Legal Limits on Credit Card Interest Rates

Unless you are benefiting from a 0% promotional rate, all credit cards incur interest on outstanding balances each month. Therefore, it’s crucial to understand how credit card interest rates function, including the interest charges and the regulations governing them.

At the federal level, there are no usury laws that cap the interest rates credit card companies can impose on borrowers. However, consumers are protected from deceptive practices by credit card companies under the Credit Card Accountability, Responsibility and Disclosure Act of 2009.

This article will delve into the legal maximum interest rates, how these rates vary by state, and strategies to avoid excessive interest on credit cards and loans.

What does usury law mean?

Usury refers to the practice of imposing excessive interest rates on consumers for financial products. Usury laws set a ceiling on the maximum interest rates applicable to various loans, including credit cards.

The absence of federal usury laws means that maximum interest rates differ based on the usury regulations of each state. In fact, national banks are required to comply with the maximum interest rates of their home state, not the cardholder's state; thus, the rates charged to cardholders can exceed their state's limits.

For instance, a resident of California borrowing from a New York-based bank can face an interest charge of up to 16% (the maximum rate in New York), despite California's rate limit of 10% for in-state banks.

It's worth noting that many national banks and credit card companies can sidestep state usury laws by establishing themselves in states with lenient regulations, such as Delaware, even if they conduct business in other locations.

Maximum Interest Rates in Your State

Various states impose different maximum interest rates for small loans. For instance, in California, the cap for a $500 loan with a six-month repayment period is 45%, while a $2,000 loan with a two-year term has a maximum rate of 25%.

The disparities in these rates are detailed in the National Consumer Law Center's list of state rate caps for $500 and $2,000 loans.

Overview of the Military Lending Act

There is a notable exception to the varying state maximum interest rates and the absence of federal regulations: the Military Lending Act.

The MLA supersedes state regulations regarding maximum interest rates and is applicable to active-duty military personnel and their dependents. The law caps the maximum interest rate for those covered by the MLA at 36% annual percentage rate.

Financial products governed by the MLA include payday loans, credit cards, overdraft lines of credit, and certain installment loans.

Tips for Avoiding High Interest Rates

High interest rates can significantly impact your personal finances and complicate debt repayment. However, there are several strategies to steer clear of excessive interest rates, some of which may be more beneficial than others.

Begin by reaching out to your credit card issuer or bank to negotiate a lower rate. The APRs for loans or credit cards are partially determined by your credit score, so if your score has improved since you obtained the loan or credit card, you might be eligible for a reduced interest rate.

If adjusting the rate isn't possible, think about transferring your outstanding balance to a 0% APR credit card. If you have debt spread across multiple high-interest loans or credit cards, you may also consider obtaining a debt consolidation loan. This could not only provide a lower interest rate but also simplify your payments to a single monthly bill.

Conclusion

Although there are no federal usury laws in the U.S., state usury regulations can help curb excessively high interest rates on loans and credit cards. However, this doesn’t guarantee that your credit card will adhere to your state’s maximum rates, as many national banks and credit card companies exploit various loopholes to impose higher rates.

Fortunately, there are measures you can take to avoid high interest rates, such as balance transfers and debt consolidation loans. Ultimately, the most effective strategy is to avoid carrying a balance and to pay off your credit card or loan promptly.