How Can Credit Card Companies Charge High Interest Rates?

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You may never have heard about state usury laws.  Each state in the United States has usury laws limiting the amount in interest that can be charged in various financial transactions.  Every state can control by law the amount of interest that can be charged when money or credit is extended.  The California Code and a number of subsections govern the interest rates that can be charged in California.  Personal loans and consumer loans in California have a usury interest rate attached to these loans of 10%.  The interest rate established for non-consumer loans is 5% greater than the interest rate duly established by the Federal Reserve Bank of San Francisco.

So How Can Credit Card Companies Charge Such High Interest Rates?

Again, so how can credit card companies charge such high interest rates?  The answer is the need for jobs, the Supremacy Clause, capitalism, and Marquette National Bank v. First of Omaha Corporation, 439 U.S. 299 (1978).  This is a 1978 Supreme Court of the United States (SCOTUS) case that led to the change in how much you pay for interest on credit card debt.  SCOTUS more or less ruled that First Omaha Corporation could charge citizens of other states the allowed interest rates for the state where First Omaha was located in, not the state interest rate where the customer resides.  12 U.S.C. 85 authorizes a national banking association “to charge on any loan” interest at the rate allowed by the laws of the State “where the bank is located. Not where the customer is located.  This means that First Omaha Corporation, located in the state of Nebraska, could charge customers in other states the higher interest rate Nebraska state law allowed, and not be limited to the interest rate in the state the customers lived.  This probably created millions of bankruptcy cases for bankruptcy attorneys to file since 1978.  How many less bankruptcy cases would there be if interest rates were capped at 10%?

Okay, so how did this lead to 29% interest rates when most state usury laws protect us from such high interest rates?  Well, this is where the need for jobs and capitalism took over.  Guess what happened next?  Certain states really needed jobs for their residents.  The state legislatures of these certain states basically did away with their state usury laws to entice banks that issue loans and credit cards to set up shop there and give their residents jobs.  It worked really well.  South Dakota is home to thousands of jobs as of a result because banks flocked there to set up shop and charge higher interest rates to customers in other states now that South Dakota had favorable usury laws.  South Dakota is not the only state that did this.  A few other states repealed their state usury laws limiting interest rates to attract banks too.  To be blunt about it a few thousands jobs were created resulting in millions of citizens of the United States legally being charged interest rates of 20% or more on their credit cards.  Was it worth creating millions in indebtedness for the many for a few states to generate a mere few thousand jobs for their residents?  No, usury laws exist for a reason and usury laws exist to protect the poor and vulnerable from lenders with unfair bargaining power.

Fun With Numbers

Do you really know what 28% interest on a revolving credit account looks like or how the interest accrues?  We shall no play with some numbers to get a better idea. 

Example No. 1:  The credit card has a credit limit of $10,000 and the interest rate is only 7%.  The balance is $7,500 and more or less the minimum payment is made each month and seek to payoff the total in 36 months or three years.  $7,500 paid over 36 months at 7% interest creates $835 in total interest paid (11% of total borrowed).  $7,500 paid over 36 months at 14% interest creates $1,731 in total interest paid (23% of total borrowed).  $7,500 paid over 36 months at 28% interest creates $3,673 in total interest paid (49% of  total borrowed).  The difference between 7% and 28% over the long-term is nigh and day.  People spend hours and hours shopping to find the best deal then make the purchase with their 28% interest credit card thinking they got a good deal.  If you payoff the balance each month yes.  If you carry a balance for years you are paying 23% – 49% more for your purchases that you bought on sale.  

The fake news is that most bankruptcy cases are caused by medical debts or other circumstances outside of a persons control.  That is not true.  While there are plenty of bankruptcy filings due to uncontrollable horrible circumstances the majority are due to credit card debt and consumer spending.  Credit card debts and the high  interest rates are the most common reason our bankruptcy clients speak of when explaining their reasons for choosing to file for bankruptcy protection.