What are usury laws and maximum interest rates?

If you’re one of the many Americans that carry a balance on your credit card, you should keep an eye on your card’s interest rate to manage how much you pay your issuer for the privilege of using the card.

What you may not know is that, on a federal level, there is no cap on the amount of interest a credit card company is allowed to charge. However, cardholders can find a bit of security in the federal Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) and in usury laws, which set interest rate limits on a state-by-state basis.

What are usury laws?

Usury refers to the practice of charging a very high interest rate that is deemed unreasonable. Usury laws set a limit on the amount of interest that can be charged on different kinds of loans.

State usury law exceptions

While most states have usury laws, national banks can charge the highest interest rate allowed in the bank’s home state — not the cardholder’s. So, while you may live in Arkansas where the maximum interest rate is 17 percent, your card issuer can charge you a higher amount if it has its headquarters in a different state with a higher maximum rate. And if your issuer is based in a state like Maine, which has no usury laws, you have even less protection.

In some circumstances, a national bank can even take recourse to the higher interest rate of a state where it has branches, rather than using the rate in the state where it is based, irrespective of the state where the consumer lives. 

Christopher L. Peterson, a usury law expert and professor of law at the University of Utah in Salt Lake City, puts it this way: 

In effect, what that really meant is that there are virtually no interest rate limits that are applicable to any type of bank, anywhere in the country, anymore.

— Christopher L. Peterson Professor of law, University of Utah

How do usury laws impact maximum interest rates?

Each state has a different approach to usury law and the maximum interest rate that lenders can charge. However, credit card lines of credit are rarely subject to these laws the same way consumer loans are.

Consumer loans vs. credit cards

For instance, if you’re in South Carolina, the legal maximum rate of interest is set at 8.75 percent, but at 18 percent for credit card debt. However, usury law is not always so black and white. Many states defer to contract law instead of usury law. For example, in Hawaii the usury law sets the interest maximum at 10 percent, but a written contract can override that maximum. This is also the case in other states, including Arizona, Utah and Texas.

Another bit of fine print to check for is exemptions, since credit card lending may not be bound by usury laws. For example, in California the maximum annual interest rate on consumer loans is 10 percent. However, the law states that banks and similar institutions are exempt. This is also the case in Florida, Minnesota and New Jersey, among others.

And then there’s Colorado where a rate above 45 percent is deemed usurious for non-consumer loans. However, the rate for consumer loans is capped at 12 percent unless they are “supervised loans,” which includes credit card debt, made by a “supervised lender.” These loans are capped at 36 percent.

The important thing to keep in mind as you explore usury laws for your state is that your issuer isn’t necessarily bound by your state’s laws.

Protections for military personnel

There are also laws that protect those serving in the armed forces, and their dependents, from high interest rates. The Military Lending Act caps credit card interest rates at 36 percent for those who enjoy this law’s protections. The Servicemembers Civil Relief Act also caps interest rates on any credit card debt incurred by an active service member prior to entering military service at 6 percent.

What to do about high interest rates

If you are dealing with a high interest rate, there are some things you can do to help ease your burden. For starters, you can talk to your issuer to try to negotiate a lower rate. If this doesn’t work out, there is also the possibility of transferring your balance to a balance transfer card with a lower interest rate.

Just remember that balance transfers are great tools, but they aren’t magic. A repayment plan and budget go hand-in-hand with balance transfers. If you want help figuring out your repayment plan, you could use Bankrate’s credit card payoff calculator and home budget calculator to crunch the numbers.

If paying off your high-interest debt seems out of your reach, you can also seek help from a debt counselor. There are debt management organizations out there that can step in to negotiate on your behalf with your credit issuer, many of which are non-profit groups.

The National Foundation for Credit Counseling is a good resource to find debt management services in your area. Additionally, there are other steps you can take to better manage and get out of debt, including consolidating the debt.

The bottom line

If you’re a cardholder carrying a balance, it’s in your interest to keep an eye on the finance charges you’re paying. There’s no federal regulation on the maximum interest rate that your issuer can charge you, though each state has its own approach to limiting interest rates.

State usury laws often dictate the highest interest rate that can be charged on loans, but these often don’t apply to credit cards. If you are facing the burden of high rates, you could negotiate with your lender or take other steps to better manage your credit card debt.