Thursday, May 21, 2009

Credit Check

Congress passed a bill yesterday that will impose some limits on credit card companies. You'll be entitled to 45 days notice of rate increases; the rate on an existing balance can't increase without some permitted reason (including being 60 days late in paying); penalty fees have to be reasonable; and so on. Of course the credit card companies are protesting that credit will be less available.

Unfortunately, the bill doesn't address the number one problem with credit cards -- they charge interest rates that would be usurious if anyone else did it. Most states have limits on the rate of interest that a lender can charge on a loan, and many credit card interest rates exceed the rate permitted by the usury laws.

How can this be? The federal government is responsible -- which makes it appropriate for the federal government to take action to do something about it. The Supreme Court decided in 1978 that, by virtue of the National Bank Act, a bank can charge interest permitted by the state where the bank is located, even if the borrower is in another state that has a lower limit on interest rates. You can imagine what happened -- banks flocked to states with high interest limits, or, better still, no limit at all. South Dakota, which repealed its interest rate ceiling altogether, got most of the business. That's why, if you look carefully, you'll notice that your credit card company is probably located there.

So what Congress should really do is restore state control over interest rates, or fix some national limit, so we're not all helpless in the face of South Dakota's freewheeling, laissez-faire attitude. But in the meantime, it's good that Congress has recognized that it can pass consumer protection laws. Now if it could just do something about airlines and cell phone providers.

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