Usury Laws and Limits on Credit Card Interest Rates
Federal law does not mandate interest rate limits for credit cards, but credit card companies must follow certain federal rules under the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act). Some, but not all, states have "usury" laws that limit the interest a lender may charge on a debt. However, federal court decisions and statutes have virtually exempted credit card companies by allowing them to charge customers, regardless of their state of residence, the interest rates allowed by the state in which they are incorporated.
This means that there are no limits on credit card interest rates in practice, even if certain limits remain on the books, the only exception being the 18 percent interest limit for federally chartered credit unions. Therefore, the best way to protect yourself as a borrower is to be informed about your federally guaranteed rights to interest rate disclosures and other protections.
See FindLaw's Financial Consumer Protection section for more related information.
State Usury Laws
The term "usury" dates back to the Roman Empire and has been used to describe everything from the blatant exploitation of borrowers to any cash loan that incurs interest. Today, usury generally refers to the former and is subject to interpretation, but a "usury limit" is a statutory limit on how much interest a lender may charge.
Most states have usury laws that set limits on interest rates for loans, but they have been significantly weakened over the years to the point of irrelevancy by at least one U.S. Supreme Court decision, federal statute, and some state laws.
The 1978 case Marquette National Bank v. First of Omaha Service Corp. unanimously held that nationally chartered banks may charge the highest rate allowed in the bank's home state. This is why so many banks are located in states like Delaware and South Dakota, which have very liberal or nonexistent usury laws. So even if you live in a state that has a very low usury limit, it typically has no bearing on the interest you pay on your credit card.
State usury laws were further eroded with the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). This federal law allowed all federally insured banks (including most state-chartered banks) to charge out-of-state customers the highest rate possible in the bank's home state. After DIDMCA was enacted, most state legislatures passed laws allowing local banks to charge as much interest as out-of-state banks.
Interest Rates and the Credit CARD Act
While the Credit CARD Act does not limit the rate of interest, the legislation does require that credit card companies provide card holders with advance notice of any rate increases. Specifically, they must provide you with a 45-day notice before they can increase your interest rate, change certain fees, or make other significant changes to the terms of your credit card.
Also, when card companies try to change the terms that apply to a cardholder, they must first give cardholders the opportunity to cancel their credit card agreement. Should the cardholder choose to do so, such a cancellation cannot be considered a "default," but the credit card company may increase your monthly minimum payment (subject to some limitations). See "Credit Card Rules and the CARD Act" for details.
Since interest rate limits are virtually unregulated (and usury laws have been superseded by federal and some state laws), make sure you read the fine print, understand your federal disclosure rights, and choose credit cards wisely.
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