How Credit Card Interest Rates Reached 24%

Americans owe nearly $1.3 trillion in credit card debt alone, with an average balance of $6,500 per person. The weight of this debt has created strange political alliances: Donald Trump proposing to cap credit card rates at 10%, supported by everyone from Bernie Sanders to Josh Hawley to Alexandria Ocasio-Cortez. But how did credit card interest rates climb to upward of 24% in the first place?

From Department Store Tokens to Plastic Power

The story begins at the turn of the 20th century in America's grand department stores—"huge palaces of consumption" that marketed themselves partly on credit availability. Customers received credit tokens, later evolving into embossed cards with names, account numbers, and addresses. These connected to mechanical billing systems that created carbon paper slips, mailed as monthly statements.

After World War II, as department stores expanded beyond city centers, banks saw an opportunity. In the 1950s and especially the 1960s, banks entered the credit market by approaching small merchants: "We can pull you all together into a centralized credit plan so you can compete with department stores."

Meanwhile, travel and entertainment cards like Diners Club and American Express emerged for business executives who needed to wine and dine clients. These weren't about borrowing—they were about managing expense accounts and projecting status with that heavy gold card.

White Flight and Banking Strategy

The real driver behind banks' credit card push was white flight—the mass migration to suburbs in the 1950s and '60s. Banks faced a problem: if you're the biggest bank in Chicago but all your affluent customers are moving to the suburbs, how do you keep them? State laws often restricted banks to single branches, typically located in business-district city centers.

Banks like Continental Illinois and First National Bank of Chicago saw credit cards as the solution—a way to attract and retain affluent suburban customers who might otherwise switch to local banks. Credit cards weren't just financial products; they were strategic responses to demographic shifts.

The Regulatory Gap and Supreme Court Ruling

Early credit cards operated in a regulatory vacuum. Banks charged 1.5 to 2 percent monthly interest, which seemed reasonable to mathematically challenged consumers. Then came 1968's Truth in Lending Act, requiring annual percentage rates. Suddenly, people saw they were paying 18% or 24% annually—a shock that led states to cap rates at 15-18%.

But banks were mailing cards across state lines, creating jurisdictional confusion. The pivotal case involved First National Bank of Omaha mailing cards to Iowa and Minnesota residents. Nebraska's rates were slightly higher than what Iowa and Minnesota allowed. Why should Nebraska law apply to an Iowa resident using their card only in Iowa?

The Supreme Court's answer changed everything: "The bank is in Nebraska, so Nebraska law applies." This ruling meant banks could locate in states with favorable regulations and solicit customers nationwide.

Citibank's South Dakota Solution

By the late 1970s, Citibank faced a crisis. The Federal Reserve had jacked up interest rates to combat inflation, meaning Citibank was paying more to borrow money than New York's strict rate caps allowed them to charge cardholders. Every card transaction lost money.

Citibank found salvation in South Dakota, which had no credit card interest rate restrictions. The pitch was simple: "We'll bring hundreds of jobs to your state if you'll let us open a branch." Citibank relocated its credit card division to South Dakota and gained the freedom to charge whatever rates it wanted. Delaware enacted similar laws, and most major banks followed suit.

Follow the Money: Where Interest Goes

When you don't pay your credit card balance in full, where does that interest go? Straight to the banks. Credit card lending consistently ranks among banks' most profitable business lines. The money flows to stockholders, funds credit card rewards programs (which primarily benefit affluent customers who get points for money they were already spending), and pays for advertising—ironically, using your interest payments to fund ads encouraging the very behavior that got you into debt.

Banks justify high rates by arguing they're necessary to extend credit to riskier borrowers. But as one expert notes, "It's the most affluent, the people who have access to the airport lounges, who have the high points cards, who get all the benefits and the rest of us pay all the costs."

The Debt-Fueled Economy

Over the past 70-80 years, the U.S. economy has increasingly run on household borrowing: mortgages, auto loans, credit cards, "buy now, pay later" schemes, and student loans. Household debt climbs relentlessly upward. People feel the precarity, the risk, the weight of all that debt.

Yet the system's design creates a two-tiered structure where the wealthy extract benefits while others bear the costs. The affluent get airport lounge access and premium rewards cards, while everyone else pays the interest that funds these perks.