How Credit Card Companies Became Modern Day Loan Sharks

by Alonzo on February 25, 2009

Watch out. Your credit card rate interest rate could rise DRAMATICALLY. Over the past three months banks have been increasing credit card rates to astonishing levels.

People are seeing 8% credit card rates rise to 25% or more practically overnight. Worst yet, even people with stellar payment histories and great credit scores are seeing their rates go through the roof.

BusinessWeek, for example,  recently reported that in mid-January Bank of America  sent letters to many of its cardholders informing them that their rates could more than double and go as high as 28%.

Why are banks doing this? Simply because they can.

Burned by their bad decisions and management in regards to home mortgages, banks are looking to shore up their balance sheets at our expense. Our initial credit card agreements generally allow credit card companies to raise interest rates for ANY reason as long as they provide us with written notice and a 15 day period in which to opt out.

If you do chose to “opt-out” you’re often required to pay off your balance and close your account.

Its clear that banks are becoming modern day loan sharks charging interest rates of 25%, 28% and higher.

What is especially infuriating is that these banks take billions of dollars of taxpayers’ money, and then turn around and stick these same taxpayers with sky-high credit card interest rates.

Many states actually have laws that prohibit these loan shark rates. So how do credit card companies get away with charging many of their customers such outlandish interest rates?

Banks can thank the Supreme Court. In the case of Marquette National Bank of Minneapolis v. First of Omaha Service Corporation, the Supreme court ruled that nationally chartered banks could charge people in other states the maximum interest rate allowed by the state in which the bank was headquartered.

Say you live in State X with laws that cap interest rates at 12%  You use a credit card issued by a bank located in state Y, which unlike State X, has no cap on interest rates.

Guess what. Thanks to this Supreme Court ruling, although you lived in State X, because the bank issuing your credit card resided in State Y,  the bank could charge you any interest rate it felt like.

Seeing a business opportunity to attract large banks to their states, some states like South Dakota did away with or dramatically raised interest rate caps.

Big banks followed and moved to these states so that they could charge customers nationwide that maximum allowed by the state laws in which they now resided.

This explains why CitiBank and Wells Fargo moved to South Dakota. Seeing the success of South Dakota, Delaware and a host of other states also dropped their interest rate caps luring large banks to their states as well.

Lesson: Always check your credit card statements and bills for notices that your credit card interest rate is about to go up. Additionally, try to make every effort to limit your credit card use because you could be falling into the hands of a loan shark.

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