How Can Credit Card Companies Charge Such High Interest Rates?

Usury is defined as the act of lending money at an unreasonably high rate of interest. The practice is frowned upon almost universally and yet credit card companies continue to charge outrageous interest rates. How do they get away with it?

At many points in history, charging interest at all was frowned upon. Today many states have usury laws in place which cap interest rates. It is no coincidence then that most major credit card issuers are based in states without usury laws and without interest rate caps on credit cards. Banks and credit card issuers based in these states can charge any interest rate they wish — as long as the rate is listed in the cardholder agreement and the borrower agrees. However, high credit card interest rates are not reserved for residents of states with no usury laws…

Usury laws and the Supreme Court

How do the credit card companies get away with charging usurious interest rates to “customers” all across the country? The Supreme Court has been a big help. In Marquette National Bank v. First of Omaha Corp., the Court allowed First Omaha, a nationally chartered bank based out of Nebraska, to charge its cardholders in Minnesota a rate of interest acceptable under Nebraska law but illegal under Minnesota usury law. In an opinion written by Justice Brennan, the court held that the National Bank Act provision, which 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” preempted Minnesota state law. The result: a nationally chartered bank can charge all of its cardholders according to the law of the state where it is chartered.

Strict application of the National Bank Act has prevented some state legislatures from enforcing usury laws and created a strong business incentive for others not to write them. In their rush to attract the jobs that come with the banking industry, state legislatures are indirectly legalizing usury.

Rob Cohen

Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.
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