law” by Andrew D. Myers.

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