Credit card interest rates vary widely from as low as 0% promotional rates to as high as 36% default rates with rates averaging somewhere between 12% to 27% but is there a maximum credit card interest rate allowed by law? Credit card companies have complete flexibility in determining their interest rate provided they use a standard type of formula to calculate the APR and notify you of the terms and conditions of your credit card in writing. Other than that, there is very little restriction as to the highest credit card interest rate they can charge you by law.
State Usury Laws
State usury laws control the interest rates that are allowed by that state. Usury laws are very complicated, but to define it simply, they set the maximum amount that one is allowed to charge for interest on a loan. These rates vary by state but average between 6% and 12%. Some states, however, charge as much as 5% over the Federal Reserve limit and others have no usury limits on certain loan types, such as commercial.
You may now be wondering why your credit card interest rates are more than double the state usury average interest rate. This is due to a couple of reasons, but primarily that the state of your residence is not taken into consideration when determining your bank’s interest rates. Instead, the state where your bank or lender is headquartered becomes the determining factor for maximum interest rates, so the interest rates are determined by the bank’s state, not yours.
For example, if you live in Illinois where the maximum rate is 9%, but your credit card bank is headquartered in Vermont, then you can be charged up to 18%. Since most banks choose to headquarter in states where the laws are more lenient for financial institutions, chances are your credit card can be charged a much higher interest rate than what is allowed by the state you live in. This mean that usury laws, while still valid, are more relevant as they pertain to the interest rate you can charge an associate, not the interest rate the banks can charge you.
Federal Usury Law
The allowance for a national bank to charge the rates of its chartered state became legal with a ruling that was determined through a reverse appeal of the Supreme Court in 1978 with the Marquette National Bank versus the First of Omaha Corporation case, where Omaha Bank charged its Minnesota cardholders a higher interest rate than was allowed by Minnesota state law. Omaha, a national bank, was headquartered in Nebraska where the interest rates were set at a higher maximum limit. Minnesota residents were ultimately obligated to pay the interest rates that were imposed by the out of state bank.
While federal law does not govern credit card interest rates, if a national bank (or “N.A.”) issues a credit card, then there is no limit as to how high the interest rate can go. However, there are new federal laws that were passed in 2009 that, while they do not change the maximum interest rate allowed, they do have an indirect impact on your credit card interest rates. (See the Credit Card Act of 2009 below.)
Credit Card Act of 2009
The Credit Card Act of 2009 does not change state or federal laws on interest rates, so credit card interest rates are still without limit. However, it does offer relief for certain credit card holders who are surprised by a universal default APR by offering an opt-out option. You have to be notified in writing approximately 30 to 60 days before a change in your interest rate goes into effect.
Prior to the new law, if you triggered your universal default rate you were legally bound to pay the higher rate based on your terms and conditions. Depending on your balance and your budget, this could amount to astronomical figures. The new law provides consumers with an opt-out option to instead refuse the higher default APR, close the account, and bay the balance at the previous interest rate. The difference could add up to more than 12%, which could make voluntarily closing the account worthwhile.
If you close your account, you can apply for a new credit card with a different bank and choose a low interest rate credit card from a state bank. When you’re selecting a credit card from a national bank, review the default APR in your terms and conditions so you have an idea of how high your interest rate can go. You can use the credit card Chaser tool on our home page to help you track down low interest credit cards now for free. Get started with a free credit card comparison now!
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- Usury & Interest Guide: Usury Definition, Usury Rates, and is Your Credit Card Usurious?
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