The Secret History of the Credit Card

How did the United States become a nation of debtors? When did credit cards become popular? Did you know that many modern credit card policies are the creation of one man?

The Secret History of the Credit Card was a 2004 “Frontline” presentation from the Public Broadcasting System. The program examines the nation's use of credit and, more specifically, the methods used by credit card companies to obtain enormous profits. The Secret History of the Credit Card won the 2004-2005 Emmy Award for Outstanding Investigative Journalism.

PBS has made the entire program freely available online in RealMedia and Windows Media formats. The broadcast is divided into five segments of roughly twelve-minutes each for easier download.

When this program was produced, 145 million Americans carried credit cards. Of these:

  • 55 million paid in full every month
  • 90 million carried balances
  • 35 million paid the minimum required

Of those who carried credit card debt, the average amount owed was $8,000. “It's nice to be able to spend what you don't have,” says man. But the show's panel of citizens didn't really understand how credit cards work. They were ignorant of their credit scores, for example.

The Secret History of the Credit Card provides a brief overview of credit reporting agencies and of the credit scores developed by FairIsaac. The median FICO score is 720 out of 850. Risky customers have scores below 600. Three-quarters of American adults have a credit score. A FICO score often determines how much interest a person will pay — terms usually spelled out in the small-print of the contract. (For more on this subject, see my previous explanation of how credit scores work.)

Credit cards are a relatively recent invention. Until the 1980s, they didn't play a prominent role in American life.

In the early eighties, inflation began to outstrip interest rates, making credit cards a losing proposition for the banks that issued them. (Interest rates were limited by anti-usury laws.) Facing a bleak future, Citibank of New York began searching for options. They found South Dakota, which had recently discarded its anti-usury law, opening the way to unlimited interest rates. Citibank moved its offices to Sioux Falls and, under an obscure Supreme Court decision, was able to export its new higher interest rates to New York and to the entire country. Other credit card companies soon set up shop in South Dakota. And other states — including Delaware — repealed their anti-usury laws in an attempt to lure white collar banking jobs and the associated taxes.

Many current credit card practices can be traced to one man: Andrew Kahr, a sort of credit card whiz kid. Before him, credit cards required customers to pay 5% of their balance every month. Kahr convinced banks to lower minimum payments while raising credit lines, which caused profits to soar. (People charged more and strung it out over longer periods of time.) “High balances are more profitable than small balances,” says Kahr.

From what I've seen and read, I believe Kahr is truly an evil man, single-handedly responsible for a lot of the credit trouble Americans face.

The Secret History of the Credit Card describes how Providian, which grew from Kahr's First Deposit Corp, would receive a check, deposit it, but not credit it to the consumer's account for several days (or weeks). The consumer would then suffer escalating penalties and fees.

No wonder the credit card industry generates more consumer complaints than any other.

Credit card companies can change their terms at will. There is nothing to prevent issuers from changing their terms. Interest rates are not regulated. Fees are not regulated. Due dates on Sundays and holidays are intentional, and designed to generate late fees.

It is unsurprising that the credit card industry is the most profitable sector of banking.

The Secret History of the Credit Card is a fascinating program, though it's not really a history — it's a profile of the credit card industry and its current state. I wish that it were available for download, though. Like a lot of streaming videos, these are flaky. When I paused to answer the phone near the end of one segment, Firefox lost my place and I had to watch most of it over again.

A complete transcript of the program is available. Check out the Secret History of the Credit Card web site for even more information.

More about...Credit, Debt

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surly
surly
14 years ago

“I believe Kahr is truly an evil man, single-handedly responsible for a lot of the credit trouble Americans face.”

How can you blame one man for the problems of millions of people?

If you are an American who spends money on what you can’t afford, carry a 10k credit card balance and pay off only $100 a month – then you deserve a life crippled by debt.

Kahr didn’t make you charge that 60″ LCD screen on your McDonalds salary. YOU did.

J.D.
J.D.
14 years ago

You are right, of course, that it all comes down to personal responsibility. And perhaps I am writing with too much hyperbole. But if you watch the show, and if you research Kahr’s work, you will come to realize that he’s intentionally manipulating the system to entrap people in lifelong debt in order to gain more profit for himself and for the company’s to which he acts as a consultant.

VinTek
VinTek
14 years ago

I saw this documentary when it first came out, and urged everyone at a geek (tech) site that I am a member of (dualboot.net). It was an eye-opener for the folks who managed to catch it. Although the site is tech oriented, we had some very spirited discussions about credit card debt and how to get out of it a couple of years ago. Much of what Kahr was able to do has now been blunted, thanks to the ability to make online payments. I pay all of my credit cards online and religiously make note of the date of… Read more »

mike
mike
14 years ago

“. . . describes how Providian, which grew from Kahr’s First Deposit Corp, would receive a check, deposit it, but not credit it to the consumer’s account for several days (or weeks). The consumer would then suffer escalating penalties and fees.”

I believe this is now illegal. Companies are required to post the payments within 24 hours of receipt.

I also agree with Surly’s comment above. For example – 55 million people pay their accts in full every month, according to the show.

Peter
Peter
14 years ago

I aw this program when it was first on and it is/was a VERY biased program. The entire show was based on the idea that these evil companies are somehow forcing consumers to be irresponsible and stupid about their finances. It removed all personal responsibility from the consumer while putting ALL the blame on the financial companies. It’s all printed right there for you to read (sure it’s in 2 point type but it is there). If you have a question about your credit card or a fee – ask. If you think your bank charges too much, find another… Read more »

J.D.
J.D.
14 years ago

I saw this program when it was first on and it is/was a VERY biased program. The entire show was based on the idea that these evil companies are somehow forcing consumers to be irresponsible and stupid about their finances. I’m not sure that it’s a bad thing (from a personal finance perspective) to have a show that is biased toward consumers. 🙂 Since this is a site about saving and keeping money, I feel no qualms in sharing such information, especially if it’ll help some people. One point the program makes, though, is that these companies don’t always play… Read more »

Marc Hedlund
Marc Hedlund
13 years ago

This is a great show, and well worth watching (it was one of the inspirations for Wesabe). Also worth checking out is the accompanying NY Times piece on the subject:

http://www.nytimes.com/2004/11/21/business/21cards-web.html

Scholz
Scholz
13 years ago

Another documentary on the credit card industry is In Debt We Trust
http://indebtwetrust.com/
It is based on the book Credit Card Nation by Robert Manning.

Rob
Rob
13 years ago

So, I’m reading this article and finding out how credit cards are designed to increase the fees, penalties and interest charges. I get to the end and what do I find? An ad for a discover card!

icup
icup
13 years ago

“From what I’ve seen and read, I believe Kahr is truly an evil man, single-handedly responsible for a lot of the credit trouble Americans face.”

No, Americans living beyond their means are responsible for 100% of the credit trouble Americans face. Kahr simply exploited that desire.

I have had credit since 1994 and have *never* had to suffer late fees. Largely because I pay my bills before the due date and have never tried to float a check.

J.D.
J.D.
13 years ago

Ah, yes. I took a lot of flak for calling Kahr when I originally posted this. In the nearly six months since I first wrote that, I’ll admit that my viewpoint has changed. Evil probably isn’t the correct word, but opportunistic and immoral aren’t far from the mark.

kronos
kronos
13 years ago

if the streaming video doesn’t work too well, you can always check out the flash version here:
http://video.google.com/videoplay?docid=-5417695091889596000&q=The+Secret+History+of+the+Credit+Card

mapgirl
mapgirl
13 years ago

I think it’s pretty evil to delay posting a customer’s payment to their credit account. That’s not a widely accepted accounting practice. More usual practice is to post things immediately so that each day is a true picture of the balance sheet, rather than inflate your assets by delaying the payment posting to an account. (Actually that might be inflating it twice, one for the customer balance and second for the cash balance.) It’s flat out deceptive, and you’d sure as hell ought to be questioned on it by an independent auditor if you were a business.

Growth in Value
Growth in Value
13 years ago

What an interesting program!

Thanks for the heads up. Always good to have more ammo when I unload on the evils of credit card companies to my endebted friends.

moneymonk
moneymonk
13 years ago

I also saw that documentary on PBS earlier this year.

It is amazing how credit cards companies make their money.

I myself do not own a credit and after watching that piece. I may not never apply for one.

Credit cards give you permission to live above your means!

Melsky
Melsky
13 years ago

It makes me happy that my husband and I have paid off our credit cards.

I think the credit card industry should be regulated a lot more.

Nikki
Nikki
13 years ago

Having had the unfortunate experience of working for a credit card company, I can tell you that the documentary, while fascinating, didn’t even scratch the surface of the tactics used. Never having had a late fee and always paying your bill off in time is not something to be proud of in the credit card world, all it means is that you are being watched more closely than any other card holder. Any mis-step, even if its no fault of your own, and your rate will skyrocket. If you’re savvy and can work the system you can end up with… Read more »

DavidR. Zukerman
DavidR. Zukerman
13 years ago

Have been commenting about credit card aggrandizement well before PBS gotaournd to it. 29.99% intgerest opught to speak for itself. USURY, people. But my hunch is that campaign contributions have nullified usury laws. Madison, in the opening sentence, Federaloist 57, seemed to anticipate the Enropn mentality (and the credit card squeeze) in warning that society includes people who seek the “ambitious sacrifice of the mabny to the aggrandizement of the few.” I have bneen citing this document more than ten yeasrs, tyo no avail. Certainly no politician has called attention to it, either in campaigns or inh calls for camp;aign… Read more »

James Kew
James Kew
13 years ago
beanspants1
beanspants1
13 years ago

But the show’s panel of citizens didn’t really understand how credit cards work. They were ignorant of their credit scores, for example. \ I take issue with this: i don’t know my credit score, and i know how credit cards work. if you don’t carry a balance, then your credit score — in relation to your credit cards — is irrelevant. Also, credit cards can ding your credit report for other loans, but again, if you don’t carry a balance, they can’t help you with your credit cards. if you do carry a balance, then your interest rate is written… Read more »

Stephen
Stephen
12 years ago

Really good stuff…old beyond belief (for a blog) and I doubt anyone will read this but here’s a longer history of debt in america:
http://www.ihatedebt.com/ALookatDebt/TheHistoryofDebtinAmerica/

itsalovethang
itsalovethang
12 years ago

I have a question for the author.

Can Chpater 13 help boast your credit score?
Also, can Child support hurt you in obtaining credit ?

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