At the national level, the concept of usury has no currency

By Herbert Rothschild

The Federal Reserve Bank of New York’s Center for Microeconomic Data reported on Aug. 6 that, at the end of the second quarter of 2024, the balances on the credit cards of U.S. consumers reached $1.14 trillion. That averages out to $6,329 per customer. Credit card debt is far less than mortgage debt ($12.52 trillion) and slightly less than auto loan debt ($1.63 trillion), but credit card debt is far more expensive to carry.

Last year, as the Federal Reserve raised the cost of borrowing to combat inflation, the rate for a 30-year fixed-rate home mortgage peaked at around 7%. The average mortgage rate was significantly lower, however, because most mortgages had been taken out in previous years. Compare that to the average credit card interest rate in 2023, which was 20.68%. Some borrowers are paying 30% or more. Banks love us to borrow on our credit cards. In a telling transposition of value, those who pay off their balances in full each month are nicknamed “deadbeats.”

Lenders do take more risks on credit card loans than on mortgages or auto loans, which have the homes and cars as collateral. More than 9% of those $1.14 trillion credit card balances became delinquent in the 12 months preceding June 30. That wasn’t necessarily bad news for the lenders, though. They charge late fees for missed payments and can raise the interest rate on the existing balances.  

Currently, the normal late fee is $32. According to the Consumer Financial Protection Bureau, in 2022 credit card issuers raked in $14 billion in late fees alone. The CFPB recently issued a ruling that caps late fees at $8 for banks with at least 1 million open accounts. However, a Trump-appointed federal judge in Fort Worth, Texas, has put the ruling on hold at the urging of the U.S. Chamber of Commerce and the American Bankers Association.

When I was young, an interest rate of 20% was regarded as usurious. It was normal for states to have usury laws capping legal interest at rates well below that. Here’s a sample from that time:

• New York: In the 1960s, a limit of 6%. For certain types of loans, the limit was raised to 7.5% in the early 1970s.
• California: Until 1979, a limit of 10%.
• Illinois: In the 1970s, 8% for most loans.
• Michigan: In the 1960s and 1970s, a limit of 7%.

Currently, Oregon law sets the rate at 9% unless the borrower and lender have agreed to a different rate, which, of course, the holder of a credit card must do.

What allowed the banks that issue the majority of credit cards to charge interest well above the legal rates set by the states where many of their borrowers live was the U.S. Supreme Court ruling in Marquette National Bank v. First of Omaha Service Corp. (1978). In a unanimous decision, the judges held that nationally chartered banks may charge the highest rate allowed in the bank’s home state to all its borrowers no matter what state they live in. Two years later, Congress extended that ruling to all federally insured banks.

The largest banks have incorporated in states that by law allow them to charge the highest interest rates. Delaware is a favorite. Its allowable rate is 24% on loans of $2,500 or more and 25.5% on loans less than that (most credit card purchases are below $2,500). Among the banks incorporated in Delaware are Bank of America, Wells Fargo Bank, Capital One, U.S. Bank and Goldman Sachs. New York changed its maximum allowable interest rate to 25%. Citibank and Morgan Chase are among the banks incorporated there.

In 2005, Congress made it harder for consumers to get out from under credit card debt by declaring personal bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act mandated a means test to determine whether borrowers have any money beyond what is needed to meet their basic needs. It also mandated credit counseling before the filing of bankruptcy and an eight-year waiting period before another bankruptcy could be filed.

After the financial meltdown of 2008, when there was great public anger toward the large banks, Congress passed the CARD Act of 2009 (Credit CARD Accountability Responsibility and Disclosure Act). It protected consumers from some of the most egregious credit card practices. For example, it required credit card issuers to provide clear and concise disclosures about interest rates, fees and other terms and conditions. And it placed limits on how often they could increase interest rates on existing balances. The act also made it harder for the companies to lure people under 21 to sign up for and use credit cards.

Nonetheless, the CARD Act nibbled around the edges of the problem. It didn’t address the key issue, which is the rates of interest credit card companies can charge in the first place. It’s as if the concept of usury has no currency at the national level.

The availability of easy credit that card issuers provide goes hand in hand with the constant inducement of people to indulge themselves materially. Apparently, lawmakers would prefer to let ordinary people ruin themselves with debt rather than use their legal authority to control interest rates. If capping rates at a reasonable level meant that banks had to vet more closely those to whom they issue cards and set much lower limits on how much most cardholders could borrow, that would strike me as all to the good. It would be better yet if credit unions, not credit cards, became the primary access to credit for people of moderate to low incomes.

Herbert Rothschild’s columns appear on Friday in Ashland.news. Opinions expressed in them represent the author’s views. Email Rothschild at [email protected].