Revolving cards in the jurisprudence of the Spanish Supreme Court

In everyday life, it is common to use credit cards as a means of payment to make different purchases. There are many varieties offered by different banks, but we do not know how they work at all.

In bank cards, there are different payment possibilities:

• In debit cards: the payment is verified by deducting the amount by debiting the linked account at the time of use.
• In credit cards, it is common to find two modalities:
  • Deferred payment or debit cards, in which the balance derived from the use of the card is charged to the linked account without any interest being received for this deferment of payment.
  • Deferred credit cards that usually earn interest on a daily basis, payable monthly in favour of the bank at the monthly rate specified in the specific conditions of the contract.

Although it is required that in any case the customer be fully informed of the economic conditions involved in the use of the different types of card, the practice leads to the conclusion that this is not always the case and that consumers are not always informed of the conditions to which they are subject, generating in many cases undesirable situations of over-indebtedness.

What are revolving cards?

Revolving cards, as established by the Bank of Spain, are a special type of credit card, the main characteristic of which is the establishment of a credit limit, the availability of which initially coincides with this limit, which decreases as charges are made (purchases, cash withdrawals, transfers, interest and expense settlements and others) and is replaced by payments (payment of periodic bills, purchase returns, etc.), as well as the interest, commissions and other expenses generated, which are financed jointly.

That is to say, they are credit cards that allow the return of the credit in a deferred form by means of the payment of periodic quotas that vary depending on the amounts disposed of. Within the limits set by the entity, the amount of the instalment can be fixed, but it is necessary to bear in mind that with each instalment paid the credit is reconstituted, that is to say, the amount of the amortized capital in each instalment can be made available again. Hence its name revolving, so it constitutes a credit that is automatically renewed at its monthly maturity so that it is actually a revolving credit that is equivalent to a permanent credit line. The agreed interest rate is applied to the capital drawn down. In addition, if defaults occur, the debt is capitalized again with accrued interest.

The revolving operation consists of the provision of a credit with a certain limit, the repayment of which is carried out with the monthly instalments paid to the bank, with an interest rate generally higher than that used in loans, which normally ranges between 20% and 30%, and which is justified by the high risk of the financing granted by the issuers of this type of card.

The borrower has a maximum amount that can be used without a time limit. No type of guarantee is required to grant them, nor is a study of the borrower’s solvency carried out. As the amount drawn down is amortised, it can be drawn down again and so on.

Therefore, in this type of card, it is very important to find out how the debt is going to be repaid, and the first choice is in what term, given that if you choose to pay off the debt in full, institutions do not usually charge interest. However, if the payment is in instalments, interest is generated which, as we have already said, is usually quite high, justified by the high risk of the financing granted.

In view of the foregoing, the Bank of Spain’s Market Conduct and Complaints Department considers that a good financial practice would be that, in cases in which the principal is to be repaid over a very long term, the institution would periodically provide its customer with information on the following points:

• the planned repayment term, taking into account the debt generated and pending by the use of the card and the instalment chosen by the customer (when the customer would finish paying the debt if no further withdrawals were made and the instalment were not modified).
• exemplary scenarios on the possible savings represented by increasing the amount of the quota on the chosen minimum and
• the amount of the monthly instalment that would allow the entire debt to be settled within one year.

Revolving cards and the Supreme Court ruling in its Judgment of 25 November 2015 (Sygma Case)

The Sentence dictated by the Supreme Court, 1st Chamber, dictated in Plenary, of 25 November 2015 (nº62872015) declared the nullity of a revolving card contract based on the infringement of article 1.1 of the Law of 23 July 1908, of repression of usury.

The usurious nature of a revolving credit granted by a financial institution to a consumer at a remunerative interest rate of 24.6% APR, increased by 4.5% percentage points for interest on arrears.

The Court of Instance and the Hearing ruled in favour of the lender and rejected that 24.6% APR could be considered usurious. It was also rejected that interest for late payment could be considered abusive. Faced with this result, the borrower appealed in cassation, insisting on its two essential arguments, that is to say, against the agreed interests, requesting that the remunerative interests are declared as usurious and those of delay as abusive.

The Supreme Court in its Judgment establishes that in order for the credit operation to be considered usurious, it is sufficient that the requirements set forth in the first paragraph of Article 1 of the Law are met, that is to say, that “the interest stipulated is notably higher than the normal interest of the money and manifestly disproportionate to the circumstances of the case without it being enforceable, that, cumulatively, it is demanded “that it has been accepted by the borrower because of his distressing situation, his inexperience or the limited mental faculties“.

The stipulated interest rate was 24.6% APR. The Court in its Judgment states that in order to determine whether the interest is notably higher than the normal interest rate for money, it is not the nominal interest rate, but rather the annual percentage rate of charge (APR) which is calculated taking into account any of the payments that the borrower has to make to the lender as a result of the loan in accordance with legally predetermined standards. It is a question of comparing it with the normal or habitual interest in concurrence with the circumstances of the case and the existing freedom in this matter. The Supreme Court considers that a difference between the APR fixed in the operation and the average interest on consumer loans on the date on which it was arranged allows the stipulated interest to be considered as “notably higher than the normal interest rate for money“.

In order to consider what is considered to be “normal interest”, the statistics published by the Banco de España may be used, based on the information that credit institutions must provide monthly on the interest rates applied to different types of asset and liability operations.

Furthermore, as a requirement, it is established that the interest must be “manifestly disproportionate to the circumstances of the case“. As stated in the Judgment itself, the financial institution that granted the revolving credit did not justify the existence of exceptional circumstances that explain the stipulation of a notably higher-than-normal interest rate in consumer credit transactions.

It is stated that the high-interest rate cannot be justified on the basis of the risk deriving from the high level of defaults, and the disproportionate high-interest rate in consumer finance operations cannot be justified on the basis of the risk deriving from the high level of defaults tied to consumer credit operations granted in an agile manner and without even adequately verifying the payment capacity of the borrower. This is because the irresponsible granting of consumer loans at high-interest rates facilitates the over-indebtedness of consumers and thus means that those who regularly fulfil their obligations have to bear the consequences of the high level of defaults, cannot be subject to legal protection and such high-interest rates cannot be justified.

The Supreme Court in its resolution establishes that the usurious nature of the revolving credit entails nullity, which has been expressly qualified by the highest Court as radical, absolute and original.

The consequences of nullity are set out in Article 3 of the Usury Repression Act, i.e. the borrower is obliged to pay only the sum received, i.e. the financial institution is obliged to return all interest paid by the client.

Therefore, and an application of the control derived from the Law of 23 July 1908, generally known as the Azcárate Law, the corresponding stipulation can and must be declared null and void when the expected interest is “notoriously higher than the normal use of money and manifestly disproportionate to the circumstances of the case“.

In order to determine when the remunerative interest is “notoriously higher than the normal use of money the referent must not and manifestly disproportionate to the circumstances of the case“. In order to determine when the remunerative interest is “notoriously higher than the normal interest for money“, the reference should not be the average interest in consumer credit operations, but the specific interest of revolving credit contracts since this is the relevant market.

In order to determine the “normal interest rate for money” in the revolving credit market, it is advisable to use the statistical information provided by the Banco de España.