Why Do the Usury Laws Not Apply to Credit Cards?

Usury is the practice of lending money and charging the borrower interest at exorbitantly high, and even illegal, rates. Personal and business loans are scrutinized for usury, but charge cards are exempt from usury laws on a national basis, and are only governed by state laws.

History

The 1978 Supreme Court decision, Marquette National Bank v. First of Omaha Service Corporation, decided that national banks such as Bank of America or Citibank may charge the highest interest rate allowed in the home state of that bank. This interest rate is allowed to be charged to individual consumers no matter which state they live in. That means that credit card issuers that have a home base in states that have high usury or non-existent usury ceilings may charge those rates to customers everywhere. Therefore, many of these national banks have their credit card issuing arms headquartered in states like Delaware or South Dakota, where the usury limit is very high.

Further Laws

Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) gave state banks the same power to charge the state's interest rates to out-of-state customers. This applied to all federally-insured banks, including state-chartered ones.

After passage of the DIDMCA, state legislatures across the country passed laws that allowed them to charge whatever rates out-of-state banks were allowed to charge. This was reinforced in 1999, when President Clinton signed the Gramm-Leach-Bliley Act into law. One part of this act stated that a bank in Arkansas had the right to charge the same interest rate of an out-of-state bank that had a branch in Arkansas, even though at the time the interest rate was usurious in Arkansas.

Significance

Now that the mortgage crisis has come into being, lenders claim it is just the tip of the iceberg and that signs point toward credit cards being the next crisis on hand. Bank of America, J.P. Morgan Chase and Capital One expect a 20 percent increase in credit card losses in the short to midterm future.

Resons for Raising Interest Rates

Banks have sophisticated software and are able to track a customer's transactions. Lack of activity or heavy usage points to those customers represent easy marks for an interest increase. The bank can also ascertain whether a customer is using a lower-interest card for transactions, suggesting that the consumer may be strapped for money, but indicating that they still need their credit line with that bank; another reason to increase rates.

Universal Default

Universal default is when a credit card company raises its rates on their consumer's card because that customer has been late on another company's card. The reasoning behind this is that the customer is not so credit worthy if he has been late on his payment to anyone.

Theories/Speculation

Fox Business reports that many credit card companies say that with the current weak economy and high unemployment rates, many people are unable to pay their credit card bills, leading to greater losses and, therefore, justifying higher interest rates.

Many of these companies received federal tax dollars for a bailout and are now charging the same taxpayers exorbitant interest rates. Unfortunately, with the history of government decisions on credit card interest, usury laws are almost non-existent.