The concept of credit or buying something "on time," has been around for a long time. For well over 200 years, merchants and customers have been exchanging goods and services in ways that didn't require payment in full. It began as individual deals that merchants would strike with their most favored customers. It was a good deal for the merchants because it strengthened their connection with their customers. It was good for the customers because they had a more convenient way of acquiring what they wanted and they didn't have to have all of the money up front. In these early days, little or no interest was charged.

In the 1940's, the first bank cards started to appear. They were issued to only the bank's customers and could only be used locally, usually at merchants that were also customers of the bank. These were the first charge cards and they charged no interest.

---------------------------------------Sidebar----------------------------------------
Charge cards and credit cards are two different animals. With a charge card, you're obligated to pay your bill in full at the end of your grace period which is usually at the end of the month. With a credit card, you're allowed to carry a balance forward each month and pay a minimum amount instead of the full bill (this, of course, includes credit card interest)
------------------------------------------------------------------------------------------

Flash forward to the 1950's and the revolving balance is born...and of course its ugly duckling half-brother, credit card interest! This meant that customers no longer had to pay off their complete balance in full at the end of their billing cycle. It also meant that banks could now charge them for that privilege.

By the 60's the credit card game was heating up and banks were forming up into two opposing teams. We've come to know them as Visa and MasterCard. Originally, they were heated competitors; a bank could join one side or the other but not both. Ultimately, the credit card business was just too good to fight over, and banks were allowed to join both organizations and make money from both products.

By the end of the century, Discover Card had entered the scene and had started to carve out its own slice of the credit card pie. American Express too had branched out into the credit arena, expanding on its charge card business. The lure of interest rate charges and the expanding credit market were just too attractive to pass up. And now today, all of the credit card companies live in a sort of harmonious balance, each one content to mine their own share of the market while continuously trolling for new customers.

Revolving balances couldn’t exist if banks weren’t allowed to charge interest on them. And it’s a fair proposition on its face. After all, businesses are entitled to make a profit. There’s nothing wrong there.  Interest charges are the main way banks turn that profit on your credit card account. Essentially, they charge you a fee to borrow money. That’s what your revolving balance is, borrowed money. So you’re basically paying a fee for the ability to spend money that you haven’t yet saved up. You get the benefit of being able to spend tomorrow’s money today and the banks are compensated for their risk by charging you the fee. It’s designed to be a win-win situation.

To make sure that the relationship stayed “win-win,” governments have historically placed limits on interest rates. The concern was that borrowers needed a certain amount of protection against unethical or radical changes in rates. In the U.S. this was left mostly up to individual states. And that’s how the system worked for decades.

But in 1978 the rules took a decided turn in the credit card companies’ favor when the Supreme Court held in Marquette vs. First Omaha Service Corp that a credit card company could charge the highest rate allowed in their home state to all of their U.S. customers – regardless of where they lived or what their State’s interest rate laws allowed.

So major credit card issuers started moving their operations to “rate-friendly” states. For instance, New York’s Citibank moved its credit card operations to South Dakota a state very friendly to lenders. Others moved their operations to places like Delaware, Georgia, or Illinois. Not soon after that, credit card interest rates started to climb for most consumers.

Today, the average consumer credit card rate is over 14%. That means (on average) for every consumer that has a 5% rate, there’s another one with a 23% rate. Some individual rates are nearly 30% and there are no real controls in place to keep them from going even higher.

For instance, credit card companies have the legal right to raise your limit for any number of reasons. For example:

• If you’re late on a payment
• If you’re late on a payment to another creditor (i.e. the Gas company)
• If you’ve taken on more debt from another creditor (i.e. another credit card)
• If your FICO score drops

Most credit card agreements give the credit card issuer the right to raise your rate with only the small condition of having to give you 15 days notice.

----------------------------------------------Update------------------------------------------
The Congress passed the CARD bill in May, 2009 which will go into effect February of 2010. The bill, while not placing a cap on credit card interest rates, does eliminate or curtail some of the more ruthless practices that have found their way into credit card company policies. For instance, cardholders will receive 45 days notice before their interest rate can be changed. The bill will also place restrictions on the ability for card issuers to raise interest rates and to charge certain fees or penalties.
--------------------------------------------------------------------------------------------------

Interest rates on credit cards have long been a profitable enterprise for banks and other credit card issuers. In roughly 60 years they’ve gone from zero to double digits. They are a major contributor to a bank’s net interest margin which directly contributes to their bottom line. So you can expect banks to do whatever they can to continue to drive credit card interest rates as high as possible.

Do yourself a long-term favor. Become better educated in the ways of credit cards and their fees and charges. Explore alternatives (especially prepaid debit cards). Learn about your options and exercise them to your benefit. Because making informed decisions is the only real weapon we have in our battle to protect our consumer rights.