There is no federal limit on the interest rate a credit card company can charge. If you've ever looked at the return address on your statement, you may notice your credit card issuer is located in a state such as South Dakota or Delaware. That's because these are the states that have either weak or no "usury laws" meaning there is no cap on the interest rate that is charged. (View this map that shows the states where the top ten credit card issuers are located.) The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new usury laws in place. That's why Citibank, the issuer of MasterCard, moved to South Dakota, which has no cap on interest rates. (For more on the South Dakota story and how the credit card industry took off in the 1980s, read The Ascendancy of the Credit Card Industry.)Various financial services started implementing higher fees and interest rate hikes. Somewhere along the line, the "universal default" policies came into play. These policies allow a creditor to move a customer to a maximum interest rate for late payment on any reported bill - even if the payments to that creditor have never been late. As this practice started kicking in, consumer bankruptcies started rising. Along the way we started seeing articles like this one from 2004 in the NY Times - Soaring Interest Compounds Credit Card Pain for Millions. The soaring interest was a direct consequence of universal default practices. We got confirmation of this lucrative practice for through articles such a the 2005 Consumer Affairs report "More Banks Using Universal Default to Hike Interest Rates." This news came after the passage of the new bankruptcy law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) went into effect on October 17, 2005. This was a legislative change that the companies spent millions to push through. Any efforts to soften the blow of the legislation on consumers was thwarted. To see a list of who voted for BAPCPA check this list What we largely heard was the company line that looser consumers were bugging out on their credit obligations and that creditors needed to be "protected."
After eight years of trying, Congress next week is expected to pass legislation aimed at a growing problem: Encouraged by mass mailings from the credit-card industry, more and more consumers are taking on more debt than they can handle and ending up in bankruptcy court. The law, crafted with industry help and backed by President Bush, takes the firm view that this is the borrower's problem, not the industry's. The bill would swing the legal pendulum on this long-running issue in favor of creditors. (WSJ, 4/06/05, embedded article at this link)Of course, implementation of limitless rates and fees, and then universal default, had nothing to do with bankruptcies. Lost in the entire discussion was the actual purpose of the bankruptcy laws - namely to keep creditors from doing exactly what they were doing. Creditors were luring consumers into debt and then jumping rates outrageously. Implementation of universal default just widened the field of reasons to soak consumers. The strict limitations on consumers filing for bankruptcy have essentially allowed the companies to act with impunity. As the economy turns downward and costs leap upwards, the issue of extorting consumers arises again. I don't see any reason to hope that controls on the credit industry are going to change in the favor of consumers. It gripes me no end that both the Senate and the corporate media act as if this is a new issue that came out of nowhere. It is not new, it is intentional. Both the reporters and most of the Senators wringing their hands were there for the 2005 legislation. Why don't they talk about that? Why don't they talk about the abandonment of the populace to no holds barred creditors with dollar signs in their eyes? Give us all a break and report what is really going on. Testimony of Elizabeth Warren Leo Gottlieb Professor of Law Harvard Law School Before the Committee on Banking, Housing and Urban Affairs of the United States Senate. Hearing: Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers. January 25, 2007. People Are Getting the Short End of the Stick. Wolf, Uncommon Thought Journal, 3/04/05.
