Category Archives: Credit Card Companies and High Interest Rates

Why Credit Card Interest Rates Should Be Capped

By Ryan C. Wood

Credit card interest rates should be capped for the same reasons we have laws to make sure the food supply is safe and why we have seatbelts in our vehicles.  It is all about consumer protection.  It is just that simple and laws about our credit “products” are no different.  I recently noticed another bill was put before Congress to legislate at the federal level interest rate caps on creditor cards for consumers.  Maybe this time the law might actually get passed and signed.  I have written all kinds of articles about how we need credit and short-term loan reform in a number of areas. I am hopeful, but I doubt any real progress will be made in the near future to limit taking advantage of people that need short-term loans to pay for food or housing. Even as a bankruptcy attorney I have advocated for years to legislate protection regarding debts………

How Did We Get To 30 Percent Interest Rates To Begin With?

Each state has usury laws to protect consumers from unreasonable or unconscionable interest rates and contracts.  I have previously discussed “Why Are Credit Card Interest Rates So High” given there are state usury laws that are supposed protect consumers from unconscionable interest rates. Big business can easily find all kinds of ways to skirt existing legislation or change protections that protect individual consumers. I could list hundreds of examples and it is nothing new. It is unfortunate that over the years it has just become worse and worse to the tune of millions of dollars in disparity.  We just see higher and higher shameless interest rates.   

Payday Loans and Title Loans

In a prior article I wrote: “Why Payday Loans and Title Loans Need More Regulation and Not Less.”  I used the term loan shark not less than twelve times.  It is just the truth and why and how can this continue?  In this particular article I mention how there are laws to make sure there is no price gouging in the event of a natural disasters given people are vulnerable at that time………  These laws are protections resulting from a natural disaster. For some reason we do not want to protect consumers when they have a personal disaster whether in their control or not . . . . .

Why Payday Loans and Title Loans Need More Regulation and Not Less

The lending and credit practices in place right now are absolutely loan sharking and should be illegal period.  In the meantime let us discuss how things have run amuck. 

I have also questioned and complained about “How Can 1,000 Percent Interest Be Legal?” Well it should not be period.

Why Are Unconscionable Contract Laws Not Enforced

Arguably, or just my opinion, most payday loans, title loans and potentially credit card agreement terms are unconscionable contracts. In California we have Civil Code Section 1670.5 providing that if a part of a contract or contract is found to be unconscionable the court may refuse to enforce the provision of the contract or contract. Proving a contract is unconscionable is no easy task but generally the contract is overly harsh, unduly oppressive or unfairly one-sided. Unconscionable contracts are agreements that are unreasonably favorable to the credit card company or bank given they are clearly the more powerful party in the transaction.  Contracts or agreements that are overly harsh or unduly oppressive or are so one-sided as to shock the conscience should not be enforced.  Again, arguably 20-30% interest shocks the conscience.  Can we not agree that 1,000% interest is shocking? What is the limit?  In some industries there is no limit on mark-up of goods or services.  In our system the market is supposed to determine price of goods or services.  At the same time there are all kinds of examples of regulation that manipulate market conditions to the detriment of some parties and the benefit of others.  It is very difficult to agree on what is right or wrong, but can we all agree that we as consumers are supposed to have protections from parties we have no bargaining power with……….

Regulation For A Safe Food Supply

No one really complains about regulations that ensure our food supply is safe from production to sale.  We all actually take it for granted.  If we have more financial regulations to ensure the safe distribution of borrowed funds is it so different?  Nope.  They are just different industries and products.  We need better regulation to ensure safe borrowing for the benefit of consumers.  People are getting sick on bad meat (bad credit agreements) and it is not okay.

Capping Credit Card Interest Rates [AGAIN] Is A Great Start

I cannot say this about all laws that are changed, but generally how we treat many circumstances under the law have been developed over hundreds of years of trial and error. As a bankruptcy attorney there has been some form of debt relief by law, Bankruptcy Code, to obtain the discharge of personal liability of debts. We have modified the Bankruptcy Code over time but never entirely done away with it. Do you think debt and credit is something new? It is not. There is absolutely nothing new about one party as lender and another as the borrower. Why cannot we not learn from history so we are not doomed to repeat bad history? We more or less have done away with interest rate caps even though for hundreds of years under state usury law we capped interest rates to protect consumers. I ask you what has changed to warrant eliminating caps on interest rates? If there anything? Is there no more capitalism with a conscience possibly?

I see capping credit card interest rates like legislating that cars must have seatbelts or regulation to ensure safe food supply.  It is just that simple.    

How Can Credit Card Interest Rates Be So High?

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The short answers is because the law has been interpreted to allow credit card interest rates to be criminally high.  It was not always like this though.  You may be thinking to yourself that each state has usury laws limiting interest rates.  You are correct but keep reading to find out why it does not matter.    

There are price gouging laws in time of emergencies to not allow improper increases in price to make money at the expense of human suffering. There are state usury laws limiting how much interest can be charged when lending money.  So why are credit card interest rates so high?  If someone is in financial turmoil, financial disaster why are there not laws limiting interest rates on what they can borrow just like you cannot price gouge during natural disasters? How can a bank charge 29% interest on a revolving unsecured credit account? It is like loan sharking right?  Loan sharking is illegal right?  My best analogy is seatbelt laws. Seatbelt laws save lives. This is a fact and without seatbelt laws requiring wearing seatbelts not as many people would wear seatbelts and vehicle deaths would be higher. Well, The Supreme Court of the United States more or less opened the door to the repeal of seatbelt laws regarding limits on interest rates and people have been getting killed with credit card interest rates ever since. We all need to be saved from ourselves sometimes and our laws protect us. So what happened?

State Usury Laws

First let us talk about state usury laws. Each state can have usury laws limiting how much interest can be charged under different types of financial transactions. Over time many exceptions and loopholes have been created to allow lenders in different forms of loans to charge ridiculously high interest rates. See our other bankruptcy attorney articles about 1,000% interest title loans and payday loans. Somehow these horrible loans are legal though . . . . Below are the various sections of law in California that make up California usury laws. Generally, and very generally, 10% is the highest interest rate under California usury laws depending upon the type of financial transaction.

California Const. Art. XV §1
California Civil Code §§1912-1916.12
California Civil Code §§1916-1 to 1916-3
California Civil Code §§1917-1917.006
California Civil Code §§1917.060-1917.069
California Civil Code §§1917.160-1917.168
California Civil Code §§1917.610-1917.619
California Commercial Code §§9201-9208
California Corporations Code §§25116-25118
California Financial Code §§22000-22064
California Government Code §§5900-5909

Why Are Credit Card Interest Rates So High?

If there is state usury laws limiting the amount of interest that can be charged how can banks charge 29% interest on a credit card debt? The case is Marquette National Bank v. First of Omaha Corporation, 439 U.S. 299 (1978). Somewhere there is a bankruptcy attorney, not this one, cheering for these high interest rates given unmanageable debts drive bankruptcy filings. “The First National Bank of Omaha (Omaha Bank) is a national banking association chartered in Nebraska; it is enrolled in the BankAmericard plan, and solicits for that plan in Minnesota. Omaha Bank charges its Minnesota cardholders interest on their unpaid balances at a rate permitted by Nebraska law, but in excess of that permitted by Minnesota law.” So there you go. First National Bank of Omaha solicited clients in the state of Minnesota but chose not follow Minnesota state law regarding interest rates. First National Bank of Omaha charged higher interest rates according to the law in which they were located, the state of Nebraska. What should be controlling was the issue? Generally speaking the law of the jurisdiction where the individual is located, a state or country, governs their legal rights and not the corporate headquarters or location of the business they are doing business with. Each state has usury laws to protect their state residents within that state and limit interest rates. Each state in the United States has many different laws than other states. Family law is a great example and the 8.5 community property states vs. equitable distribution in the remaining 41.5 states. Why is there a 0.5? Alaska is an opt-in community property state. Save that one for Jeopardy. Back to . First National Bank of Omaha and how they arguably disrespected the state law of Minnesota. SCOTUS provided: “Though the “exportation” of interest rates, such as occurred here, may impair the ability of States to maintain effective usury laws, such impairment has always been implicit in the National Bank Act, and any correction of that situation would have to be achieved legislatively. Pp. 439 U. S. 318-319.” So under the federal National Bank Act what The First National Bank of Omaha did was okay even though it violated the usury laws of Minnesota. There you have it and the rest is history.

But wait. What state allows interest rates of 29%? This is where capitalism and greed took over and now we have more deaths by higher interest rates than before 1978. Certain states repealed or changed their usury laws to allow for high unconscionable interest rates. These states did this to lure the big banks to set up shop in their states to create jobs in these states. Well it worked. So for a few thousand jobs millions of Americans can be charged massive interest rates that we can all agree of too high.

What is the legislative solution SCOTUS mentions in The First National Bank of Omaha? Our United States legislatures, the Senate and House of Representatives, would have to pass legislation to limit interest rates and then that would applicable nationally. Do not hold your breath given our federal legislatures chose to bailout these same banks from the mortgage meltdown. Too big to fail means too big to be honestly regulated.

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.