Jonquilyn Hill

What happened is in 1968, Congress enacted something called the Truth in Lending Act, which says you have to present interest rates as a simple annual rate.

It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.

And so all of a sudden, then people are seeing, oh, I'm being charged 18% or 24%.

And that is a huge shock.

And so what happens is the states tend to limit rates to between 15 and 18%.

The rules in each state are kind of different and kind of complicated.

And so as banks are developing their sort of credit card networks, they begin to mail cards across state lines.

And there's a big fight centered around a bank called the First National Bank of Omaha, which is still a going bank in Omaha, Nebraska.

But the First National Bank of Omaha begins mailing cards into Iowa, and they're mailing cards into Minnesota.

And the interest rates in Nebraska are not especially high, but they're a little bit higher than what's allowed in Iowa and what's allowed in Minnesota.

But from a consumer's perspective, if you live in Iowa and you only ever use your card in Iowa, why would you expect that Nebraska interest rates are what would apply to you?

And the state attorney generals and individual consumers begin to sue the First National Bank of Omaha saying that they're charging too much.

And so this kind of creates a whole slew of legal cases that end up in the Supreme Court.

The Supreme Court says, well, you know, the law is pretty clear.

Right.

The bank is in Nebraska, so the transactions are in Nebraska, and so Nebraska law applies.

So the Supreme Court rules that it's where a bank is based that all of this is factored on, not where the customer is?

That's right.

A bank can then locate itself in whichever state has the most favorable regulations and then solicit cardholders across the country.

South Dakota didn't have any restrictions on credit card interest rates.