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 And other states — including Delaware — repealed their anti-usury laws in an attempt to lure white collar banking jobs and the associated taxes.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.