The Secret History of the Credit Card (full documentary) | FRONTLINE

Summary

The documentary "The Secret History of the Credit Card" reveals how credit cards have evolved into a staple of modern American life. It explores the rapid expansion and deregulation of the credit card industry, particularly following influential legislative changes in South Dakota and Delaware, leading to high profits for banks but significant debt for countless users. The story delves into complex terms and fees often unknown to the average consumer, the manipulative strategies banks employ to increase profits, and the lack of sufficient regulatory oversight to protect consumers from unfair practices.

Highlights

• South Dakota and Delaware's deregulation allowed banks to charge high interest rates across the nation. 🏦
• Credit cards have become essential, yet many struggle with accumulated debt due to high interest rates and fees. 😓
• Manipulative marketing strategies are used by banks to attract and keep consumers in debt longer. 🛍️
• Many consumers are unaware of terms like 'universal default,' which can drastically increase interest rates. 📝
• Data-driven personalization allows banks to target specific consumers, maximizing profitability. 📊

Key Takeaways

• The credit card industry has unprecedented control over interest rates, leading to high profits but user debt. 😯
• The Marquette decision and South Dakota's deregulation played major roles in shaping today's credit landscape. 🏦
• Credit card companies target 'revolvers,' those who carry a balance, as they are the most profitable customers. 💸
• The industry's best customers are ironically those who don't pay their balances on time, leading to fees and interest. 🤔
• Legislation efforts to regulate the industry and protect consumers regularly face blockades. 🛑

Overview

In a fascinating glimpse behind the curtain, "The Secret History of the Credit Card" uncovers the story behind one of America’s most indispensable, yet often perplexing, financial tools: the credit card. With an engaging narrative, the documentary highlights how credit cards have become both a necessity and a culprit of financial strain for many Americans. From the dizzying highs of credit card profits to the devastating lows of consumer debt, it’s a thrilling exposé.

The program delves into pivotal moments and decisions, such as South Dakota's and Delaware's legislative maneuvers and the Supreme Court's Marquette decision, which propelled the industry into a highly profitable realm while setting the stage for accumulating consumer debt. In a lighthearted yet insightful manner, it explores the intricate webs of interest rates, rewards, and penalties that characterize the industry today.

Viewers are introduced to different sides of the credit labyrinth—from the lucrative, strategically crafted offers to unsuspecting consumers, to the behind-the-scenes data operations that banks employ to monitor and influence customer behavior. The documentary doesn't shy away from calling out the industry's tactics or highlighting ongoing regulatory battles, making it an eye-opening watch for anyone who holds one of these little plastic cards.

The Secret History of the Credit Card (full documentary) | FRONTLINE Transcription

• 00:00 - 00:30 [Music] tonight on front line the average American family has eight 0% for life on transfer balances credit cards plastic money have become both a necessity and a ticket to a better life Hawaii a credit card is an extraordinary unbelievably great convenience for the consumer but the credit card industry plays by its own rules I don't know any merchand in America who can change the
• 00:30 - 01:00 price after you've bought the item except a credit card company credit card Banks earn record profits MB and's profits last year one and a half times that of McDonald's well McDonald's didn't do too well last year but the profits come at a price now they've raised my rate to 19.98 and I have not been late ever there are irritated unhappy dissatisfied customers in this industry they are the new lone sharks in America I certainly didn't imagine that
• 01:00 - 01:30 someday we might have ended up creating a Frankenstein Frankenstein what do you mean Frankenstein tonight Frontline correspondent L Bergman and the New York Times investigate the secrets of your credit [Music] card3 may not have this may seem an
• 01:30 - 02:00 unlikely place to begin a modern history of the credit card more than a, miles from Wall Street in the panel Halls of the Federal Reserve in [Applause] Washington but this is where the credit card business first began to really take [Music] off2 this is Fall South
• 02:00 - 02:30 Dakota a modest town of 140,000 known for its cattle auctions and meat packing industry it's a town which boasts a huge post office big enough to service a city several times its size every day millions of pieces of mail pass through here and from here millions of credit card solicitations and bills are sent to mailboxes across America and billions of dollars in credit card payments come in from around
• 02:30 - 03:00 the world today sou Falls is one of the major credit card processing centers in the country it all happened in soue Falls because a quarter of a century ago times were hard in South Dakota there was a nationwide recession with double-digit inflation money was very tight South Dakota Banks were issuing very few mortgages or loans of any kind interest rates were going going into orbit they were climbing all the
• 03:00 - 03:30 time so Bill Jano was then the governor of South Dakota when I became to the governor's office South Dakota had very tight historical laws on what you could charge to borrow in other words uh there was one interest rate by law that they could charge for new cars another one for used cars it was highly regulated what interest rates people could pay what I'm trying to say is we may have a lot that said you could charge 9% but
• 03:30 - 04:00 money cost 11% so Banks weren't loaning money to get the banks to issue loans South Dakota decided to eliminate its historic cap on interest rates known as a usury law we had actually changed some of our laws in 79 and we had previously introduced legislation and pass legislation or we're passing legislation to lift the ceilings on Usery so we could free up and get capital in South Dakota at the same time across the
• 04:00 - 04:30 country in New York City a legendary Banker had his own problems well it's very simple we're going broke success Walter wriston then chairman of City Bank had a credit card division that was hemorrhaging money New York's Usery laws prohibited Banks from charging more than 12% on most Consumer loans interest rates went up to 20% M and if you are lending money at 12% and paying 20%
• 04:30 - 05:00 you don't have to be Einstein to realize you're out of business and it was costing City Bank 20% for money and you were only getting 12% back certainly because of the limit on interest yes there was no way that you could continue so riston and City Bank began looking for a new place to do business so we made a study of the five states that had either no Usery law or very high amounts one of them was South Dakota so he said
• 05:00 - 05:30 look we'll bring a couple of thousand jobs out here in 1981 City Bank moved its credit card operation from New York to South Dakota from the time I met them until we passed our legislation it was just several weeks I mean we really moved that that was a good deal for us it was a hell of a deal for them what did they get out of this what City Bank out of it they got to stay alive but what really attracted City Bank to South Dakota was an obscure
• 05:30 - 06:00 Supreme Court decision that said a bank could now export its interest rate to other states it was called the Marquette decision the Marquette Bank decision was a US Supreme Court decision that said forget where the bank is chartered wherever the credit decision is made in whatever state that's the place where you can apply interest wherever you make the loan in other words if South Dakota had a 25% ceiling then you could charge
• 06:00 - 06:30 25% even to a loan in Florida JLo realized that the Marquette decision meant that South Dakota could become the credit card capital of America in a very short period of time matter of a few months I was meeting with the chairman of the board of Bank of America with first Chicago of Illinois uh Chase Manhattan Bank manufacturers Handover Bank Chemical Bank Bank of New York all the big banks in America because only South Dakota that point in time appeared
• 06:30 - 07:00 to be willing to to move forward to invite people to come in but soon another state got into the ACT Delaware copied South Dakota's legislation and Wilmington soon became the credit card center of the East luring other New York Banks and giving rise to new companies like MBNA for the first time in American history there were no legal restrictions on the interest rates Banks could charge on credit cards Nationwide you could
• 07:00 - 07:30 look at the Marquette decision and say all right maybe it took the lid off but what it did was it had a very egalitarian effect Duncan McDonald is the former general counsel of City bank's credit card division he says the marquet decision allowed Bankers to charge higher interest rates to riskier customers the minute Marquette came along you could jack the price up a little bit more to cover those people and as a result tens of millions of people who were paying 30 and 35% interest rates to small loan companies all of a sudden got the product at at 19
• 07:30 - 08:00 percentages rate at an annual fee of $20 so in that sense it was very egalitarian and very good and very good for banking as the deregulation of interest rates enabled more people to get credit cards the industry began to expand and became the most profitable sector of banking with $30 billion in profits last year we wanted to talk to the executives of the major credit card Banks about their business but were directed instead to the
• 08:00 - 08:30 American Bankers Association we've asked for interviews with all the major credit card companies they won't talk to us why that's our job uh they pay us dues to handle these kinds of sometimes difficult assignments Ed Yingling is the incoming president of the American Bankers Association and the industry's top lobbyist how profitable is the credit card business the credit card business is profitable you would expect
• 08:30 - 09:00 the credit card business to be somewhat more profitable than the rest of the industry or parts of the industry because it's riskier uh it is an unsecured loan and so you would expect the returns to be a little higher wasn't last year record profits for this industry and they're expected again this year uh yeah but compared to what there is not an unusually profitable business compared to other businesses MBNA profits last year one and a half times that of McDonald's
• 09:00 - 09:30 well McDonald's didn't do too well last year MBNA is a big company City Bank more profitable than Microsoft Walmart and the executives are highly paid right right these are these are really big businesses and they do make money today nearly 144 million Americans have credit cards and they are using their cards like never before charging $1.5 trillion last year alone credit
• 09:30 - 10:00 cards have become an essential part of the American economy I really can't say that I love my credit card but I would hate to live without it I use it a lot for work it's easy it's easy access I can take clients out for dinner I take advantage of the miles we fly first class on vacations it's nice to be able to spend what you don't have can you imagine living without a credit card in this Society it's hard to imagine we sat down with a group of credit card customers to
• 10:00 - 10:30 talk about how they use their cards we're consumers America loves to consume it's in our blood it is like an addiction I mean I have this new credit card in my pocket and look at that great dress I can do it I really shouldn't do it I'll just pay it off later and you do it mhm but I don't have that iPod I'm not cool yeah so I can charge and pay it off and Christmas is just around a corner there's always something they're just a gift for the tra traveler which I am a very very very
• 10:30 - 11:00 frequent traveler indeed is what I am uh they are indispensable actor and author Ben Stein loves the convenience of using his credit cards credit cards are an incredible deal for me I mean I have lots and lots of different cards I I mean my wallet is just stuffed with cards it's just insane it's just ridiculous I look like I I look like I've got a third breast from my uh carrying around my wallet with so many credit cards in it thank you very much thank you very much thank you very much
• 11:00 - 11:30 Stein says he charges thousands of dollars a month in business expenses on his credit cards I use all their good services and they don't make any money from me I mean none to speak of oh wait here's a kind of cute one the credit card companies do make a percentage on each transaction but Stein is not their ideal Customer because like 55 million Americans he pays his bills off every month and doesn't pay any interest the credit card company hate people like me
• 11:30 - 12:00 who pay off our bills every month and I know that cuz I ran into a fellow I went to high school with on the street and he told me he worked for a credit card company and I told him about how much I use credit cards now I pay them off every month and he said oh we got we hate you we hate you guys we call you dead beats dead beats in the upside down world of the credit card business are the people like Ben Stein who pay off their bills on time the industry's best customers are the 90 million Americans who don't don't pay off their credit
• 12:00 - 12:30 card debt they're called the revolvers people in the industry tell us that that revolvers people who borrow money basically with their credit card that's where the profits are I don't think that's where all the profits are I think it is generally understood that those that use the revolving part of the credit card uh are are kind of The Sweet Spot today The Sweet Spot as Mr Yingling calls it continues to grow and the top
• 12:30 - 13:00 interest rates charged are higher than ever before according to Robert McKinley who founded cardweb a research firm that tracks the industry the top 10 issuers in in the country are charging interest rates of 25 to 30% to some of their customers and this is in a market where interest rates are at a 40-year low we have consumers paying interest rates that would be considered lone sharks uh in my day at the same time Americans with credit card balance Es are carrying
• 13:00 - 13:30 a record amount of debt how much credit card debt is the average American family carrying about $8,000 for those who are carrying some debt Elizabeth Warren is a Harvard law professor she has researched the growing credit card debt held by middleclass families and how it can lead to big trouble and what families are discovering even with Mom and Dad in the workplaces they often can't make it to the end of the month and and so they often use credit cards to bridge the gap
• 13:30 - 14:00 they borrow to make ends meet and then what happens is something goes wrong somebody loses a job somebody gets sick family breaks apart through death or divorce she doing okay like most Americans Jim and Wanita Mueller managed to pay their credit card bills each month until they both lost their jobs we didn't have any e Mercy fund set aside
• 14:00 - 14:30 so they kind of became our emergency fund to to fund our life while we were waiting for the employment to come along so you borrow from the credit card and pay that month and then the job doesn't happen so now you got to borrow more and and we just kept digging deeper and deeper and we started robbing Peter to pay Paul as the expression goes you know take a money from a credit card to pay other credit cards and that just increases it then that's where it really
• 14:30 - 15:00 started to snowball as the muers fell behind their credit card companies began to apply penalty interest rates and fees to their bills do you remember when the interest rates started to rise some of them one late payment and forget your old interest deal that you had so um and forget the fact that you had the credit card for a number Years and we're paying on it regularly we're never late and as soon as you make what you miss one payment it's like all deals are off
• 15:00 - 15:30 everything goes up I mean some of the credit cards we had were 9% or less all of a sudden they're 24 25% because oh well you're late you've been late several months and now we're going to raise your interest rate and we're charging you the late fee and now because the interest rate and the late fees have accumulated now you're over your limit so there's an over limit fee the Mueller's credit card debt eventually grew to nearly $80,000 on 10 cards they found that they could no longer keep up with their payments and
• 15:30 - 16:00 had to file for bankruptcy they were one of a record 7 million families to file in The Last 5 Years it wasn't that we didn't want to pay off our our credit cards it's we got to the point where it was impossible right there was just I mean short of uh a rich relative which neither one of us have dying and leaving us uh $100,000 nothing was going to happen because the credit card companies weren't they weren't willing to work with US unless they got all their
• 16:00 - 16:30 money as fast as possible the main things that trigger a bankruptcy filing are a job loss a medical problem or family breakup without those things most American families can deal with their credit card debt but High credit card debt puts them at much greater risk so that if they stumble if they get hit by one of the other blows they get their feet Tangled Up In Those High interest rates and they just get sunk 0% for life
• 16:30 - 17:00 on transfer balances and a three up to 3% cash back bonus ironically the muers are still getting offers for more credit cards you're still getting solicitations in the mail yeah we got one yesterday from a credit card company that told me I would never have credit with them again one of the last times I talked with them and told them what our situation was they said well we're canceling your card and you are in essence blackballed with us for life you'll never have a credit card from us
• 17:00 - 17:30 ever again yesterday received a solicitation from them 0% for life with up to a $50,000 line of credit diapers milk and laundry detergent $25 oh yeah and that stuff he just said spend more time with your family Priceless encouraging Americans to take on credit card debt is critical to the profitability of the industry Hawaii call now to request the city Advantage World MasterCard and you can earn free award travel plus get 10,000
• 17:30 - 18:00 bonus miles making it easier and more attractive to spend has been the job of Madison Avenue marketers new tool belt and chrome tool set $126 getting some use out of it Priceless there are some things money can't buy for Father's Day there's MasterCard but the success of the industry has also relied on financial innovators like this man Andrew Carr whose peculiar genius industry insiders
• 18:00 - 18:30 say has helped shape the way the credit card business Works Carr a consultant who rarely consents to interviews only agreed to talk with us if we did not identify his clients or where he is currently living give me an idea of from the time you got involved late 70s with credit cards the ideas the innovations that you've come up with well I convinced the client that instead of having 5% of the balance as a minimum payment we should reduce that to 2%
• 18:30 - 19:00 which is a very dramatic change less than half before Andrew Carr got involved in the industry most Bankers required that customers pay 5% of their credit card balance every month Carr realized that if customers were able to pay less they would borrow more you were able to explain that it was people making low payments who were the most profitable having a lower minimum payment allows you to offer higher credit lines which first of
• 19:00 - 19:30 all makes your card product more attractive because people judge even if they don't intend to use the whole line they would rather have a higher line the high balance accounts will be much more profitable than the low balance accounts because they're paying interest because they're paying interest on a higher balance today car's 2% minimum is a common feature on millions of credit card bills and every month some 35 million Americans pay only the minimum payment by the way while you running up
• 19:30 - 20:00 balances on your credit cards or currently have balances on your credit cards do you have cash in the bank oh yeah yeah I can wipe my debt out so why don't you do it I feel it's a nest egg you never know what's going to happen tomorrow you might need that money for something else so even though you're paying double digit interest and you could get rid of the balance or most of it you're going to still make those
• 20:00 - 20:30 payments and keep the cash in your bank account right Andrew Carr's research showed that making the minimum payment eased consumer anxiety about carrying large amounts of credit card debt they believed they were being financially prudent if you lose your job or you you know something bad happens you have to have money and you don't want to live off of a credit card so you need to have that money you know saved somewhere in case something happens in fact the industry was reaping huge profits from
• 20:30 - 21:00 Andrew Carr's intuition about people's behavior but then in the late '90s Carr says he had a new insight customers were being flooded with competitive offers for low interest cards people were offering 12.9% interest for the first 6 months uh 10.9% unbalance transfers and I convinced the client to go straight to 0% as an introductory rate it gave them competitive Advantage it led to of
• 21:00 - 21:30 course the others also going to 0% car knew that even though the 0% offer could easily change people would still be attracted to the bait when you're getting something in the mail several times a week that offers you 0% for 6 months they look at the headlines of the solicitation of the mail they spend 30 seconds on it and okay I'm going to be better off at the beginning they're going to give me something they're going to give me a 0% rate uh people believe what they want to believe 0% APR what
• 21:30 - 22:00 does this mean I mean you're saying that's meaningless most cases if you were to sign up for this card the bank will honor that rate through that period of time but there's a lot of fine print that goes with what could happen for example if you were to miss one payment uh this rate will go away immediately according to McKinley the key to understanding how credit cards are marketed lies in the great digital Revolution the amassing of data on
• 22:00 - 22:30 American consumers well there's a gold mine of information residing out there in these databases by the consumer reporting agencies the credit bureaus uh they're collecting information about what kind of accounts you have open the balances whether or not you make those payments on time and that's a huge reservoir of information there that they can tap into and be able to get a sense as to whether or not a consumer is a revolver someone who doesn't pay the balance off in full each month so they can kind of sift those out and and and today it's really
• 22:30 - 23:00 become almost surgical the ability to surgically Target consumers and track their financial behavior has become a booming business dominated by three credit reporting agencies which gather information all that data is then crunched by a little known company called Fair Isaac which calculates a number called a FICO score for almost every American with a credit history we're not a credit reporting agency like Equifax TransUnion or Experian that's
• 23:00 - 23:30 gathering information daily on consumers and building up consumer records Tom Quinn is a spokesman for fair Isaac we simply work with the credit reporting agencies and they deploy their data onto our mathematical formula to create that score the median FICO score is 720 out of a possible 850 the riskiest customers have scores below 600 the score is an indication of How likely you are to pay your bills lenders use that score almost
• 23:30 - 24:00 like a thermometer to determine if they're going to Grant credit or not so the algorithm is an indication of that consumer's future risk in terms of credit Behavior algorithm meaning a mathematical formula mathemat yes mathematical formula and how many people have this number we estimate that approximately 75% of the US population that is eligible for credit I.E those who are 18 years or older have a FICO score at any given time you know your
• 24:00 - 24:30 credit score M you're not aware that you have a credit score I'm aware that I have one I don't know what it is right yeah I don't know what it is I don't know what it is either so if I said to you the words FICO score do you know what a FICO score is I know the terms I'm not clear on what they are I've never gotten my credit score an individual's FICO score often determines how much interest he will pay on a credit card the terms and conditions of the card are laid out in the fine print of
• 24:30 - 25:00 this contract when I get a credit card there's a a contract that goes along with it what kind of contract is this cuz I never read it have you ever read it when it came to you uh I'd have to admit most cases I may have just glanced at it you know it's filled with so many legal terms and so many pages and such small print and it can be intimidating I think it says that I'm guarantee the terms of the loan for as long as I have the card yeah well the know things that the one unique
• 25:00 - 25:30 thing about the credit card business is that the issuer can change the terms and conditions at will without asking my permission absolutely they can change at all it only takes 15 days notice to make those changes I mean you could be offered a five or 6% interest rate today and perhaps get it two months later that could be 30% there's nothing to prevent the issuer from changing those uh conditions even Professor Elizabeth Warren an expert on contract law says she has a hard time deciphering her
• 25:30 - 26:00 contract I've read my credit card agreement and I can't figure out the terms I teach contract law and the underlying premise of contract law is the two parties to the contract understand what the terms are have you ever read the contract that's sent to you with your credit card yes but I'm a lawyer do you understand it I I do understand it I think it'd be very hard for uh a lot of people to understand and I
• 26:00 - 26:30 think it's a constant battle to try to figure out how you make disclosures and those types of things in plain English so that somebody will uh uh read them Ed Yingling says the fact that the contracts are difficult to understand is not the industry's fault our disclosures are very explicitly set forth in law and in regulation much more so than in most consumer contracts uh ours are are heavily regulated they say the contract
• 26:30 - 27:00 contains information even the type phase that's mandated by law laws the laws that's the point now the laws are inadequate there's not enough there these guys have figured out the best way to compete is to put a smiley face in your commercials a low introductory rate and hire a team of mbas to lay traps in the fine print one of those traps according to Warren and other other critics is something called universal
• 27:00 - 27:30 default if you do miss a mortgage payment you do miss a car payment any other it can trigger what is called a universal default they actually have the right to change it if you miss a payment with another creditor or in some cases even if there's a change in your credit worthiness in fact you don't have to miss a payment you don't have to go over your credit limit to be in default you could for example maybe your balances are too high just you you've seen all one of these right before it I want to read you something from a a
• 27:30 - 28:00 contract your aprs Also may vary if you are in default under this agreement or any other agreement that you have with us or any other related companies for any of the following reasons you fail to make a payment to another creditor when due do you understand what this means fine you do do you know that it means that if you fail to make a payment and relate on anything else that you're paying on your house your car anything else they will
• 28:00 - 28:30 find out and they can change your interest rate did you know that I had no idea I had no idea this is the first I've ever heard that why is it legal mhm well because it's disclosed in the contract doesn't seem fair you you've done no harm to the company themselves you're late with someone else you haven't affected your standing with that company no it doesn't seem fair that they would suddenly say oh when now I can raise your rate they're taking advantage of someone who is in that
• 28:30 - 29:00 position that's what Andrew guile of Wilmington Delaware says happened to him yes um I had gotten a letter from MBNA several months ago that my rate was going to be increased MBNA raised his 8.9% interest rate to 19.9% and his minimum monthly payments nearly doubled they told me the first time that my rate had been raised because they found an occasion back in
• 29:00 - 29:30 1998 when I'd gone 60 days past due on a competitor's credit card and I asked them what in the world does that have to do with MBNA especially being six years ago I said that has nothing to do with my account here I mean that absolutely took my breath away when guile protested he says he was given another reason for the change he had become riskier he was told because his account balances with other creditors were too high I was a
• 29:30 - 30:00 great customer at MBNA always paid my balances on time paid more than the minimum balance you know many times paying it down completely but I was I was never late and I used the card in a wise and responsible manner Frontline wanted to ask MBNA about Guile's problem but we were told they never comment on an individual's account but just 2 months after our interview guile says he got a call from the office of the the president of MBNA saying they would move
• 30:00 - 30:30 his interest rate back to 88.9% the real question here is whether or not you can change the price not for new items you buy after your credit score has changed but for old credit that you've already taken out my mortgage company agreed to an interest rate and if I lost my job my mortgage company does not get the double my mortgage credit card companies can say remember how you bought the big screen TV at 99.8% interest we've decided we
• 30:30 - 31:00 want 29.9% interest and there's not a darn thing you can do about it right now the contract allows a credit card company to change the interest rate on money you borrow from them after you've borrowed it uh some do yeah depends on the contract but a lot of them do if um they find out through this information system that you've been late on your payment
• 31:00 - 31:30 for your automobile they they can notify you and that that you're going to change the interest rate on the money they've already lent you and I think there is a misunderstanding about what the credit card agreement is my agreement with you is you've come to me you have a certain credit score and based on that credit score I'm going to charge you 12% if in the future it turns out that your credit score score has deteriorated and you now are more risky to me m I'm
• 31:30 - 32:00 going to charge you the interest rate I would charge to somebody that has that credit score is it fair to change the price of the deal after the fact the product is not a promise to somebody that we will lend you that amount of M money Forever at that interest rate it is a very short-term revolving line of credit it's dis plain and simple it's
• 32:00 - 32:30 dishonest they they may say it's good business for their financial bottom line but it is a very poor way to treat a customer in 1996 another important Supreme Court decision opened the door to bigger profits for the credit card industry and a raft of new complaints from their customers that decision Smiley versus City Bank much like the Marquette decision before it lifted State restrictions this time on the fees that
• 32:30 - 33:00 credit card Banks could charge we were working this thing here for a good cause free market pricing Duncan McDonald was one of the lawyers who worked on the smiley case the late fees that were common across the industry up until Smiley were in the $5 and the $10 range and the economic thinking was that there had to be flexibility to allow up to $15 but when Smiley came along and took took the lid off it it went from 5
• 33:00 - 33:30 to 10 to 15 to 29 and recently it's gone up to 39 I would guess that it's probably going to go up to $50 a year and a half from now I certainly didn't imagine that someday we might have ended up creating a Frankenstein Frankenstein what do you mean Frankenstein I look at that and I say to myself it's $50 a fair fee plus a 25% interest rate and all these other fees that are thrown on for folks who probably not that risky is that fair I look and I say to myself there's the Frankenstein we've created something
• 33:30 - 34:00 that that that has to be uh has to be dealt with since Smiley credit card companies have doubled the amount of Revenue they generate from fees late fees overthe limit fees return check fees and the like fee income uh has gone up much much faster than interest income in the business so the the fees are meant as a penalty to make sure that you pay on time or are they a Profit Stream well they really have become a Profit Stream it's not just the fees that they
• 34:00 - 34:30 charge even though they're three and four times higher than they were uh less than 10 years ago that's the tip of the iceberg when it comes to the Penalty that's inflicted on consumers with these uh situations where they make a late payment it's the penalty interest rate that really does the damage your interest rate could double overnight but just so I understand that the the interest rates are not regulated they can change the interest rate relationship that you have with with them with 15 days notice so that's a
• 34:30 - 35:00 major source of profit for them and the fees are now no longer regulated it's exactly right it's uh you know it's wide open uh we're beginning to see Banks do all this tweaking where they're changing the interest rates and uh raising fees adding new fees uh uh all kinds of way they calculate interest setting the due dates on a Sunday and a holiday on the hopes that uh maybe you'll trip up and get a payment in late it's become very anti-consumer Marketplace even the
• 35:00 - 35:30 industry's top lobbyist is concerned I think it would be shortsighted for a credit card company to have fees that that uh would make somebody angry because they're likely to lose that customer and I think it's going to cost them more to replace that customer uh than they're likely to get out of the fee you have Bankers who have skyrocketed rates from 14% to 25 5% and $40 uh uh late fees and uh bad check
• 35:30 - 36:00 fees and so on that fall on the shoulders of the less well off yes this something bad has happened so we need regulation well we have regulation we have regulation already the control of the currency regulates all the National Banks uh and they have very vast Powers the office of the comproller of the currency the OCC is an obscure Washington Agency part of the Treasury Department and it regulates the National Banks Banks like Chase City Bank and
• 36:00 - 36:30 MBNA that issue most of the credit cards in this country Julie Williams is the acting comproller of the currency we have three goals to make sure that the banks don't fail to ensure the Integrity of how the banks operate their their corporate governance and to make sure that they deal fairly and honestly with their customers at the extreme we have the ability to take enforcement actions and we have done that we have taken
• 36:30 - 37:00 enforcement actions can you give us an example of how you have brought a large institution to task well I think the probably the most conspicuous uh example of that would be uh the action that we took uh in connection with peridian that's not the story they tell in San Francisco where in the late 1990s the credit card company Providian Financial was experiencing double-digit growth Providian specialized in the
• 37:00 - 37:30 riskiest customers with the lowest credit scores they were targeting people with questionable credit or marginal credit uh people that couldn't get bank cards elsewhere Pat Wallace is the head of the Better Business Bureau in the San Francisco area first thing that got our attention of course were the numbers and the numbers of complaints Providian was involved in all kinds of questionable uh offers and policies and procedures
• 37:30 - 38:00 and operations complaints about pidan from around the country came here to Wallace's office pridan for example was accepting payments from consumers on their accounts depositing the checks but not crediting the account for sometimes up to several weeks what was the net result of that invariably the consumer got a late charge they were holding
• 38:00 - 38:30 payments so that they could charge late fees and they could charge overdraft fees and in a sense over limit fees 50% of their income were fees not interest on the money loan they were pushing the envelope and they got by with it for a period of time and they made a lot of money the office of the com of the currency is the main Federal agency that takes complaints did they come to your assistance no they just simply weren't interested you know the response was
• 38:30 - 39:00 well you know we'll take it from here we'll watch it from here you know it's not a problem uh at this time for us complaints about pidan were also coming to June cette at the San Francisco District Attorney's consumer protection unit and she began to investigate eventually drawing local press attention and then a phone call from the OCC had you ever heard of the office of the comproller of the currency the answer from my perspective is
• 39:00 - 39:30 no didn't really know much about it didn't know exactly what they did and exactly who they regulated we never heard of them being very active in the area of consumer litigation or consumer enforcement actions against the banks and when the OCC contacted June cette she says instead of cooperation they issued a challenge there were a couple of meetings where the subject of preemption was raised preemption yeah
• 39:30 - 40:00 that's where they say because we the federal regulator that uh they have exclusive authority over the National Banks and therefore we don't have jurisdiction you San Francisco don't have jurisdiction yes the San Francisco district attorney says to us that they were told you don't have real jurisdiction we have jurisdiction and indicated to them that
• 40:00 - 40:30 they might want to get out of the case the way that that worked out was we worked together with the San Francisco District Attorney's office it was a a collaborative process uh and well they say once you got involved it was very fruitful but what they're telling us is that the OCC only got involved once this whole situation became public that prior to the news publicity that they were responsible for they had no cont cont with the OC we worked um cooperatively with them
• 40:30 - 41:00 when we got information about what was going on the joint investigation eventually culminated in a $300 million settlement Providian declined to be interviewed and issued a statement saying rather than revisit the past the company is focused on services that provide real benefits today in Washington the OCC has been increasingly ass in its Authority and attempting to curb consumer enforcement
• 41:00 - 41:30 actions by local prosecutors this has sparked a nationwide battle led by the Attorneys General in all 50 states the OCC is now trying to squeeze out the state presence to prevent us from protecting consumers which I think is ultimately very injurious to Consumers Elliot Spitzer is the Attorney General of New York State we get thousands of complaints every year about Credit Card issues relating to the major Banks the
• 41:30 - 42:00 major card issuers and so we get these complaints and we try to deal with the credit card companies but increasingly over the past number of years what we have heard back from the major banks in a variety of contexts is that we don't need to deal with you because the OCC has told us indeed has directed us not to deal with state enforcement entities isn't this just a Turf battle between the states in a federal agency it's a one-way Turf battle and by that what I
• 42:00 - 42:30 mean is we are more than happy to acknowledge that the OCC has jurisdiction across the financial system when it comes to certain issues what the OCC is trying to do is squeeze the states out in the one area where we have been incredibly useful which is consumer protection the State Attorneys General Mr Spitzer and others say that people in our state know who we are we have a Consumer complaint office and our beef is is that you guys the OCC want to push
• 42:30 - 43:00 them out of the business of consumer complaints we don't want to push them out of the business uh we are both there uh protecting consumers what we have have been striving to do uh is to uh individually uh and uh in uh developing arrangements with the states work out the best way to work cooperative with them in January of 2004 the OCC declared
• 43:00 - 43:30 itself the exclusive regulator of all the National Banks effectively immunizing the big credit card issuers from most State consumer protection laws the OC cited the pridan case as proof of its commitment to Consumers I was dismayed that they used Providian as the um the prime example of their ability and their will to
• 43:30 - 44:00 enforce uh the laws that pertain to Consumers to you they weren't the White Knight who came into San Francisco and saved consumers from peridan no we were since the Providian case the OCC says it has been more aggressive recently issuing an advisory admonishing the banks for misleading the public about practices like 0% introductory rates and universal default the OCC itself has acknowledged that these
• 44:00 - 44:30 practices are as they describe it very troubling but notice what they didn't do they didn't say and we're going to prohibit them stop them those are unfair practices they are unsafe and unsound and don't do them instead they said it's a problem look if they think it's a problem then tell the credit card companies to stop doing it why don't you simply stop them why don't you ban these practices when we see practices that are
• 44:30 - 45:00 potentially problematic we take a variety of actions so you could tell them to stop and they would have to do it if we had a basis for concluding that a bank was involved in a practice that was unfair or deceptive uh if it violated any of the other many consumer protection standards that apply to them we can tell them to stop it immediately whatever the OCC is doing Pat Wallace
• 45:00 - 45:30 says it hasn't stopped the Better Business Bureau from being deluged with complaints it's not an accident that the banking credit card business generates more complaints nationally across the country than any other industry now what does that say to you out of a thousand industries that we track they're number one I'd say there's a problem here these things aren't an anomaly all the these complaints have some basis in fact there are irritated
• 45:30 - 46:00 unhappy dissatisfied customers in this industry and we see it the Better Business Bureau tells us credit cards and Banking and credit cards together number one problem of all types of complaints I would have thought it was like cable satellite installation use car dealers your members apparently are amongst that's I would not have thought that uh that that was the case critics like Elizabeth Warren believe
• 46:00 - 46:30 that there would be fewer complaints if the credit card industry clearly disclosed how its business Works particularly when it comes to the minimum monthly payment if people knew that the cost of minimum monthly payments was that they would still be paying for yesterday's trip to the shopping mall for the next 35 years some people might decide to pay a lot more than the minimum and the industry knows that that's why they don't want to tell you advertise in your
• 46:30 - 47:00 bills what the minimum monthly payment is but you don't tell people how much that might cost you if you stuck to that minimum paying why not the disclosure would be wrong 99% of the time because nobody almost nobody pays exactly the minimum that minimum every month for 20 years and never charges another thing this it's going to be a hyper technical expensive disclosure that nobody would understand so we are against disclosures
• 47:00 - 47:30 that nobody would understand and that are wrong we are for disclosures that help people understand it's that simple this is a nonsense argument in the line directly under the line that says minimum monthly payment there's a simple sentence that can be added if you make minimum monthly payments it will take you how many years 35 years and how many
• 47:30 - 48:00 months to pay off this bill the man who takes credit for inventing the 2% minimum payment thinks more disclosure is useless this is a Fascination that every now and then uh someone with an axe to grind or someone who thinks he's going to help consumers has on his mind but if we had a tape and we ran a computer on transcript of 10,000 customer service
• 48:00 - 48:30 calls with questions okay I don't think you'd ever hear that question so I'm kind of baffled at the artificiality of it I don't think that's what consumers want to know because they don't expect to make minimum payments forever do you know if you made the minimum payment for instance on your bill how long it would take you to pay it off I'm not in a hurry to find out I'm just going to pay it off would you like to know sure curious yeah mhm it would inspire me to put down more it would inspire me and I think
• 48:30 - 49:00 that's probably why they don't put it down it would inspire a lot more people to pay more than the minimum virtually everyone who holds a credit card one way or the other under existing laws today and Provisions can be completely taken advantage of by the credit card industry so there is a deception going on to get you into the game once you're in and I've got you in then then if you get out I charge you if you don't meet your obligations I charge you you move left you move right I've got you so what are you going to do
• 49:00 - 49:30 about it well I've got legislation so I got a bill there always a quick answer here and I don't know how far it'll go because I've tried this in the past I'm not new to the issue a good deal of the blame for the crisis of credit card debt we're seeing in America lies in how the practices are followed by credit card companies in the summer of 2004 Senator Dodd introduced a credit card Reform Bill that would among other things require credit card companies to disclose how long it would take consumers to pay off their balance but
• 49:30 - 50:00 he is not optimistic that the bill will pass his many previous attempts to reform the credit card business have all failed why haven't you or other lawmakers been able to put some regulation into place is it their political power sure there's no question about it I mean every time we've tried to offer legislation this industry has become very very powerful and uh and it it's very successful in defeating every legislative attempt that's been made over the last several years to inject
• 50:00 - 50:30 some responsibility on the part of this uh this credit card industry your critics say that you block every attempt to pass industry reform or consumer protection legislation you blocked minimum monthly payment legislation interest cap rates and a ban on marketing to college students uh we've done our best to to block bad bills those are bad bills and we'll continue to do our best to block them bad for bad for consumers I want to promise you
• 50:30 - 51:00 something today you know keep on defeating me and keep on defeating ideas like this and you look back and wished we had passed these legislation because I'll tell you Congress will come along and they'll take steps far more egregious in their view than anything I'm suggesting I'm just suggesting disclosure just let people know what the deal is I think there's a time when the American Consumer is going to hit the Tipping Point on this issue and it's no longer going to be all right for credit card
• 51:00 - 51:30 companies once they're in financial trouble to change the interest rates to load them on with fees and penalties to just decide that the terms of the contract they originally signed are no longer the terms of the contract I think that day is coming even an industry Insider like Duncan McDonald who worked at City Bank for nearly 30 years is deeply concerned I know enough about the industry and the lawyers in the industry and there have to be people
• 51:30 - 52:00 sitting there saying we've got to find a way to deal with this have we reached that point I don't know but my guess is there's a debate going on and I hope there's a debate going what a tragedy would be if there isn't the tragedy would be what the status quo gets worse the status quo is bad and then it gets worse profits keep in 25% of bad rates become 30 % bad rates and late fees become $50 and $60 and so
• 52:00 - 52:30 on back in South Dakota the man who helped the industry take off in the 1980s has mixed feelings about what he helped create do you ever reflect on the fact that in this great success which has been a great benefit to your state at the same time has helped create a way of borrowing money spending money that may have gotten out of control I think the answer is yes I mean it's we've become a
• 52:30 - 53:00 plastic Society we' become a plastic Society a lot of times you want to give people cash they look at you cash cash you were instrumental in making this happen in many ways I didn't think of any of this when it happened and I'm still glad what we I still like what we did and I still think it was a huge opportunity for my state now if we're talking about the industry in 189 20 plus perc interest do I think that's a healthy thing for human beings the
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