A true financial horror story began on Halloween in 1978. On that date, the Supreme Court began hearing Marquette National Bank vs. First of Omaha Corp. The case appeared to be a simple conflict over which state laws govern the relationship between debtor or creditor – the state where the creditor is based, the state where the debtor lives or the state that decides to grant the loan.

Marquette was a Minnesotacredit card issuer that followed the state cap of 12%, but charged annual fees as a tradeoff. An out-of-state issuer, First of Omaha, followed the looser laws of its state and offered cards charging 18% with no annual fees. The lack of annual fees attracted more customers and cut into Marquette’s business. The Supreme Court ruled that the relevant laws are those of the state in which the lending decision was made. This meant a bank could open a credit division in a state with friendly usury laws and run all of its lending operations through that division in order to avoid tougher usury laws in either its own state or that of the debtor.

Initially, the drive to find friendly states was fueled by high inflation. Many credit card companies were capped below a 15% interest rate by state laws at a time when the inflation rate was as high as 20%. This meant many of the credit card companies were better off not lending at all, if they could not raise rates to keep up with inflation. The solution was offered by down-and-out states like South Dakota and Delaware.

When Citibank ran up against New York usury laws and it became clear that the state would not budge, Citibank cut a deal with South Dakota. South Dakota was in the economic doldrums and eagerly agreed to alter its usury laws to bring Citibank’s credit arm and its thousands of jobs into the state. Other states have changed their laws to attract credit companies into relocating and the trend has continued – to the great advantage of credit card companies. Although inflation has dropped sharply since the stagflation period in the 1970s, many of the relocated credit card companies have kept their interest rates very high simply because they can.

(For more on this topic, read Cut Credit Card Bills by Negotiating a Lower APR and Understanding Credit Card Interest.)

This question was answered by Andrew Beattie.

Most Americans encounter some form of debt at one point in their lives. Debt comes in several forms, but all debt can be categorized within a few main types including secured debt, unsecured debt, revolving debt and mortgages. Not all debts are created equally; therefore, some are considered better than others.

Secured Debt

Secured debt is any debt backed by an asset for collateral purposes. A credit check is necessary for the lender to judge how responsibly you handle debt, but the asset is pledged to the lender in case you do not repay the loan. For example, if you require a loan to purchase a car, the lender supplies you with the cash necessary to purchase it but also places a lien, or claim of ownership, on the vehicle’s title. In the event you fail to make payments to the lender, it can repossess the car and sell it to recoup the funds. Secured loans like this have a fairly reasonable interest rate, which is based on your creditworthiness and the value of the collateral.

Unsecured Debt

Unsecured debt lacks any collateral. When a lender makes a loan with no asset held as collateral, it does so only on the faith in your ability and promise to repay the loan. Granted, you are still bound by a contractual agreement to repay the funds, so if you default, the lender can sue to reclaim the money owed. Doing so comes at a great cost to the lender, however, so unsecured debt generally comes with a higher interest rate. Some examples of unsecured debt include credit cards, signature loans, gym membership contracts and medical bills.

Revolving Debt

Revolving debt is an agreement made between a lender and consumer that enables the consumer to borrow an amount up to a maximum limit on a recurring basis. A line of credit and credit card are examples of revolving debt. A credit card has a credit limit, and the consumer is free to spend any amount below the limit until the limit is reached. Payment amounts for revolving debt vary based on the amount of funds currently on loan. Revolving debt can be unsecured, as in the instance of a credit card, or secured, such as on a home equity line of credit.

Mortgages

Mortgages are probably the most common and largest debt many consumers carry. Mortgages are loans made to purchase homes, with the subject real estate serving as collateral on the loan. A mortgage typically has the lowest interest rate of any consumer loan product, and the interest is tax deductible for those who itemize their taxes. Mortgage loans are most commonly issued at 15- or 30-year terms to keep monthly payments affordable for homeowners.

A true financial horror story began on Halloween in 1978. On that date, the Supreme Court began hearing Marquette National Bank vs. First of Omaha Corp. The case appeared to be a simple conflict over which state laws govern the relationship between debtor or creditor – the state where the creditor is based, the state where the debtor lives or the state that decides to grant the loan.

Marquette was a Minnesotacredit card issuer that followed the state cap of 12%, but charged annual fees as a tradeoff. An out-of-state issuer, First of Omaha, followed the looser laws of its state and offered cards charging 18% with no annual fees. The lack of annual fees attracted more customers and cut into Marquette’s business. The Supreme Court ruled that the relevant laws are those of the state in which the lending decision was made. This meant a bank could open a credit division in a state with friendly usury laws and run all of its lending operations through that division in order to avoid tougher usury laws in either its own state or that of the debtor.

Initially, the drive to find friendly states was fueled by high inflation. Many credit card companies were capped below a 15% interest rate by state laws at a time when the inflation rate was as high as 20%. This meant many of the credit card companies were better off not lending at all, if they could not raise rates to keep up with inflation. The solution was offered by down-and-out states like South Dakota and Delaware.

When Citibank ran up against New York usury laws and it became clear that the state would not budge, Citibank cut a deal with South Dakota. South Dakota was in the economic doldrums and eagerly agreed to alter its usury laws to bring Citibank’s credit arm and its thousands of jobs into the state. Other states have changed their laws to attract credit companies into relocating and the trend has continued – to the great advantage of credit card companies. Although inflation has dropped sharply since the stagflation period in the 1970s, many of the relocated credit card companies have kept their interest rates very high simply because they can.

(For more on this topic, read Cut Credit Card Bills by Negotiating a Lower APR and Understanding Credit Card Interest.)

This question was answered by Andrew Beattie.

Most Americans encounter some form of debt at one point in their lives. Debt comes in several forms, but all debt can be categorized within a few main types including secured debt, unsecured debt, revolving debt and mortgages. Not all debts are created equally; therefore, some are considered better than others.

Secured Debt

Secured debt is any debt backed by an asset for collateral purposes. A credit check is necessary for the lender to judge how responsibly you handle debt, but the asset is pledged to the lender in case you do not repay the loan. For example, if you require a loan to purchase a car, the lender supplies you with the cash necessary to purchase it but also places a lien, or claim of ownership, on the vehicle’s title. In the event you fail to make payments to the lender, it can repossess the car and sell it to recoup the funds. Secured loans like this have a fairly reasonable interest rate, which is based on your creditworthiness and the value of the collateral.

Unsecured Debt

Unsecured debt lacks any collateral. When a lender makes a loan with no asset held as collateral, it does so only on the faith in your ability and promise to repay the loan. Granted, you are still bound by a contractual agreement to repay the funds, so if you default, the lender can sue to reclaim the money owed. Doing so comes at a great cost to the lender, however, so unsecured debt generally comes with a higher interest rate. Some examples of unsecured debt include credit cards, signature loans, gym membership contracts and medical bills.

Revolving Debt

Revolving debt is an agreement made between a lender and consumer that enables the consumer to borrow an amount up to a maximum limit on a recurring basis. A line of credit and credit card are examples of revolving debt. A credit card has a credit limit, and the consumer is free to spend any amount below the limit until the limit is reached. Payment amounts for revolving debt vary based on the amount of funds currently on loan. Revolving debt can be unsecured, as in the instance of a credit card, or secured, such as on a home equity line of credit.

Mortgages

Mortgages are probably the most common and largest debt many consumers carry. Mortgages are loans made to purchase homes, with the subject real estate serving as collateral on the loan. A mortgage typically has the lowest interest rate of any consumer loan product, and the interest is tax deductible for those who itemize their taxes. Mortgage loans are most commonly issued at 15- or 30-year terms to keep monthly payments affordable for homeowners.