As this article is being written, the Federal Reserve discount rate is at 1.75%. Yet national banks are charging many of their credit card customers interest rates in excess of 35%! There was a time in this country, not so long ago, when interest rates this high resulted in jail time for the loan shark that offered them. Not anymore.
Usury laws are all about predatory lending and loan sharking. Federal law says that state laws do not apply to national banks. As a result, these national banks provide loans at interest rates far higher than many state usury limits. The rates are many points higher than the Federal Reserve discount rate -- which is the rate that the banks get when they borrow from the Federal Reserve. Federal law defines the criminal limit as twice the amount of the particular state's usury limit. If the state has no limit then this federal "protection" doesn't mean a whole lot to the average consumer. We'll see shortly how a single state with a pie in the sky limit affects everyone.
For thousands of years, governments and societies have controlled the interest rates that lenders could charge. These rates were kept low, providing a reasonable return for the lender and a fair loan to the consumer. But in today's environment, where the bankers become the board members of the Federal Reserve as wells as Treasury Secretaries controlling the money, the people are on their own, without a voice.
Most credit card issuers place their headquarters in states that have virtually no interest rate cap on credit cards. As a result, the banks and credit card issuers based in these states can charge any interest rate they wish. Thanks to a 1978 U.S. Supreme Court decision, Marquette vs. First Omaha Service Corp, these exorbitant interest rates dominate the business. Essentially, this decision allowed banks to charge the prevailing interest rate in the state they are based in, as opposed to the state you live in. For example, while you may live in a state that has laws trying protecting you from these sky-high interest rates, all the corner bank had to do was transfer their headquarters to a state like South Dakota or Delaware -- and they were home free! As a result, you pay the effectively unlimited rates of their bank in South Dakota or Delaware when you don't even live there, rendering YOUR state's laws ineffective in protecting you.
In the late 1970's most states capped interest rates on credit cards somewhere in the 12-18 percent rate. As many states scrambled to keep national banks from moving to places that had no limit or minimal limits, the rates kept rising to over 24%. Then, bigger banks started buying up most of the smaller banks and we were left with a handful of giant banks. Currently, many of those giants themselves have fallen and we are left with only a few enormous ones and interest rates approaching 40% when they are paying less than 2% for their money. What's next?
One state - Arkansas - because of their constitution, has kept interest rates low for over a hundred years. Currently, the maximum rate in Arkansas is 5% over the Federal Reserve rate, which today would be 6.75%! However, another federal law, the Gramm-Leach-Bliley Financial Modernization Act, allows even state chartered banks to charge the same rates as the national banks. So, even though states like Arkansas have a long tradition of low interest rates, the federal government has overridden this and allowed all the banks to charge whatever they want.
There are virtually no protections left for the consumer. Other laws and court decisions have allowed just about any fee and service charge to be added to your account. The only rule is that they notify you in writing of their new credit policy. How thoughtful. So, even if you sign up for a card at one rate and fee package, via a contract, the credit card companies can legally change it to anything they want, simply by notifying you of the change. When it comes to credit cards -- a contract is not a contract. You are locked in from your end and cannot change any terms. But the banks can raise your interest rate and assess any fees they want, without your consent. Of course, you always have the right to refuse the higher rate, but then they close your card -- which adversely affects your credit score! One might say, "Then simply pay things in cash." That is partly correct, but our economy has made it nearly impossible for us to live without credit. We're required to establish credit in order to buy things such as a car or a house or even rent an apartment.
So, then what's a person to do? A lot of experts will give you all sorts of advice, from calling your credit card company to get a better rate, to transferring your balance to a lower rate card. However, these "solutions" ignore the fact that the bank is only paying 1-3% for the money they are lending! So, even if they reduce your rate form 36 percent to 30 percent, or from 25% to 20 % they are still ripping you off!
Get angry! And get even. The only way to win this game is to rid yourself of the debt. Pay off the cards and use them minimally, paying their balances every month to keep from incurring a finance charge. This will ensure that you still have excellent credit when needed while not giving them a dime. Stay away from credit card with membership fees at all cost. This is just hidden interest. You may have to cut back on your style of living a bit, but so what? Americans are already in for a huge awakening regarding spending more than they can afford.
Imagine what would happen if even 10% of Americans did this and lived like their parents and grandparents did? Instead of the banks telling you what you're going to pay and what you're going to do, they would be begging people to do business with them. They would have to earn your business, the good 'ol fashioned way -- with honesty and truth in lending. Even if it's just you that that takes this course of action -- you still end up ahead by not paying these modern-day, legal loan sharks their ridiculous rates and making yourself independent and free of the strangle hold of American consumer debt. Some liberties you have to take into your own hands!
Last, but certainly not least, this whole issue makes one wonder about the recent $700 billion government bailout of the last standing, giant banks. How is it possible that, while charging up to 35% on money lent, the banks could have ever gone under...? Hmmmm....