A:

A true financial horror story began on Halloween in 1978. On that date, the Supreme Court began hearing Marquette National Bank vs. First of Omaha Corp. The case appeared to be a simple conflict over which state laws govern the relationship between debtor or creditor - the state where the creditor is based, the state where the debtor lives or the state that decides to grant the loan.

Marquette was a Minnesotacredit card issuer that followed the state cap of 12%, but charged annual fees as a tradeoff. An out-of-state issuer, First of Omaha, followed the looser laws of its state and offered cards charging 18% with no annual fees. The lack of annual fees attracted more customers and cut into Marquette's business. The Supreme Court ruled that the relevant laws are those of the state in which the lending decision was made. This meant a bank could open a credit division in a state with friendly usury laws and run all of its lending operations through that division in order to avoid tougher usury laws in either its own state or that of the debtor.

Initially, the drive to find friendly states was fueled by high inflation. Many credit card companies were capped below a 15% interest rate by state laws at a time when the inflation rate was as high as 20%. This meant many of the credit card companies were better off not lending at all, if they could not raise rates to keep up with inflation. The solution was offered by down-and-out states like South Dakota and Delaware.

When Citibank ran up against New York usury laws and it became clear that the state would not budge, Citibank cut a deal with South Dakota. South Dakota was in the economic doldrums and eagerly agreed to alter its usury laws to bring Citibank's credit arm and its thousands of jobs into the state. Other states have changed their laws to attract credit companies into relocating and the trend has continued - to the great advantage of credit card companies. Although inflation has dropped sharply since the stagflation period in the 1970s, many of the relocated credit card companies have kept their interest rates very high simply because they can.

(For more on this topic, read Cut Credit Card Bills by Negotiating a Lower APR and Understanding Credit Card Interest.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. How can I avoid paying unnecessary credit card fees?

    Examine different strategies for reducing fees on credit cards. Learn about the Consumer Financial Protection Bureau and ... Read Answer >>
  2. Am I responsible for fraudulent charges on my credit card?

    In the event that your credit card is stolen in the United States, federal law limits the liability of card holders to $5 ... Read Answer >>
  3. What are some common models that practitioners use in quantitative analysis of equity ...

    Understand which aspects of a credit card agreement make accepting a new credit card offer a good deal or one that should ... Read Answer >>
  4. Can I still use my credit cards if I'm on a debt management program?

    Learn how to find out if you can keep, use or apply for credit cards while on a debt management program and what kinds of ... Read Answer >>
  5. Which bank actually issues the Best Buy credit card?

    Learn that the Best Buy credit card is issued by Citibank, and offers its holders either 5% back in rewards or special interest-free ... Read Answer >>
  6. Can a creditor sue me for a delinquent account?

    Learn what happens when an account is delinquent and read about the regulations that protect consumers who have delinquent ... Read Answer >>
Related Articles
  1. Personal Finance

    How Credit Cards Built A Plastic Empire

    A decade before Mastercard or Visa existed, the first credit card company was introduced.
  2. Personal Finance

    Understanding Credit Cards

    Credit cards are a type of unsecured personal loan between the credit card issuer and the credit card holder.
  3. Investing

    Investing In Credit Card Companies

    This investment requires keeping an eye on consumer indexes and the overall health of the economy.
  4. Personal Finance

    Everything You Need To Know About Credit Card Rates

    Understanding credit card rates will help you choose the right credit card, and avoid any unpleasant surprises.
  5. Personal Finance

    How To Get A Credit Card Despite Bad Credit

    Prepaid credit cards and secured credit cards are both excellent options for getting a credit card despite having a poor credit rating.
  6. Personal Finance

    Take Control Of Your Credit Cards

    The plastic in your wallet doesn't have to hurt your finances. Learn how to manage it responsibly.
  7. Personal Finance

    7 Factors For Comparing Credit Cards

    It's good to find a credit card that fits your lifestyle, but read the fine print to make sure you're not overpaying for the benefits.
  8. Personal Finance

    Why More Millennials Need Credit Cards

    Here's why more Millennials should have credit cards – even though a majority don’t.
  9. Personal Finance

    The Pros And Cons Of Small Business Credit Cards

    Business owners have many financial tools at their disposal. Should a credit card be one of them?
  10. Personal Finance

    Credit Card Debt: America’s Biggest Struggle?

    Dealing with credit card debt is a huge struggle for many American families. Here are some tips to get you started.
RELATED TERMS
  1. Usury Laws

    Regulations governing the amount of interest that can be charged ...
  2. National Issuers

    Credit card companies that give credit cards to creditworthy ...
  3. Fee Harvesting Card

    Credit cards targeted at consumers with poor credit scores that ...
  4. Debtor

    A company or individual who owes money. If the debt is in the ...
  5. Credit Card Balance

    The amount of charges, or lack thereof, owed to the credit card ...
  6. Credit Card

    A card issued by a financial company giving the holder an option ...
Trading Center