Spain's banks brace for usury ruling on "snowball" credit cards

Spain's banks are on edge for an upcoming Supreme Court ruling that will decide at what point the interest charged on credit card borrowing is so high it could be classed as "usury". Ultra-low rates have pushed Spanish banks to seek returns from more profitable business lines such as consumer credit.

But high rates on increasingly popular cards, which allow periodic payments and automatically renew credit lines, have sparked a wave of lawsuits from debt-laden borrowers. A case brought by one woman from Santander over a "Visa City Oro" card issued in 2012 with an annual interest rate of 26.82% is to be heard from Feb. 26 by Spain's highest court.

Her so-called "revolving" credit card, which allows customers to continuously borrow up to certain limits depending on purchases and payments, was originally issued by Citibank Spain but now belongs to online lender WiZink. Two lower courts have ruled the rate represents usury, prompting WiZink to appeal.

If the Supreme Court rules the rate in the Santander woman's case was too high or poorly explained, it could leave banks with a large compensation bill and having to cut rates. WiZink, which is facing 2,500 lawsuits over credit cards, declined to comment on the case. It is one of many banks offering cards with interest rates that can top 25%.

With Spaniards increasingly chasing fast liquidity, revolving credit transactions rose to 13.6 billion euros ($14.75 billion) by the end of 2019, a 54% increase over five years, while mortgages dropped by 12% over roughly the same period. Under Spain's 1908 usury law, there is no specific rate above which a loan is defined as "usurious", but it says borrowing costs should not be "manifestly" above the normal cost of credit.

The woman's lawyer, Celestino Garcia Carreno, said they will be arguing credit cards should not be given special status compared to other types of consumer loans, which tend to come with rates of around 7%. PENSIONER'S MISERY

Spanish pensioner Jose Luis Vaquero is one of the thousands who will be watching the ruling closely. Six years ago, he signed up for a revolving credit card at an airport in the Canary Islands that came with a rate of around 27%. After taking on around 13,000 euros ($14,095.90)of credit through the card, also issued by WiZink, he said the rates were so high his debt spiraled as he could not pay off the capital.

"It just turned into paying interest on top of interest, with total payments of 700 euros a month," Vaquero recalled. "They kept pestering me and were calling me four or five times a day, so in the end, I was forced to sell a property I had in Marbella for 180,000 euros in February of 2019."

The legal uncertainty has delayed WiZink's public offering plans, two sources with knowledge of the matter said, forcing it to set aside 25 million euros for the plethora of lawsuits. Last week, the Bank of Spain highlighted the risks of the widely-offered credit card products, saying monthly payments may not even cover the interest. "There is a snowball effect and the debt risks become indefinite," it said.

WiZink, which manages around 3.4 billion euros in credit cards, has said higher costs were justified on riskier lending. It did not comment on Vaquero's case.

Other banks are also facing hundreds of more lawsuits related to consumer lending, according to the Bank of Spain. Patricia Suarez, head of consumer association Asufin, said that for her the main issue was transparency.

"It is not just a question of usury but also of explaining a contract clearly to a client," she told Reuters. Spain's Economy Ministry is working on a bill to better protect users of revolving credits.

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