Americans charged more than $374 billion on their 841 million credit cards last year. The average cardholder has about eight of them. A little less than half of that credit was issued by banks and other financial firms, as opposed to retailers, says the Nilson Report, an industry research firm in Santa Monica, Calif.
Credit cards have ``become a form of national banking in a nation that has no national banking system,'' says Gerry Kraft, executive vice-president of FirstBank in Atlanta.
And even though thousands of financial institutions issue credit cards, the majority of the cards come from the top 50, which charge an average interest rate slightly above 18 percent, according to Nilson figures. Annual fees from these institutions hover around $17, and are double that for high-end ``gold cards.''
Several states, however, have put limits on how much banks and others can charge for their credit cards. These limits, in effect in various forms in 30 states, cover interest rates, annual fees, and charges for late payments, and they can define the ``grace period'' - the amount of time before late fees are charged.
To make their card business more profitable and less risky, many issuers are tacking on extra fees and charges anyway, but finding ways to skirt state regulations. A 1978 Supreme Court decision allows national banks that are chartered in states that have no limits on credit card fees and interest rates to export their business - solicit customers - in states that do have limits.
To get a charter, the banks ``simply put a piece of paper on file and hire a registered expert,'' explains Richard Cleland, assistant attorney general of Iowa.
The effect of the court's decision has been to create a regulatory environment that is focused on a few states with the weakest consumer protection, says Elgie Holstein, director at BankCard Holders of America, a consumer advocacy group.
Although increased competition should have brought both rates and fees down, costs have instead gone up for the majority of cardholders.
The decision has also put pressure on state legislatures to repeal interest rate and fee limits because of the threat of having their banks move credit card operations - and jobs - out of state.
Georgia, Louisiana, and Alabama recently removed restrictions on credit card interest rates, bringing the number of states with no regulation to 17.
Boatmen's Bancshares Inc. in St. Louis last year moved its credit card operations to a state without restrictions. ``We were seeking ... a stable legislative environment that would assure [Boatmen's] would retain the flexibility necessary to meet future requirements of credit card customers,'' spokesman Larry Bailiss says.
Banks have to be able to anticipate rising and falling interest rates, he says.
National bankers argue, too, that anything that increases competition benefits consumers. Credit card loans, unlike mortgage or auto loans, for example, are unsecured, Mr. Kraft at FirstBank says.
``In an environment where bankruptcy is being declared with more frequency - especially in New York and California, where spending is high and spending limits are higher - an issuer is taking more risk,'' adds David Robertson, vice-president of the Nilson Report. Banks have to anticipate cycles of rising and falling interest rates, he says, noting the recent increase in the prime rate.
Though consumers can reject cards with excessive charges, states with restrictions contend that the market is not all that free, and that people do not always make informed decisions.
``People will run to save money on a purchase and then spend it on the financing,'' says Paul Karass, senior examiner at Maine's Department of Professional and Financial Regulation.
Maine is one of the states that has both an annual-fee limit and an interest-rate cap on its credit cards. Its residents have been ``bombarded by solicitations'' from other banks whose rates are much higher than the 18 percent state limit, he says. While out-of-state banks have higher rates, they have used other inducements, like travel insurance, gifts, and money back on purchases to win customers.
Iowa has deregulated interest rates and annual fees charged by national banks, but it still requires specific authorization before any other charge can be levied. It has filed suit against four out-of-state banks that were either exporting fees - trying to get Iowans to take cards with higher fees - or were not national banks but were exporting higher interest rates into Iowa. So far, one of the banks settled with an agreement not to export terms or rates into Iowa.
South Carolina and several other states are considering similar actions.
``The citizens of Iowa don't get to lobby in South Dakota or Delaware, so we don't have a voice in setting their terms,'' Mr. Cleland in Iowa says. ``Our legislative decision ... ought not be subject to veto by another state.''
Under the 124-year-old National Bank Act, national banks enjoy the same ``most-favored-lender status'' that states normally grant their own state banks, says Philip Porter, counsel for the administrator at the National Association of Consumer Agency Administrators.
With the Supreme Court's ruling, he says, not only can these banks now assume most-favored-lender status, they can also export that status, in the form of unrestricted credit card terms, into other states. This reduces the system to one in which almost everyone falls into the ``most-favored-lender'' category.
``It's leading to de facto deregulation ... based on one state's law,'' Mr. Porter says.