The Secret History of the Credit Card (full documentary) | FRONTLINE
TLDRThe FRONTLINE documentary delves into the rise and impact of the credit card industry in America, highlighting its transformative journey from a necessity to a significant contributor to the economy. It explores the industry's strategies, including high-interest rates, fees, and marketing tactics, which have led to record profits but also to a growing consumer debt crisis. The documentary features interviews with industry insiders, legal experts, and affected consumers, discussing the implications of practices like universal default and the minimum payment trap. It also touches on the role of regulators like the OCC and the challenges faced by consumer protection advocates in addressing these issues.
Takeaways
- π³ The average American family has eight credit cards, highlighting the prevalence of credit card usage in the United States.
- π Credit card companies have seen record profits, with some institutions earning more than major corporations like McDonald's.
- π The credit card industry's growth took off in Sioux Falls, South Dakota, due to the state's deregulation of usury laws, making it an attractive location for credit card processing centers.
- π The Supreme Court's Marquette decision allowed banks to export their interest rates to other states, which played a significant role in the expansion of the credit card industry.
- πΈ The industry's profitability largely depends on 'revolvers'βcustomers who carry a balance from month to month and generate interest income for credit card companies.
- π Credit card debt has become a significant issue for American families, with the average family carrying around $8,000 in debt for those who have some balance.
- π¦ The OCC (Office of the Comptroller of the Currency) is the main federal agency regulating national banks that issue most credit cards, but its effectiveness in consumer protection is questioned.
- π The practice of 'universal default' allows credit card companies to increase interest rates on existing balances if a customer is late on other loans or increases their credit risk.
- π Credit card agreements are often filled with complex legal terms, making it difficult for consumers to fully understand the terms and conditions they are agreeing to.
- π« The industry has been resistant to changes that would require more transparent disclosure of the long-term costs of only making minimum payments.
- ποΈ There have been legislative attempts to reform credit card practices and provide more consumer protection, but the industry's political power has often led to the defeat of such bills.
Q & A
How have credit cards become both a necessity and a ticket to a better life in the eyes of some?
-Credit cards are seen as a necessity because they provide a convenient way to make purchases and manage finances. They offer the ability to borrow money for immediate needs and can help build credit history. Additionally, credit cards often come with rewards and benefits such as cash back, travel miles, and exclusive discounts, which can enhance the consumer's lifestyle and potentially lead to a better life.
What is the significance of Sioux Falls, South Dakota, in the history of the credit card industry?
-Sioux Falls, South Dakota, is significant because it became one of the major credit card processing centers in the United States. This development was largely due to the state's decision to eliminate its cap on interest rates, known as usury laws, which attracted credit card companies like Citibank to move their operations there. The city's large post office also facilitated the processing and mailing of credit card solicitations and bills.
What was the impact of the Marquette decision on the credit card industry?
-The Marquette decision by the Supreme Court allowed banks to export their interest rates to other states. This meant that a bank could charge the interest rate of the state where the credit decision was made, regardless of where the bank was chartered. This decision was a boon for the credit card industry as it enabled them to charge higher interest rates to customers in states without usury laws, significantly increasing their profitability.
How did the deregulation of interest rates affect credit card customers?
-The deregulation of interest rates led to the credit card industry becoming one of the most profitable sectors of banking. It allowed banks to charge higher interest rates, especially to riskier customers. This meant that millions of people who were previously paying high interest rates to small loan companies could now access credit cards at relatively lower interest rates, but it also led to increased profits for credit card companies at the expense of consumers carrying debt.
What is the term used to describe credit card users who do not pay off their balance in full each month?
-Credit card users who do not pay off their balance in full each month are referred to as 'revolvers'. These individuals are considered the most profitable for the credit card industry because they accumulate interest on their balances, leading to higher revenue for the credit card companies.
What role do credit reporting agencies and FICO scores play in the credit card industry?
-Credit reporting agencies collect information on consumers' financial behavior, including the accounts they have open and their payment history. This data is used to calculate FICO scores, which indicate a consumer's likelihood of paying bills on time. Credit card companies use these scores to determine whether to grant credit, the interest rate, and other terms of the credit card agreement. This allows them to target consumers more effectively and manage risk.
What is 'universal default' in the context of credit card agreements?
-Universal default is a clause in credit card agreements that allows the credit card issuer to increase the interest rate or change the terms of the agreement if the customer defaults on any other debt, not just the credit card itself. This could be due to missed payments, late payments, or a change in the customer's credit worthiness.
How did the Smiley vs. Citibank Supreme Court decision impact the credit card industry?
-The Smiley vs. Citibank Supreme Court decision lifted state restrictions on the fees that credit card banks could charge. This led to an increase in the late fees and other charges imposed by credit card companies, which in turn doubled the revenue they generated from fees and significantly boosted their profits.
What is the role of the Office of the Comptroller of the Currency (OCC) in regulating credit card companies?
-The OCC is a federal agency that regulates national banks, including those that issue most of the credit cards in the United States. Its role is to ensure that these banks operate without failing, maintain the integrity of their corporate governance, and deal fairly and honestly with their customers. The OCC has the power to take enforcement action against banks that violate consumer protection standards.
What challenges do state attorneys general face in regulating credit card companies?
-State attorneys general face challenges in regulating credit card companies due to the OCC's assertion of exclusive regulatory authority over national banks. This has led to a conflict between state and federal regulators, with the OCC attempting to curb consumer enforcement actions by local prosecutors, which the state attorneys general argue is detrimental to consumer protection.
What is the criticism against the credit card industry's practice of not disclosing the long-term cost of minimum monthly payments?
-Critics argue that the credit card industry is not transparent about the long-term financial impact of only making minimum monthly payments. They believe that if consumers were made aware that such payments could lead to decades of debt, they might be more inclined to pay off their balances faster, reducing the profits the industry makes from interest and fees.
What legislative attempts have been made to reform the credit card industry?
-Senator Christopher Dodd introduced a credit card reform bill that aimed to require credit card companies to disclose the length of time it would take to pay off a balance if only minimum payments were made. However, he acknowledged that his previous attempts at reform have been unsuccessful due to the political power of the credit card industry.
Outlines
π³ The Emergence of Credit Cards
This paragraph discusses the rise of credit cards as a necessity and a tool for a better life in America. It highlights the profitability of the credit card industry, with companies like MBNA earning record profits. The segment also touches on the unique rules of the credit card industry, such as the ability to change prices after a purchase, and the impact of these practices on consumers. The narrative begins in Sioux Falls, South Dakota, where the credit card business first took off due to the elimination of usury laws, and the Supreme Court's Marquette decision that allowed banks to export their interest rates to other states.
π¦ Citibank's Move and Industry Expansion
In this paragraph, the focus is on Citibank's decision to move its credit card operations to South Dakota in 1981, which was driven by the state's deregulation of interest rates and the Marquette Supreme Court decision. The move allowed Citibank to survive and thrive, leading to South Dakota becoming a major credit card processing center. The narrative also covers the rise of Delaware as another credit card hub and the nationwide deregulation of interest rates, which led to the credit card industry becoming the most profitable sector of banking.
πΈ The Credit Card 'Revolvers' and Profits
This segment delves into the concept of 'revolvers,' or consumers who carry a credit card balance from month to month, and how they are the most profitable customers for credit card companies. It discusses the high interest rates and fees that these consumers face, the growing credit card debt among Americans, and the financial struggles that lead to bankruptcy. The story of Jim and Juanita Mueller is used to illustrate the challenges of managing credit card debt and the consequences of falling behind on payments.
π The Psychology of Credit Card Debt
The paragraph explores the psychological aspects of credit card debt, describing how consumers view credit cards as a necessary tool for modern life andε¦δ½εΊε―Ή the temptation to overspend. It features interviews with consumers who discuss their attitudes towards credit card usage and debt. The narrative also includes insights from Ben Stein, who represents consumers who pay off their credit card balances each month and are not profitable for credit card companies. The segment highlights the industry's reliance on consumers who carry debt and the strategies used to encourage spending.
π The Marketing and Data Revolution in Credit
This section examines the role of marketing and data collection in the credit card industry. It discusses how Madison Avenue marketers have encouraged Americans to take on credit card debt and the use of consumer data to target and influence consumer behavior. The narrative highlights the innovations introduced by Andrew Kahr, such as the 2% minimum payment, and the impact of these changes on consumer spending habits. The segment also covers the role of credit reporting agencies and the FICO score in shaping the credit card landscape.
π The Fine Print and Changing Terms
The paragraph focuses on the complexity of credit card contracts and the ability of credit card companies to change terms and conditions at will. It discusses the concept of 'universal default,' where a consumer's failure to make a payment on any loan can trigger a rate increase on their credit card. The narrative includes expert opinions on the fairness and transparency of credit card agreements, and the challenges consumers face in understanding and navigating these contracts. The segment also touches on the role of the Office of the Comptroller of the Currency (OCC) in regulating national banks and protecting consumers.
π‘ The OCC's Role and State Regulation
This segment discusses the role of the Office of the Comptroller of the Currency (OCC) in regulating national banks and its recent efforts to assert its authority over state consumer protection laws. It highlights the nationwide battle led by state attorneys general in response to the OCC's declaration of being the exclusive regulator of all national banks. The narrative includes interviews with the acting comptroller of the OCC and critics who argue for more transparency and consumer protection in the credit card industry. The segment also covers the OCC's actions against Providian Financial and the challenges faced by local prosecutors in enforcing consumer protection laws.
π« The Struggle for Reform and Industry Resistance
The final paragraph examines the challenges faced by lawmakers in implementing credit card industry reform and the resistance from the industry. It discusses the political power of the credit card industry and its successful efforts in defeating legislative attempts at reform. The narrative includes interviews with Senator Christopher Dodd, who has introduced a credit card reform bill, and Edward Yingling of the American Bankers Association, who defends the industry's practices. The segment concludes with reflections from industry insiders and former officials on the potential consequences of the current practices and the need for change.
Mindmap
Keywords
π‘Credit Card Industry
π‘Usury Laws
π‘Marquette Decision
π‘Revolvers
π‘Minimum Payment
π‘Universal Default
π‘Credit Scores
π‘Fair Isaac Corporation (FICO)
π‘Credit Card Reform
π‘Consumer Protection
π‘Office of the Comptroller of the Currency (OCC)
Highlights
The average American family has eight credit cards, highlighting the prevalence of credit card usage in the United States.
Credit card companies earn record profits, with MBNA's profits being one-and-a-half times that of McDonald's.
South Dakota's decision to eliminate its cap on interest rates, known as a usury law, attracted credit card businesses, leading to Sioux Falls becoming a major credit card processing center.
Citibank moved its credit card operation from New York to South Dakota in 1981, taking advantage of the state's deregulation of interest rates.
The Marquette decision by the Supreme Court allowed banks to export their interest rates to other states, which was a key factor in the credit card industry's growth.
Delaware copied South Dakota's legislation, becoming the credit card center of the East and contributing to the industry's profitability.
Credit card banks make most of their profits from the 90 million Americans who don't pay off their credit card debt, known as 'revolvers'.
The top interest rates charged by credit card issuers range from 25 to 30 percent, even though overall market interest rates are at a 40-year low.
The average American family carries about $8,000 in credit card debt for those who have some debt.
Credit card companies can change the terms and conditions of loans at will, often leading to increased interest rates and fees for consumers.
The Office of the Comptroller of the Currency (OCC) is the main federal agency regulating national banks, including those that issue most credit cards.
The OCC declared itself the exclusive regulator of all national banks, immunizing big credit card issuers from most state consumer protection laws.
State attorneys general, including Elliot Spitzer, argue that the OCC is trying to squeeze out state presence in consumer protection.
Credit card companies are very powerful and have been successful in defeating legislative attempts to reform the industry and protect consumers.
Senator Christopher Dodd introduced a credit card reform bill that would require companies to disclose the long-term implications of minimum payments, but is not optimistic about its passage.
Industry insiders like Duncan MacDonald express concern about the potential negative consequences of the credit card industry's practices.
Transcripts
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