Usury Laws on Credit Card Debt

High interest rates or credit cards with hidden fees and costs can mean financial trouble for consumers who spend above their means or accumulate too much debt. Some consumers may claim that high interest rates violate usury laws. That answer depends largely on what state the credit card company is incorporated in.

Usury Laws in General

The purpose of usury laws is to prevent a lender from charging illegal interest rates and to protect borrowers from predatory lending practices. States may set the usury limit on various transactions such as general legal rates of interest, consumer lending rates of interest and judgment rates of interest. It is illegal to exceed those interest rates, however, certain rules apply to banks and financial companies like credit card companies.

Special Rules

According to the 'Lectric Law Library, in 1980 Congress enacted legislation that allowed national banks to ignore state usury laws. If the bank or financial institution is national, typically denoted by having the work "national" or "N.A." in its title, the credit cards it issues are not subject to state usury laws. Further, another exception exists allowing financial institutions to override state usury laws.

Supreme Court Ruling

The Supreme Court case "Marquette vs First Omaha Service Corporation" ruled credit card companies may charge the maximum interest rate allowed in the state where the business is incorporated. This ruling applies regardless of where the card was used or where the consumer lives. Certain states, such as South Dakota, have no limit on consumer usury interest rates. Credit card companies incorporated in South Dakota can charge any rate as outlined in its terms and conditions.

Usury Rule Example

Assume a consumer lives in Hawaii, a state with a legal maximum interest charge of ten percent. If that consumer borrows money from his neighbor, the neighbor cannot charge an interest rate greater than ten percent, or else he is in violation of the usury law. Violators are subject to penalties and the borrower won't have to pay the higher rate. If this Hawaiian consumer obtains a credit card from a company incorporated in South Dakota, the South Dakota usury limits apply. Since South Dakota has no usury limit for consumers, the credit card company can charge twenty percent or more on credit card balances.