The word “cap” means to put an upper limit on what is allowable in a contract, usually in terms of finance. When it comes to credit, the interest rate is the item being capped so that the loan terms never degenerate into a predatory lending type situation. As you may already know, credit card companies tend to be seen as largely (but legally) unfair when it comes to calculating interest, especially when compared to traditional bank loan contracts. Forbes Magazine in association with MSNBC recently reviewed some of the “Worst Deals” in America and not surprisingly, pretty much all of the major credit card companies made the top of the list.
Legal Provisions on Capping
One might think that there could legal provisions in place that would protect the credit holder from paying an absurd amount of interest every month. After all, the line separating credit card companies and predatory lenders should be only so thin. The broad answer is yes, there are some laws in the United States that protect credit holding consumers. However, a more in-depth answer reveals that you might not be able to use these laws to your advantages unless you live in a specific state.
State Laws and Capping
State law is what dictates interest capping, and unfortunately for most of the U.S., less than 50% of all states actually get involved in legal aspects of credit card capping. Capping is an easy lesson to understand. Once the law is set in place, the credit card company cannot increase the interest rate or they will risk legal censure. Therefore, credit card companies are smart enough to stay out of U.S. states that pass these consumer protection laws.
Upon analyzing the contact information of major credit card companies, you will notice that the majority of them are based out of states that do not currently have usury laws or any such caps on revolving credit.
If there is no capping law, the companies are legally permitted to charge any interest rate they see fit. The only catch, and the only real protection you as a consumer have, is that the terms of the agreement must be documented and signed by both parties before the credit can be extended.
National Laws on Capping
What about basic American rights? Can’t the credit card companies get in trouble for abusing trust? No, thanks to a very important case known as Marquette National Bank of Minneapolis vs. the First of Omaha Service Corp. (439 U.S. 299) In 1978, the U.S. Supreme Court decided that state-created laws concerning exorbitant rates of interest could not apply to a national bank, with a multi-state presence. From that moment on, nationally chartered banks would be held accountable to Federal law, overstepping state boundaries.
Not only did this profoundly affect the credit business in general, but it also gave credit card companies and banks an advantage. They could become a national bank or simply move to a state where there were no or low credit card usury laws in place. The only limitation of this ruling was that the bank or credit company could only charge the state-imposed usury limit as determined by their home state. However, the company’s state-approved interest rate could apply to consumers across various regions of the U.S.
Usury laws are not the sort of thing credit card companies take lightly. According to the Federal Deposit Insurance Corporation, back in the year 1982 four of the largest banks in the state of Maryland actually relocated their companies to another state just to get away from certain usury laws which benefited consumers. This is what you might call a cycle of usury—most U.S. states depend on credit card companies’ business in order to profit and so they will purposely not attempt to create legislation or will “loosen the chains” as it were, all in an effort to keep the credit companies nearby.
So while there are certain anti-usury laws in effect for certain states like Maryland, Georgia, Utah, Illinois, Nevada, Nebraska and Rhode Island, there is no national protection, nor are there a lot of states that place strict limitations on these matters. Therefore, well-read consumers tend to expect very high interest rates when they deal with credit card companies. This general consensus has no doubt contributed to the popularity of debit cards in this day and age.
What Can You Do?
What can you do to avoid credit card debt and stay away from those astronomical interest rates? Prevention is important in avoiding these issues. Consumers are advised to apply for credit cards cautiously, carefully review the terms (as it is a legal requirement that the company must disclose all interest rates in advance), and avoid charging and maintaining high balances.
You can use free online tools like the credit card “Chaser” on our home page to compare various options and get the lowest possible interest rate. If possible, look for a fixed interest rate contract above an adjustable rate contract, unless caps are clearly stated in the terms.
If you are stuck in a bad contract, don’t despair. Instead, look for a new credit card company from which you can refinance the debt under more favorable terms. You may be able to qualify for a lower interest rate based on your credit score or other considerations. Though legal resources are limited when it comes to credit interest rates, you never completely run out of options. Why not take advantage of the option on this page and use the tool to get started comparing credit cards now?
- What is the highest credit card interest rate allowed by law?
- Where can I find local credit card companies in my area?
- Usury & Interest Guide: Usury Definition, Usury Rates, and is Your Credit Card Usurious?
- Will regulators ever cap credit card rates?
- History of Credit Card Rates
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