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 And other states — including Delaware — repealed their anti-usury laws in an attempt to lure white collar banking jobs and the associated taxes.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 website for even more information.
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There are 22 comments to "The Secret History of the Credit Card".
“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.
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.
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 payment and confirmation number.
“. . . 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.
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 bank.
The show seemed to be suggesting that the companies should help inform and educate the consumer so that the companies make less money. That’s absurd. Could you imagine going into a store and having the clerk say “I can sell you this if you want, but you can get this cheaper down the street.” Of course that would never happen, why do we ask the same of these businesses.
It’s the consumer’s responsibility to educate themselves enough to have a basic knowledge of the system.
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 by the rules, and there’s very little a person can do about it. Thus the class-action suit against Providian for failing to credit accounts on time.
It’s not just Providian that practices this sort of behavior. I used to have all my accounts with U.S. Bank. I had very bad experiences with them. For one loan, even if I mailed the check two weeks before it was due, it would often be credited to my account late and I would be charged extra fees. This was crazy! Yet there was nothing I could do about it. I called to complain, but was never able to reach anyone who could help. All I could do was mail out my check as soon as I received the bill and hope that they’d credit it on time each month.
The show seemed to be suggesting that the companies should help inform and educate the consumer so that the companies make less money. That’s absurd. Could you imagine going into a store and having the clerk say “I can sell you this if you want, but you can get this cheaper down the street.” Of course that would never happen, why do we ask the same of these businesses.
A few points:
1. I own a small business. We direct people to places where they can buy things cheaper *all the time*. It’s good business. Sure, we could sell to the customer at our more expensive price, but when he found out what we’d done, he’d never come back to us again. And he’d tell his friends. If we don’t think we have a good price on something, we’re not afraid to say it. You know what? Many people buy from us anyhow. (Not everyone buys on price.)
2. I respect other companies that do the same thing. There are a couple of local businesses I shop at where the employees will say, “Oh, you can get that cheaper elsewhere.” Sometimes I go elsewhere, but the shops that are willing to refer outside their doors get most of my business. My wife and I are taking bids on a roof repair. Some of the contractors have given us prices for everything we’ve asked for. Others have told us, “You don’t need all that. What you really need to do is this, and it’ll save you thousands of dollars.” Some have told us, “We’re not the best place for that. This other company is cheaper.” Outside of corporate culture, these sorts of referrals are common. People work together to help each other. It’s only in large corporations (and not *all* large corporations) that the “screw the customer” mindset seems to survive for any length of time. Small businesses can’t think like that or they go under.
3. These banks use advertising and other subtle psychological manipulation to lure customers into a life of debt. Yes, it is ultimately the consumer’s responsibility to stay out of debt. No question. But banks do whatever they can to bypass our sense of responsibility. It used to be that credit card companies were not allowed on college campuses. Why not? Because college students are at the cusp of adulthood. Some are ready to accept the responsibility of a credit card, others are not. I was one of those who wasn’t. I didn’t have the personal finance education that I have now. I didn’t understand the power of compound interest and compound returns. I didn’t understand what it felt like to save for something. The credit card companies gave me a chance to have what I wanted now. Was I an idiot? Of course. Did the credit card companies take advantage of this? Yes, they did.
4. Whose responsibility is it to educate young adults about the perils of credit? Credit card companies — helped in part by their huge profits — have marketing and advertising budgets that dwarf any consumer education agencies. I can erect a personal finance web site in an effort to educate people, but I’m only going to reach a few hundred like-minded individuals. Credit card companies can sway millions.
It’s the consumer’s responsibility to educate themselves enough to have a basic knowledge of the system.
Agreed. But I believe the credit card companies share some culpability.
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
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.
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!
“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.
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.
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
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.
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.
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!
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.
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 some great deal on miles and points, but it takes a lot of careful management and planning. The bottom line is that if you don’t have enough to pay cash, you don’t have enough to use a credit card.
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 finance reform. (If our pols honored No. 5t7, we would have all the reform we need.)
Most curiously, this is the first I had heard of Andy Kahr since my high school graduation in 1958. Andy, a classmate, was generally regarded as having a brilliant mind–one that had
our physics teacher somewhat awed, if memory serves. Now I find that Andy is credited as being the father of current credit card practices. That, however brilliant a mind Andy has, gives him too much, uh, credit. He couldn’t have done it with a supporting cast of politicians, businessmen, lawyers who worship at the altar of the villain of “It’s A Wonderful Life.” the fictional banker Henry J. Potter. Except of course, for the credit card aggrandizers, Potter is hardly a villain. Please cf. Muhammad Yunus, whose banking practices got him and his bank a Nobel Peace Prize–and, for me, come straight out of the business mindset of “It’s a Wonderful Life” ‘s Peter Bailey and his son George–that profits in business are a consequence of serving, not crushing, the people. The director of this “Wonderful” movie–Frank Capra, is derided by cynics as giving moviegoers Capracorn. Well, Capracorn is a direct descendant, I think, of the populist (shudder) counsel Madison gave us in Federalist 57.
And here’s a no-registration-required link to the NYT story Marc recommended:
http://www.nytimes.com/2004/11/21/business/21cards-web.html?ex=1258866000&en=ed0e2f006270965c&ei=5090&partner=rssuserland
(NYT Link Generator: http://nytimes.blogspace.com/genlink)
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 right there on your statement. you can increase your rate or decrease your rate, and get some idea of your credit score.
so that’s a totally false dichotomy. In terms of your overall loan picture, where credit cards fit is a piece, but the FrontLine piece wasn’t about home loans and car loans and credit cards in relation to other debt instruments. As such, as you can probably imagine, i didn’t think much of the FrontLine piece.
and honestly, i’d say the credit reporting industries are much worse than the credit card companies. try getting the formula for your Fico score and what you can do to improve it at a mathematical level — you will fail. even more shady – the difference in default rate between a 600 and 800 is next to nothing — only around 2%. So F/I adjusts their formula to make small changes seem like more than they are — like that other great data aggregator/deceiver of consumer data – Consumer Reports — to make their product seem much more worthwhile than it is.
At least credit card companies are upfront about their evil. if your credit score changes, does F/I send you something in the mail to tell you?
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/
I have a question for the author.
Can Chpater 13 help boast your credit score?
Also, can Child support hurt you in obtaining credit ?