Unless you’re taking advantage of a 0% promotional offer, all credit cards charge interest on balances that are carried over month to month. For this reason, it’s important that you understand how the interest rates on your credit card work, including how much interest you are being charged and what the laws are surrounding credit card interest.
At the federal level, there are no usury laws limiting the amount of interest a credit card company can charge borrowers. However, the federal government protects consumers from unfair practices by credit card companies under the Credit Card Accountability, Responsibility and Disclosure Act of 2009.
In this article, we’ll explore the maximum interest rates allowed by law, how these rates can differ based on state and how to avoid high interest on credit cards and loans.
What is a usury law?
Usury is the practice of charging consumers unreasonable interest rates on financial products. A usury law caps the maximum interest rate that can be charged on different kinds of loans, including credit cards.
The lack of usury laws at the federal level means that maximum interest rates will vary depending on the usury laws in each state. In fact, the rates charged to cardholders can be higher than what their state allows, as national banks must adhere to the maximum interest rates in the bank’s home state, not the cardholder’s.
For example, a person living in California who has a loan from a New York-based bank can be charged up to 16% interest (the maximum rate in New York), whereas the interest rate limit for California-based banks is 10%.
It’s important to note that most national banks and credit card companies are able to avoid state usury laws by incorporating in jurisdictions with relaxed usury laws, like Delaware, even though they may operate elsewhere.
Related: How to use a 0% APR credit card as an interest-free loan
Maximum interest rates in your state
Many states set different maximum interest rates for small loans. For example, in the state of California, the maximum interest rate on a $500 loan with a six-month repayment term is 45%, whereas a $2,000 loan with a two-year repayment term has a maximum interest rate of 25%.
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These rate differences are illustrated in the National Consumer Law Center’s list of state rate caps for $500 and $2,000 loans.
Related: Best balance transfer credit cards
About the Military Lending Act
There is one exception to the state-by-state maximum interest rate and the lack of federal laws on interest rates: the Military Lending Act.
The MLA overrides state laws on maximum interest rates and applies to active-duty military members, including their dependents. The maximum interest rate allowed by law for those that fall within the MLA is capped at a 36% annual percentage rate.
The types of financial products covered under the MLA include payday loans, credit cards, overdraft lines of credit and some installment loans.
Related: The best credit cards for active-duty military: Get waived annual fees
How to avoid high interest rates
High interest rates can be detrimental to your personal finances and make it harder to pay off your debt. But there are several ways you can avoid high interest rates, with some being more advantageous than others.
Start with talking to your credit card issuer or bank to negotiate a lower rate. Loan or credit card APRs are partly based on credit score, so if your credit score has improved since you took out the loan or applied for a credit card, you may qualify for a lower interest rate.
If the rate cannot be adjusted, consider transferring the outstanding balance to a 0% APR credit card. If you’re carrying debt across several high-interest loans or credit cards, you may want to consider taking out a debt consolidation loan. In addition to a potentially lower interest rate, you will only have to deal with a single payment.
Related: Why paying off credit card balances is more important than ever
Bottom line
While there are no federal usury laws in the U.S., state usury laws can prevent outrageous interest rates on loans and credit cards. However, that doesn’t mean that the credit card you hold will fall within your state’s maximum interest rates, as many national banks and credit card companies take advantage of various exemptions that allow them to set higher rates.
Thankfully, there are steps you can take to avoid high interest rates, including balance transfers and debt consolidation loans. Ultimately, the best step you can take is not to carry a balance and to pay off your credit card or loan as soon as possible.