Why Are Credit Card Interest Rates So High?
- Friday, August 03, 2007
The Short Answer: Because they can be.
The More Complete Answer: For most of human history there were laws (or at least moral standards) that said usury was wrong. Depending on one’s understanding of the word, “usury” refers to charging exorbitant rates of interest. (Actually some people argue that usury means charging any interest at all—especially to a brother in the faith.) But, at a minimum, usury is the practice of charging unfair interest rates.
Historically, in America, that rate was often seen as anything over 18 percent. That is, until 1979.
In 1979, the Supreme Court made a decision on an obscure point of law that turned out to have profound effects on millions of Americans. The case involved a dispute between a bank located in state “A” with a customer of that same bank who lived in state “B.” The question was which state’s laws governed the dispute? Of course, any average person would assume that the state where the customer lived would hold the determinant jurisdiction. But, the Wizards of the Potomac saw it differently. The Supreme Court ruled that the state in which the bank was headquartered (state “A” in this case) held sway.
At first, no one paid too much attention. But before long someone in South Dakota said, “Hey, if that’s the case, why don’t we change our usury laws and allow higher rates? After all, it might bring employment to South Dakota from the big banks in New York. They actually might move here and operate lending services since we allow higher legal interest rates.” Sure enough, it worked. And before you knew it, other states (like Delaware) were saying, “Me too! Let’s change our usury laws to attract employment and jobs. After all, banks don’t pollute the air or pump toxins into the rivers.”
Gradually over the next decade, more and more Americans forgot about what was right and moral and began to accept what was profitable and expedient.
Today, many credit card companies have set up operations in states that don’t regulate usury as they should. This means, they are far less regulated. And, interest rates of 18, 25, 30, even 36 percent are not uncommon. The net result, credit card debt is threatening the very solvency of this country and her people.
What’s right and moral doesn’t count. What’s profitable does count. Today credit card companies are getting away with interest rates and terms that a generation ago would have been the domain of the loan sharks. Today, the motto seems to be “AFAB.” (That’s “anything for a buck” for those of you in Delaware.)
So what does this mean for us? It means, when you get your credit card bill and look at that low minimum payment remember—that’s what they want you to pay! As a matter of fact, credit card companies call the people who pay off their full balances “deadbeats!” If you pay the whole amount every single month—they don’t like you very much because you’re only making them a small profit. What they really would prefer is for you to make just the minimum payment and let the rest rollover. But that’s the problem! On many cards the low minimum payment barely covers the interest!
In the last couple of years Congress has been putting pressure on some of the credit card companies to raise their minimum payment requirements. (Remember: The more you pay each month—the faster it’ll go away!) So, grudgingly, some of the companies have increased the required monthly payments from as little as ½ percent to 2 or 2 ½ percent.
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