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67 U. Colo. L. Rev. 1 (1996)


This article explores the specific question of setting a legal maximum for credit card interest rates. There has been extensive discussion in the popular press of the explosion of credit card use and the extraordinarily high interest rates people are willing to pay, through various fees and interest charges, to use them. Classic free-market economic arguments have been used to prevent the imposition of a federal cap on credit card interest rates, but there is strong evidence that economic models inadequately explain the credit card market and that a lack of interest rate controls has produced a dramatic transfer of wealth from consumers to the major credit card issuers, most of which are large national banks. I argue that this absence of regulation, which relies primarily on traditional liberal economic arguments for support, either (1) ignores the irrational nature of a consumer culture and promotes an extremely limited view of what is good social and economic policy, or (2) understands the irrational nature of consumers all too well and is designed to confer special benefits on the lenders of money. The result is a legal policy that promotes consumption and acquisitiveness and encourages behavior, such as greed, that the culture has traditionally labeled undesirable. After I observe the "real world" activity of a large number of credit card holders and examine effects this prevailing legal regime has had on consumers, I make two major arguments. First, allowing the market alone to set interest rates on credit cards is a one-sided legal policy that promotes consumption and debt among consumers, while producing unusually high profits for credit card issuers. Moreover, adherence to this one-sided policy has allowed the law to become a tool of the special interests that benefit from the promotion of high consumer debt and consumption. Second, the establishment of realistic interest rate controls in the credit card market would be preferable to the present system for two important reasons: (1) as a legal policy, interest rate controls more fairly balance the interests of consumers and credit card issuers than the current laissez-faire policy; and (2) the market is not an entity that exists separately from the larger cultural values and traditions of our society. Usury laws have been used throughout history to exercise social control over economic relationships that, unchecked, tend to degenerate into exploitation and other socially counterproductive behavior.

Part I of this article examines the current state of the credit card industry and reviews the major legislative and judicial developments over the last twenty years that effectively have deregulated credit card interest rates. Part II explores the economic arguments against interest rate regulation and examines important weaknesses in these arguments as they apply to the credit card market. Part III presents challenges to some of the accepted economic arguments supporting deregulation and raises some additional arguments concerning the negative effects of a lack of interest rate controls on credit cards. Finally, Part IV offers some general observations about reforming the credit card market and argues that reasonable interest rate controls, although they may tend to restrict the amount of credit available, are essential because they help to keep market interactions in line with important values of the larger culture.


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