High Credit Card Rates & Fees * Thanks to the Supreme Court

Have you ever wondered why all your credit card bills seem to get mailed to South Dakota, Nevada or Delaware? Or how credit card companies can ignore your state's usury law, which limits the amount of interest that can be charged on a loan?

The answer lies in a couple of Supreme Court Rulings. A 1978 Supreme Court ruling, Marquette National Bank of Minneapolis vs. First of Omaha Service Corp. and the other Smiley vs. Citibank.

The first ruling let credit card issuers "export" nationally whatever interest rate was allowed in the state in which they were headquartered. To induce the companies to relocate, some states simply dropped their usury laws. Several large issuers bit on the deal, relocated and it became anything goes for credit card rates.

A couple of states deciding their economic development plan was going to be to attract the credit card export industry,deregulated their consumer credit marketplace and said, 'If you come plop your little headquarters in Delaware or South Dakota, you can export our interest rate cap -- look at us, we don't have any!' Other states said, 'They're getting banks to headquarter there; we should take our interest rate caps off as well to compete for credit card issuance.' It became a tool to deregulate credit card rates."

South Dakota was the first to offer what amounted to unlimited interest rates to lure card issuers into relocating their headquarters. A quick look at the membership of the state's Chamber of Commerce shows how big of an impact the offer made -- and continues to make -- on the state's employment base.

It's no coincidence that South Dakota is the home state for subprime card issuer First Premier Bank, which gained notoriety for offering a card with an interest rate of 79.9 percent.

In the other case mentioned, Smiley vs. Citibank, a California woman, Barbara Smiley, had filed a class action lawsuit against Citibank's South Dakota-based credit card division, claiming that the $15 late fee she was charged on her credit card bill violated California state law. Citibank responded that the late fee was, in effect, interest and was covered under the National Bank Act. The Supreme Court agreed; the result was an increase of late fees and other fees from $10 or $15 to the $39 fee that credit card customers may see today.

The pair of decisions caused terrific abuses in the credit card market, and probably stunted the growth of an honest credit card market for over 20 years. They also killed off State Usury Laws for Credit Card Rates, increased late fees and other fees and encouraged predatory lending. The result, were the kinds of tricks and traps based on legal gimmickry that led to the need for some protection for Consumers. That's why we now have the Credit CARD Act of 2009 and the Wall Street reform law that included a Consumer Financial Protection Bureau.

Don't expect those Acts to protect us from being charged rediculously high rates though, to take it that far would come across as anti-capitalism, socialistic or even downright unamerican.