By not enforcing a rule, South Dakota is the rule with credit card rates
Ever wonder why your Citibank credit card bill comes from South Dakota and your payment goes there too, when you know Citibank is based in New York? It is due to a combination of federal laws and 50 different state laws that allow a bank in New York to use a South Dakota address to bill a customer in California.
Many states have a usury law that limits the interest rate a business can charge. Most of these laws capped interest rates at 18%. However, some states, like South Dakota, do not have a usury law, allowing state businesses to charge as much interest as they want.
Part of the functions of Congress is to regulate interstate commerce. This includes nationally licensed banks that operate in more than one state. In the Supreme Court case Marquette v. First Omaha Service Corp. In 1978, the Court ruled that nationally licensed banks do not have to follow the state law in which they operate, but only the law of the state in which the company is incorporated. Because state usury laws weren’t uniform, they all became irrelevant, as credit card companies moved to states that allowed them to charge the highest interest rates.
After the 1978 ruling, only national banks were exempted. If you were banking with a bank that only operated in your state, you were protected by your state law. But a federal law now also exempts state banks.
The Gramm-Leach-Bliley Financial Modernization Act was passed in 1999. This act created more regulation over banks because it required financial services companies to better protect their clients’ confidential information. Although in return, the control that state banking regulators had over banks that only operated in their state decreased. The law allows state-licensed banks to charge interest rates equal to those charged by national banks operating in their state. Therefore, even if you have a credit card with First National Bank of California, which only has one branch, you will be charged the highest interest rate allowed by any state.
The only protection that consumers have now is that contained in the credit agreement that the customer signs before using the card. However, most agreements lean heavily towards the issuer, and most clients rarely read them to begin with. For clients who are affected by late payment penalties, they can see their interest rates rise up to 32%.
Another problem with deregulation was that credit issuers were not required to set a manageable minimum payment. Most credit cards have slowly lowered their required minimum monthly payment from around 5% of the balance to just 2%. This encourages your customers to pay less each month, which translates into more time to pay off the balance. If a customer has a balance of $ 5,000 and only pays 2% of the balance each month at an interest rate of 18%, it will take 46 years and interest costs of more than $ 13,000 to pay it off.
Deregulation was intended to create and created more credit options for consumers. The removal of state-imposed interest rate caps allowed credit card companies to offer credit to customers across the country and not just in their home state. Now, several major lenders are having trouble with defaulted accounts, mainly because the interest payments on those accounts were so high. Due to the credit collapse, the Treasury Department recently proposed new legislation that will change the way credit is regulated in the country.