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Why Is Credit Card Interest So High?

Have you ever noticed that all your credit card bills seem to get mailed to South Dakota, Nevada or Delaware? More importantly, why can credit card companies ignore your state's usury law, which limits the amount of interest that can be charged on a loan, and charge whatever rate they want?

The answer lies in a 1978 Supreme Court ruling that changed the law and opened the door to the credit card industry to make use of the laws in states with weak usury laws.

At the time, a small number of states -- most notably South Dakota and Delaware – saw an opportunity to expand their job bases during a deep recession by luring credit card companies to relocate there. The Court ruling let credit card issuers "export" nationally whatever interest rate was allowed in the state in which they were headquartered. To encourage the companies to relocate, some states simply dropped their usury laws. Some of the large issuers relocated and it became “anything goes” for credit card rates.

South Dakota was the first to offer what amounted to unlimited interest rates to lure card issuers into relocating their headquarters. Sioux Falls alone employs more than 8,000 people in financial services, including credit card issuers.

For consumers across the country, the impact was a dramatic increase in the availability of credit cards. According to the American Bankers Association, 38 percent of American households had at least one credit card in 1977, the year before the Supreme Court ruling. By 1989, the percentage of families with at least one credit card was 56 percent. Today, it's about 75 percent. The increased availability came at a price – high interest rates.

It is unlikely that Congress or the President will push for a national usury law to stop predatory lending. As with homeowners who default on their mortgages, credit card users are unfortunately pretty much on their own.

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