My Credit Card Rate Is What??

Chances are, if you have a credit card in your wallet, you have more than one. And if you have credit cards, you might have a balance on them, and monthly payments which never seem to bring that balance down. You might be wondering why. But have you looked at your rate?

If you haven't, you're not alone. I recommend looking over your statement regularly - the APR, or Annual Percentage Rate, is usually buried on the bottom of the statement, along with the actual "interest charge" or, the amount of money being added to your balance each month. Until this year, when the Credit Cardholders' Bill of Rights Act of 2009 kicked in, your rate was probably going up without your knowledge - even if you made all your payments on time. And even with the Act in place, it still can go up, mysteriously, except that now you have to be notified in advance.

What kicks a credit card rate up? It can be as innocent as you using and increasing the balance of another credit card. That gets reported to the credit bureaus, and, claim the credit card issuers, makes you more of a risk for paying back your other credit cards. The riskier you are, the higher of a rate you get. That's just one of many examples of why. But how high can rates get, anyway?

Many people have rates on their credit cards of 18%, 25%, even 29.99%. And while your rates may have automatically gone up, they hardly ever go down on their own. With rates that high, a person paying minimum payments every month will take more than two decades to pay off the balance, and that's if the borrower stops using the credit card.

Once you've looked at your rate, however, take a look at the billing address you send your payment to. I can bet that the last line will either list Delaware or South Dakota as the state where the bill gets sent. Why can I predict that? Because credit card companies have flocked to these two states due to their very loose credit laws. And as long as a credit company is headquartered in that state, they use that state's laws when they sell you a credit card, even if you live elsewhere.

You can read more about the history of this here, and on Frontline's website. (Frontline did an excellent documentary on credit cards.)

Those loose laws pertain to the interest rate the company can charge. In the days before usury laws were slackened at the federal level, in the 1980s, it was universally tough to charge exorbitant interest rates on credit cards. But once the federal laws changed, it was up to the states to determine their own laws. Two states, Delaware and South Dakota, loosened their laws in order to attract these credit card businesses to move there and create jobs. So naturally, they did.

What to do about it...

So, you've got a high-interest credit card (or two, or more) with one of the big banks, and it's headquartered in Delaware or South Dakota. If so many companies do this, how can you ever just open a new card and transfer a balance in order to solve the problem of overly-high interest rates, without being right back where you started?

That's where local banks and credit unions can make a huge difference! If you live in a state that isn't Delaware or South Dakota (and you probably do!) a local bank which issues a credit card from their own headquarters (which should be local!) will have to adhere to the different laws of your own state.

Here in Massachusetts, the law is that no interest rate can be higher than 18%. That's a lot better than 29.99%! When I switched banks from a national bank to a local credit union, I was told very firmly that the rate for a credit card, if I were approved for one, would be no higher than 9%. And they made it clear that it would take more than a barely-missed payment to move that rate to something higher. At 9%, a balance has a bigger chance of being paid down faster than an interest rate three times that!

I like the non-profit, customer-owned credit union style of bank, but many locally owned commercial banks are also a better deal and under their home state's laws. I recommend going bank shopping, and asking them questions. Ask them under which state's laws their credit cards are issued. Credit unions often have residency or other requirements, so generally you can join one that's in your town or city, if you have one. You have to be a member to apply for credit there. Local commercial banks are obviously open to all.

So, maybe it's time to dump your high interest credit cards and go local!