How high can a credit card’s interest rate go?

Is there any limit to how high your credit card interest rates can go? You may be surprised to learn that generally there isn’t. As cardholders are aware, your variable credit card interest rates have been on the rise this year, going from just above 16 percent in January to about 18.4 percent at the end of September.

This year’s upward trend has been influenced by the Federal Reserve’s fight against inflation. This has caused the central bank to move up its target interest rate, which influences variable card rates for consumers. Besides Fed-influenced rises, there are some other situations in which your card issuer can raise interest rates on your account without notice.

When can your card’s interest rate go up?

For one, if you have a promotional 0 percent APR, your issuer will raise your rate automatically once the promotional period ends.

And if you don’t make at least your minimum payment for 60 days, your issuer could impose a penalty interest rate on your account.

Otherwise, a card issuer generally cannot hike up your interest rate during the first year you open the account. After that period, other than in the situations outlined above, it must notify you 45 days in advance about any rate changes, per the Credit Card Accountability Responsibility and Disclosure Act (CARD Act).

New transactions you enter more than two weeks after this notice period will be charged at the new rate. If you are not agreeable to the interest rate change, you can cancel your credit card. In that case, you can pay off any existing balances on the account at your lower current rate.

There is no limit on card interest rates

As for how high your card interest rate can go, the CARD Act did not establish a ceiling. While many states have usury laws that limit the interest rates that lenders can charge, a lot of these state laws don’t apply in practice to credit card rates.

Usury refers to lending at a rate of interest that is so high as to be unreasonable. In California, the state’s usury law limits rates on consumer loans to 10 percent. However, California also exempts loans made by banks and credit unions from this usury law. Some other states also exempt banks from their usury laws.

And banks can charge the interest rates prevailing in the state where they are headquartered, rather than in the consumer’s state. That’s why credit card issuers tend to be based in states such as Delaware and South Dakota that don’t have interest rate ceilings on credit card debt.

In some circumstances, banks can even charge the rates permitted in a state where it has branches and not where it has its headquarters, even if the borrower lives in another state.

Practically speaking, there is no limit on how high your card interest rate can go.

Rate caps apply in some cases

However, there are some situations in which consumers do get the protection of a cap on their interest rates. One exception is for cards issued by a federally chartered credit union. The law states that these institutions can’t charge their members a rate higher than 18 percent, including all finance charges, on their unpaid balances.

Also, if you are actively serving in the military or a covered dependent of such a person, the Military Lending Act caps the interest rates, including finance charges, on your credit card debt at 36 percent.

For any loans taken out before you became an active servicemember, the Servicemembers Civil Relief Act provides relief, capping interest rates at 6 percent. This is to ensure that servicemembers can focus their attention on serving the nation. You will have to notify your lender about your military service and ask for the cap.

Attempts to cap rates

There have been some attempts to set national interest rate caps on credit card debt. For instance, the Veterans and Consumers Fair Credit Act would cap interest rates for consumers at 36 percent. It aims to extend the Military Lending Act’s interest rate cap to civilians, too.

And in 2019, an attempt by Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez to set a 15 percent cap on credit card interest rates didn’t take off. Their proposed federal law would also have allowed states to create even lower interest rate caps.

“We will send a clear message to the modern-day loan sharks that we will not allow them to make billions off of keeping working Americans in a state of perpetual debt,” Sanders said at the time, in an online statement. “We must stop the exploitative lending practices suppressing economically distressed communities. We must ensure every American has the opportunity to grow financially.”

The bottom line

The CARD Act does not include a cap on credit card interest rates. While there are state-level interest rate caps and usury laws, many of those laws don’t apply to credit card rates in practice. Moreover, banks can charge the interest rates that apply in the states where they are based, rather than in the state you live in.

You should read the fine print of your card’s agreement to find out which state’s laws apply to your credit card balance. Your card issuer will generally have to give you 45 days’ advance notice in case it wants to hike up your rate.

Artur Starke
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