http://www.bankrate.com/brm/news/cc/20020320a.asp

Credit card companies sidestep usury laws
By Lucy Lazarony • Bankrate.com

For hundreds of years, societies all over the world have protected borrowers by limiting interest rates charged by lenders.

But in today's credit card market, American borrowers are pretty much on their own.

Less than half of all U.S. states bother to cap credit card interest rates, and few credit card issuers are based in these states anyway.

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.

And thanks to a 1978 U.S. Supreme Court decision, these the-sky's-the-limit rate policies dominate the credit card business.

State of interest rates
In Marquette vs. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps.

"It's whatever is agreed to in the contract," says Michael Donovan, a consumer attorney and partner at Donovan Searles in Philadelphia.

"They can export rates to other states and override state law limits."

When it comes to credit card interest rates, the law in a lender's home state rules. It doesn't matter what kind of rate cap exists in a customer's state.

A funny thing happened after the Marquette ruling. Major credit card companies began relocating to states with liberal or no usury laws. New York-based powerhouse Citibank moved its credit card business to South Dakota in 1981.

"Citibank went to South Dakota, not because South Dakota was a banking center but because it had that particular law," Donovan says.

In 1982, the four largest banks in Maryland relocated their credit card operations to Delaware because of that state's lender-friendly credit card laws. Other states with lender-friendly credit laws include Georgia, Illinois, Nebraska, Nevada, Rhode Island and Utah.

To hang on to the credit card business, many other states loosened state usury limits.

In the early '80s, most states capped credit card interest rates between 12 percent and 18 percent. Today's caps are in the 18-percent to 24-percent range.

Hawaii and the District of Columbia cap credit card interest rates at 24 percent, which isn't much of a cap at all. Missouri caps card rates at 22 percent. And Colorado, Indiana, Kentucky, Oklahoma, Tennessee and Wyoming allow credit card interest rates up to 21 percent.

"The unmistakable dynamic is in the direction of deregulation," says Mathew Street, associate general counsel at the American Bankers Association. "The states have moved in the direction of raising the caps or removing the caps."

The low-rate state
One exception is the state of Arkansas. Arkansas' state constitution has kept a tight lid on interest rates for more than 125 years. Amendment 60 to the constitution, approved in 1982, caps interest rates at 5 percent above the federal discount rate. Because of this, Arkansas banks offer some of the lowest credit card rates in the country.

"It's a wonderful thing for our consumers," says Todd Turner, a consumer attorney based in Arkadelphia, Ark.

Every time banks and businesses tried to change the amendment, consumers voted them down.

"The banks and the chambers of commerce wanted it changed," Turner says. "The common folk in Arkansas don't want it changed because it protects them."

But all that may be changing, thanks to the Gramm-Leach-Bliley Financial Modernization Act, which the U.S. Congress passed in 1999. A section of the act allows state-chartered banks to charge interest rates equal to those charged by other banks operating in their state.

Needless to say, out-of-state lenders with branches in Arkansas charge interest rates beyond the state's interest rate limit. So much for that 128-year-old constitutional cap.

"The banks are going to be increasing interest rates because they are going to be able to offer the prevailing rate of their competitors," Turner says.

So far, only a handful of Arkansas banks have increased credit card rates. Simmons First National bumped up the interest rate on its variable rate card from 7 percent to 8.95 percent in December 2001, according to Bankrate.com research. Pulaski Bank and Metropolitan National Bank have kept their rates as low as ever.

So, is there an upside to the deregulation of the credit card industry for consumers? You bet -- more credit choices. The lifting of state-imposed interest rate limits made it easier for credit card issuers to offer cards to customers from all over the country. And that's what has been happening.

"The bottom line is it's become a competitive marketplace," Street says. "Issuers have customers everywhere, and customers can choose cards from issuers everywhere."

Caveat cardholder
With this increased choice in credit cards comes increased consumer responsibility. In many cases, there's no law stopping an issuer from charging you a super-high interest rate or an interest rate higher than you deserve.

The only person who can insure that you get a good card rate is you. The best advice is to build a strong payment history and keep your credit as clean as possible.

"The main thing is to keep your nose extremely clean no matter what," says Linda Sherry, editorial director at Consumer Action, a consumer advocacy organization based in San Francisco, Calif. "Avoid late payments."

You can bet a credit card issuer will up your interest rate if they see something on your credit report they don't like. Don't give them a reason. Pay your credit and other bills on time, every month. Here are some tips on avoiding credit card late fees.

Let's say your credit record has improved since you applied for your card. There's a good chance you qualify for a lower rate. But no card issuer in the world is going to knock down your rate unless you ask. So call and ask. Have other lower rate credit card offers in hand when you call.

If your issuer won't lower your rate, transfer your balance to a lower rate card. This article by Bankrate.com will show you how.

Always be on the lookout for a better card deal. Study the offers that come in your mailbox. Search online. The Bankrate.com credit card search engine can help you locate the best deals from issuers from around the country.

"Pull out all the stops," Sherry says. "Beg, borrow and steal to get a good rate. You have to do it because they're not going to offer you one proactively."