The birth of out of control
credit card interest rates and fees

Some experts point the finger at consumers too willing to spend beyond their means. But others blame greedy banks legislators and courts who have allowed predatory lenders to charge out-of-control interest rates and hidden fees.

So how did we get to this point anyway?

National lending laws go back to the days of the Civil War when the government was searching for a way to boost its struggling national banking system. It enacted the National Bank Act, which allowed states to regulate the interest rates on loans offered by banks within its own boundaries.

Of course, you couldn't swipe a MasterCard in 1864. It took more than 100 years before the first landmark ruling to broaden the scope of the National Bank Act to include credit cards.

That ruling came in December 1978, when the Supreme Court unanimously agreed that states could only regulate the interest rates charged on credit cards issued by its own banks, not by out-of-state banks - even if those competing banks were soliciting customers in their state. The case, known as Marquette V. Omaha, involved the First National Bank of Omaha in Nebraska, which had been offering credit cards to BankAmericard customers in Minnesota. At the time, Minnesota capped its interest rates at 12 per cent, while Nebraska allowed interest rates up to 18 per cent. The ruling allowed the First National Bank of Omaha to offer its Minnesota customers rates nearly 50 per cent above those allowed by the state.

This ruling put pressure on states to weaken their regulations or face losing their banks to other states. It encouraged financial institutions to seek out states with the fewest regulations. Many banks began moving their operations to places like South Dakota and Delaware, which do not limit interest rates. Today, at least 29 states have no cap on credit card interest rates. The result is that interest rates across the U.S. have essentially been deregulated.

A second Supreme Court ruling in 1996, Smiley V. Citibank, broadened the definition of “interest rate” to include other fees, such as late-payment or membership fees. The decision came after a group of California residents complained that Citibank, a national bank based in South Dakota, was charging late-payment fees higher than California laws permitted.

Supporters of these rulings argue that it benefits consumers by allowing them to shop around for the best credit card deals, not just those available in their home state. But critics say the court rulings have allowed banks to circumvent state laws specifically designed to protect consumers.