SECRET HISTORY OF THE
PRODUCED BY David Rummel &
CORRESPONDENT Lowell Bergman
WRITTEN BY Lowell Bergman &
DIRECTED BY David Rummel
ANNOUNCER: Tonight on FRONTLINE: The average American
family has eight.
MUELLER: "Zero percent for life on transfer
ANNOUNCER: Credit cards, plastic money, have
become both a necessity and a ticket to a better life.
AND ACTRESS: Hawaii!
STEIN, Actor/Author: A credit card is an extraordinary,
unbelievably great convenience for the consumer.
ANNOUNCER: But the credit card industry plays by
its own rules.
ELIZABETH WARREN, Harvard Law School: I don't know any merchant in America
who can change the price after you've bought the item, except a credit card
ANNOUNCER: Credit card banks earn record profits.
Correspondent: MBNA's profits last year—
one-and-a-half times that of McDonald's.
YINGLING, American Bankers Association: Well,
McDonald's didn't do too well last year.
ANNOUNCER: But the profits come at a price.
GUILE, Consumer: Now they've raised my rate to 19.98,
and I have not been late ever.
WALLACE, Bay Area Better Business Bureau: There are
irritated, unhappy, dissatisfied customers in this industry.
ELIZABETH WARREN: They are the new loan sharks in
MacDONALD, Fmr. Citibank General Counsel: I certainly
didn't imagine that someday we might have ended up creating a Frankenstein.
BERGMAN: Frankenstein? What do you mean, Frankenstein?
ANNOUNCER: Tonight, FRONTLINE correspondent Lowell
Bergman and The New York Times investigate the secrets of your credit card.
NARRATOR: This may seem an unlikely place to
begin a modern history of the credit card, more than 1,000 miles from Wall
Street and the paneled halls of the Federal Reserve in Washington, but this is
where the credit card business first began to really take off.
is Sioux Falls, South 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 the world. Today, Sioux Falls is one of the major
credit card processing centers in the country.
all happened in Sioux 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
JANKLOW, Fmr. Governor, South Dakota: Interest rates were going into orbit. They were climbing all the time.
NARRATOR: Bill Janklow was then the governor of
JANKLOW: When I came to the governor's office,
South Dakota had very tight historical laws on what you could charge to
borrow. In other words, 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. And what I'm trying to say is, we may have a law that said
you could charge 9 percent, but money cost 11 percent, so banks weren't loaning
NARRATOR: To get the banks to issue loans, South
Dakota decided to eliminate its historic cap on interest rates, known as a
JANKLOW: We had actually changed some of our
laws in '79, and we had previously introduced legislation and passed
legislation, or were passing legislation, to lift the ceilings on usury so we
could free up and get capital in South Dakota.
NARRATOR: At the same time, across the country in
New York City, a legendary banker had his own problems.
WRISTON, Fmr. CEO, Citibank/Citicorp: Oh, it was very simple. We
were going broke.
NARRATOR: Walter Wriston, then chairman of
Citibank, had a credit card division that was hemorrhaging money. New York's usury laws prohibited banks
from charging more than 12 percent on most consumer loans.
WRISTON: Interest rates went up to 20
percent. And if you are lending
money at 12 percent and paying 20 percent, you don't have to be Einstein to
realize you're out of business.
BERGMAN: It was costing Citibank 20 percent for
money, and you were only getting 12 percent back?
WRISTON: Well, sure. Certainly.
BERGMAN: Because of the limit on interest.
WRISTON: There was no way that you could
NARRATOR: So Wriston and Citibank began looking
for a new place to do business.
WRISTON: So we made a study of the five states
that had either no usury law or very high amounts. One of them was South Dakota. So we said, "Look, we'll bring a couple of thousand jobs out
NARRATOR: In 1981, Citibank moved its credit card
operation from New York to South Dakota.
JANKLOW: From the time I met them until we
passed our legislation, it was just several weeks. I mean, we really moved. That was a good deal for us. It was a hell of a deal for them.
BERGMAN:: What did they get out of this?
JANKLOW: What Citibank got out of it? They got to stay alive.
NARRATOR: But what really attracted Citibank to
South Dakota was an obscure Supreme Court decision that said a bank could now
export its interest rate to other states. It was called the Marquette decision.
JANKLOW: The Marquette Bank decision was a U.S.
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 percent ceiling, then you could charge 25 percent, even to
a loan in Florida.
NARRATOR: Janklow realized that the Marquette
decision meant that South Dakota could become the credit card capital of
JANKLOW: In a very short period of time, a
matter of a few months, I was meeting with the chairman of the board of Bank of
America, with First Chicago of Illinois, Chase Manhattan Bank, Manufacturers
Hanover Bank, Chemical Bank, Bank of New York, all the big banks in America,
because only South Dakota, at that point in time, appeared to be willing to move
forward to invite people to come in.
NARRATOR: 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.
MacDONALD, Fmr. Citibank General Counsel: You could 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.
NARRATOR: Duncan MacDonald is the former general
counsel of Citibank's credit card division. He says the Marquette decision allowed bankers to charge higher
interest rates to riskier customers.
MACDONALD: 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 percent interest rates to small loan
companies, all of a sudden got the product at 19 percent interest rate and an
annual fee of $20. So in that
sense, it was very egalitarian and very good.
NARRATOR: 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
wanted to talk to the executives of the major credit card banks about their
business, but were directed instead to the American Bankers Association.
BERGMAN: We've asked for interviews with all the
major credit card companies. They
won't talk to us. Why?
YINGLING, American Bankers Association: That's our job. They pay us
dues to handle these kinds of sometimes difficult assignments.
NARRATOR: Ed Yingling is the incoming president
of the American Bankers Association and the industry's top lobbyist.
BERGMAN: How profitable is the credit card
YINGLING: The credit card business is
profitable. You would expect the
credit card business to be somewhat more profitable than the rest of the
industry, or parts of the industry, because it's riskier. It is an unsecured loan, and so you
would expect the returns to be a little higher.
BERGMAN: Wasn't last year record profits for
this industry, and they're expected again this year?
YINGLING: Yeah, but compared to what? It's not an unusually profitable
business, compared to other businesses.
BERGMAN: MBNA'S profits last year—
one-and-a-half times that of McDonald's.
YINGLING: Well, McDonald's didn't do too well
last year, and MBNA is a big company.
BERGMAN: Citibank more profitable than
Microsoft, Wal-mart. And the
executives are highly paid.
YINGLING: Right. Right. These
are— these are really big businesses, and they do make money.
NARRATOR: 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 cards have become an essential part of the American economy.
LISA: I really can't say that I love my
credit card, but I would hate to live without it.
DESIREE: I use it a lot for work. It's easy— it's easy access. I can take clients out for dinner.
ELLIOT: I take advantage of the miles. We fly first class on vacations
MATTHEW: It's nice to be able to spend what you
BERGMAN: Can you imagine living without a credit
card in this society?
ELLIOT: It's hard to imagine.
NARRATOR: We sat down with a group of credit card
customers to talk about how they use their cards.
ELLIOT: We're consumers. America loves to consume. It's in our blood.
DESIREE: 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. Oh, I really
shouldn't do it, I'll just pay it off later." And you do it.
ELLIOT: If I don't have that IPod, I'm not
cool. So I can charge it and pay
LISA: And Christmas is just around the
corner. There's always something.
STEIN, Actor/Author: They're just a gift. And for the traveler, which I am — a
very, very, very frequent traveler, indeed, is what I am — they are
NARRATOR: Actor and author Ben Stein loves the
convenience of using his credit cards.
STEIN: Credit cards are an incredible deal for
me. I mean, I have lots and lots
of different cards. I mean, my
wallet is just stuffed with cards. It's just insane. It's just
ridiculous. I look like I've got a
third breast from my carrying around my wallet with so many credit cards in it.
NARRATOR: Stein says he charges thousands of
dollars a month in business expenses on his credit cards.
STEIN: I use all their good services, and they
don't make any money from me. I
mean, none to speak of.
NARRATOR: 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
STEIN: The credit card companies hate people
like me, who pay off our bills every month. And I know that because 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 and how I pay them off every month, and he said, "Oh, we hate
you. We hate you guys. We call you deadbeats."
NARRATOR: "Deadbeats," 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 pay off their credit card
debt. They're called the
BERGMAN: People in the industry tell us that
revolvers, people who borrow money, basically, with their credit card, that's
where the profits are.
YINGLING: 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
are kind of the sweet spot.
NARRATOR: Today, the sweet spot, as Mr. Yingling
calls it, continues to grow. And
the top interest rates charged are higher than ever before, according to Robert
McKinley, who founded Cardweb, a research firm that tracks the industry.
B. McKINLEY, CEO, Cardweb: The top 10
issuers in the country are charging interest rates of 25 to 30 percent 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 loan sharks in my day.
NARRATOR: At the same time, Americans with credit
card balances are carrying a record amount of debt.
BERGMAN: How much credit card debt is the
average American family carrying?
ELIZABETH WARREN, Harvard Law School: Oh, about $8,000, for those who are carrying some debt.
NARRATOR: Elizabeth Warren is a Harvard law
professor. She has researched the
growing credit card debt held by middle class families and how it can lead to
ELIZABETH WARREN: And what families are discovering, even
with Mom and Dad in the workplace, is they often can't make it to the end of
the month, and so they often use credit cards to bridge the gap. 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.
NARRATOR: Like most Americans, Jim and Juanita
Mueller managed to pay their credit card bills each month, until they both lost
MUELLER: We didn't have any emergency funds set
aside, so they kind of became our emergency fund, to fund our life while we
were waiting for the employment to come along. And 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 we just kept digging deeper and
deeper. We started robbing Peter
to pay Paul, as the expression goes, you know, take money from a credit card to
pay other credit cards. And that
just increases it, and that's where it really started to snowball.
NARRATOR: As the Muellers fell behind, their
credit card companies began to apply penalty interest rates and fees to their
BERGMAN: Do you remember when the interest rates
started to rise?
MUELLER: Some of them, one late payment and
forget your old interest deal that you had, so—
MUELLER: And forget the fact that you had the
credit card for a number of years and were paying on it regularly, were never
late. And as soon as you make you
miss one payment, it's like all deals are off. Everything goes up. I mean, some of the credit cards we had were 9 percent or less. All of a sudden, they're 24, 25 percent
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 limits, so there's an over-the-limit fee.
NARRATOR: The Muellers' 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 had to file for bankruptcy. They were one of a record seven million families to file in the last
MUELLER: It wasn't that we didn't want to pay
off our credit cards, it's we got to the point where it was impossible. It was just— I mean, short of a rich
relative, which neither one of us have, dying and leaving us $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 money as fast as possible.
ELIZABETH WARREN: The main things that triggers a
bankruptcy filing are job loss, a medical problem or a family break-up. Without these things, most American
families can deal with their credit card debt. But high credit card debt puts them at much great 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.
MUELLER: "Zero percent for life on transfer
balances, and 3— up to 3 percent cash back bonus."
NARRATOR: Ironically, the Muellers are still
getting offers for more credit cards.
BERGMAN: You're still getting solicitations in
MUELLER: We got one yesterday from a credit card
company that told me I'd never have credit with them again. One of the last times I talked with
them, 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 ever again." Yesterday, received a solicitation from
them, zero percent for life, with up to a $50,000 line of credit.
More on marketing to consumers]
COMMERCIAL: Diapers, milk and laundry detergent,
$25. Spend more time with your
NARRATOR: Encouraging Americans to take on credit
card debt is critical to the profitability of the industry.
AND ACTRESS: Hawaii! Yes!
ANNOUNCER: Call now to request the CitiAdvantage World Mastercard, and you can earn
free award travel, plus get 10,000 bonus miles.
NARRATOR: Making it easier and more attractive to
spend has been the job of Madison Avenue marketers.
COMMERCIAL: 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,
NARRATOR: But the success of the industry has
also relied on financial innovators like this man, Andrew Kahr, whose peculiar
genius, industry insiders say, has helped shape the way the credit card
business works. Kahr, 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.
BERGMAN: Give me an idea of, from the time you
got involved, the late '70s, with credit cards, the ideas, the innovations that
you've come up with.
KAHR, Credit Card Industry Consultant: Well, I convinced the client that instead of having 5 percent of the
balance as a minimum payment, we should reduce that to 2 percent. It's a very dramatic change, less than
NARRATOR: Before Andrew Kahr got involved in the
industry, most bankers required that customers pay 5 percent of their credit
card balance every month. Kahr
realized that if customers were able to pay less, they would borrow more.
BERGMAN: You were able to explain that it was
people making low payments who were the most profitable.
KAHR: Having a lower minimum payment allows
you to offer higher credit lines, which, first of 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.
BERGMAN: Because they're paying interest?
KAHR: Because they're paying interest on a
NARRATOR: Today Kahr's 2 percent minimum is a
common feature on millions of credit card bills, and every month, some 35
million Americans pay only the minimum payment.
Consumer views on credit cards]
BERGMAN: By the way, while you're running up
balances on your credit cards, or currently have balances on your credit cards,
do you have cash in the bank?
CARD USERS: Oh, yeah. Yeah. Yes.
ELLIOT: I could wipe my debt out.
BERGMAN: So why don't you do it?
LISA: I feel it's a nest egg. You never know what's going to happen
tomorrow. You might need that
money for something else.
BERGMAN: So even though you're paying
double-digit interest and you could get rid of the balance, or most of it—
BERGMAN: —you're going to still make those
payments and keep the cash in your bank account.
NARRATOR: Andrew Kahr's research showed that
making the minimum payment eased consumers' anxiety about carrying large
amounts of credit card debt. They
believed they were being financially prudent.
DESIREE: 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.
NARRATOR: In fact, the industry was reaping huge
profits from Andrew Kahr's intuition about people's behavior. But then, in the late '90s, Kahr says
he had a new insight. Customers
were being flooded with competitive offers for low-interest cards.
KAHR: People were offering 12.9 percent
interest for the first six months, 10.9 percent on balance transfers, and I
convinced the client to go straight to zero percent as an introductory rate. It gave them competitive
advantage. It led to, of course,
the others also going to zero percent.
NARRATOR: Kahr knew that even though the zero
percent offer could easily change, people would still be attracted to the bait.
KAHR: When you're getting something in the mail
several times a week that offers you zero percent for six months— they look at
the headlines of the solicitation in the mail, they spend 30 seconds on it,
and, "OK, I'm going to be better off at the beginning. They're going to give me
something. They're going to give
me a zero percent rate." People
believe what they want to believe
BERGMAN: "Zero percent APR"— what does this
mean? I mean, you're saying that's
B. McKINLEY, CEO, Cardweb: 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, this rate will
go away immediately.
NARRATOR: According to McKinley, the key to
understanding how credit cards are marketed lies in the great digital
revolution, the amassing of data on American consumers.
B. McKINLEY: Well, there's a gold mine of
information residing out there in these databases by the consumer reporting
agencies, the credit bureaus. 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 today, it's really become almost surgical.
NARRATOR: 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.
QUINN, Fair Isaac Corp.: We're not a
credit-reporting agency like an Equifax, Trans-Union or Experian, that's
gathering information daily on consumers and building up consumer records.
NARRATOR: Tom Quinn is a spokesman for Fair
QUINN: We simply work with the
credit-reporting agencies, and they deploy their data onto our mathematical
formula to create that score.
NARRATOR: 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.
QUINN: Lenders use that score almost 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.
BERGMAN: Algorithm, meaning a mathematical
QUINN: Yes, mathematical formula.
BERGMAN: And how many people have this number?
QUINN: We estimate that approximately 75
percent of the U.S. population that is eligible for credit, i.e., those who are
18 years or older, have a FICO score at any given time.
BERGMAN: Do you know your credit score?
BERGMAN: You're not aware that you have a credit
MATTHEW: I'm aware that I have one, I don't know
what it is.
DESIREE: Right, yeah.
LISA: I don't know what it is.
DESIREE: I don't know what it is, either.
BERGMAN: So if I said to you the words, "FICO
score," do you know what a FICO score is?
ELLIOT: I know the terms. I'm not clear on what they are. I've never gotten my credit score.
What determines your FICO score?]
NARRATOR: 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 this contract.
BERGMAN: When I get a credit card, there's a
contract that goes along with it. What kind of contract is this? Because I never read it. Have you ever read it, when it came to you?
B. McKINLEY: I'd have to admit, in 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
that it can be intimidating, I think.
BERGMAN: It says that I'm guaranteed the terms
of a loan for as long as I have the card.
B. McKINLEY: Yeah, well— yeah, things that— the one
unique thing about the credit card business is that the issuer can change the
terms and conditions at will.
BERGMAN: Without asking my permission?
B. McKINLEY: Absolutely. They can change it all. It only takes 15 days' notice to make those changes. I mean, you could be offered a 5 or 6
percent interest rate today and perhaps get it. Two months later, that could be 30 percent. There's nothing to prevent the issuer
from changing those conditions.
NARRATOR: Even Professor Elizabeth Warren, an
expert on contract law, says she has a hard time deciphering her contract.
ELIZABETH WARREN: 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 that the two
parties to the contract understand what the terms are
BERGMAN: Have you ever read the contract that's
sent to you with your credit card?
YINGLING: Yes. But I'm a lawyer. [laughs]
BERGMAN: Do you understand it?
YINGLING: I do understand it. I think it'd be very hard for a lot of
people to understand. And I 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 read them.
NARRATOR: Ed Yingling says the fact that the
contracts are difficult to understand is not the industry's fault.
YINGLING: Our disclosures are very explicitly set
forth in law and in regulation, much moreso than in most consumer
contracts. Ours are heavily
BERGMAN: They say the contract contains information,
even the typeface, that's mandated by law—
Prof. ELIZABETH WARREN: But 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
NARRATOR: One of those traps, according to Warren
and other critics, is something called universal default.
B. McKINLEY: 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— or maybe your balances are too high.
BERGMAN: You've seen one of these, right,
before? I want to read you
something from a 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
GROUP: Uh-huh. Yes.
BERGMAN: You do? Do you know that it means that if you fail to make a payment
and are late on anything else that you're paying on — your house, your car,
anything else — they will find out and they can change your interest rate? Did you know that?
ELLIOT: No, I had no idea.
LISA: I had no idea. This is the first I've ever heard that.
DESIREE: Why is it legal?
BERGMAN: Well, because it's disclosed in the
ELLIOT: It doesn't seem fair. 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, now I can
raise your rate."
DESIREE: They're taking advantage of someone who
is in that position.
NARRATOR: That's what Andrew Guile of Wilmington,
Delaware, says happened to him.
GUILE: Yes, I had gotten a letter from MBNA
several months ago that my rate was going to be increased..
NARRATOR: MBNA raised his 8.9 percent interest
rate to 19.9 percent, and his minimum monthly payments nearly doubled.
GUILE: They told me the first time that my
rate had been raised because they found an occasion back in 1998 when I had
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
NARRATOR: 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.
GUILE: I was a 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 never late, and I used the card in a wise and responsible
NARRATOR: FRONTLINE wanted to ask MBNA
about Guile's problem, but we were told they never comment on an individual's
account. But just two months after
our interview, Guile says he got a call from the office of the president of
MBNA saying they would move his interest rate back to 8.9 percent.
ELIZABETH WARREN: 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 to double
my mortgage. Credit card companies
can say, "Remember how you bought the big-screen TV at 9.8 percent
interest? We've decided we want
29.9 percent interest." And
there's not a darn thing you could do about it right now.
BERGMAN: The contract allows a credit card
company to change the interest rate on money you borrow from them after you've
Read the extended interview]
YINGLING: Some do, yeah. It depends on the contract, but a lot
of them do.
BERGMAN: If they find out through this
information system that you've been late on your payment for your automobile,
they can notify you that they're going to change the interest rate on the money
they've already lent you.
YINGLING: I think there's a misunderstanding
about what the credit card agreement is. My agreement with you is, you come to me, you have a certain credit
score, and based on that credit score, I'm going to charge you 12 percent. If in the future, it turns out that your
credit score has deteriorated and you now are more risky to me, I'm going to
charge you the interest rate I would charge to somebody that has that credit
BERGMAN: Is it fair to change the price of the
deal after the fact?
YINGLING: The product is not a promise to
somebody that we will lend you that amount of money forever at that interest
rate. It is a very short-term
revolving line of credit.
GUILE: It's dishonest. Plain and simple. It's dishonest. They may say it's good business for
their financial bottom line, but it is a very poor way to treat a customer.
NARRATOR: 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 vs. Citibank, much like the Marquette
decision before it, lifted state restrictions, this time on the fees that
credit card banks could charge.
MacDONALD, Fmr. Citibank General Counsel: We were working this thing here for a good cause, free-market pricing.
NARRATOR: Duncan MacDonald was one of the lawyers
who worked on the Smiley case.
MacDONALD: 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 Smiley came along and took the lid off it, it went from
$5 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've ended up
creating a Frankenstein.
BERGMAN: Frankenstein? What do you mean, Frankenstein.
MacDONALD: I look at that and I say to myself, "Is
$50 a fair fee," plus a 25 percent interest rate and all these other fees that
are thrown on, for folks who are probably not that risky? Is that fair? And I look at it and I say to myself, "There's the
Frankenstein." We've created
something that has to be dealt with.
NARRATOR: Since Smiley, credit card companies
have doubled the amount of revenue they generate from fees: late fees,
over-the-limit fees, returned check fees and the like.
B. McKINLEY: Fee income has gone up much, much
faster than interest income in the business.
BERGMAN: So the fees are meant as a penalty to
make sure that you pay on time, or are they a profit stream?
B. McKINLEY: Well, they really have become a profit
stream. It's not just the fees
that they charge, even though they're three and four times higher than they
were 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 situations where they make a late
payment. It's the penalty interest
rate that really does the damage. Your interest rate could double overnight.
BERGMAN: Just so I understand, the interest
rates are not regulated. They can
change the interest rate relationship that you have with them with 15 days
notice. So that's a major source
of profit for them. And the fees
are now no longer regulated.
B. McKINLEY: That's exactly right. It's wide-open. We're beginning to see banks do all
this tweaking, where they're changing the interest rates and raising fees,
adding new fees, all kinds of— the way they calculate interest, setting the due
dates on a Sunday, on a holiday, on the hopes that maybe you'll trip up and get
a payment in late. It's become a
very anti-consumer marketplace.
NARRATOR: Even the industry's top lobbyist is
YINGLING: I think it would be short-sighted for a
credit card company to have fees that, that 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 than
they're likely to get out of the fee.
MacDONALD: You have bankers who have skyrocketed
rates from 14 percent to 25 percent and $40 late fees and bad-check fees, and
so on, that fall on the shoulders of the less well-off. Yes, there's— something bad has
BERGMAN: So we need regulation.
MacDONALD: We have regulation. We have regulation already. The Comptroller of the Currency
regulates all the national banks, and they have very vast powers.
NARRATOR: The Office of the Comptroller of the
Currency — the OCC — is an obscure Washington agency, part of the Treasury
Department, and it regulates the national banks, banks like Chase, Citibank and
MBNA that issue most of the credit cards in this country. Julie Williams is the acting
comptroller of the currency.
WILLIAMS, Acting Comptroller, OCC: We
have three goals, to make sure that the banks don't fail, to ensure the
integrity of how the banks operate, 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 action, and we have done that. We have taken enforcement action.
BERGMAN: Can you give us an example of how you
have brought a large institution to task?
WILLIAMS: Well, I think the— probably the most
conspicuous example of that would be the action that we took in connection with
NARRATOR: 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 riskiest customers with the lowest credit
WALLACE, Bay Area Better Business Bureau: They were targeting people with questionable credit, or marginal
credit, people that couldn't get
bank cards elsewhere.
NARRATOR: Pat Wallace is the head of the Better
Business Bureau in the San Francisco area.
WALLACE: The first thing that got our attention,
of course, were the numbers, the numbers of complaints. Providian was involved in all kinds of
questionable offers and policies and procedures and operations.
NARRATOR: Complaints about Providian from around
the country came here to Wallace's office.
WALLACE: Providian, 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
BERGMAN: They were holding payments so that they
could charge late fees and they could charge overdraft fees and—
WALLACE: And over-limit fees. Fifty percent of their income were
fees, not interest on the money loaned. They were pushing the envelope. And they got by with it for a period of time, and they made a lot of
BERGMAN: The office of the Comptroller of the
Currency is the main federal agency that takes complaints. Did they come to your assistance?
WALLACE: No. They just simply weren't interested. You know, the response was, "Well, you
know, we'll take it from here. We'll watch from here." You
know, "It's not a problem at this time for us."
NARRATOR: Complaints about Providian were also
coming to June Cravett 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.
BERGMAN: Had you ever heard of the Office of the
Comptroller of the Currency?
CRAVETT, Asst. DA, San Francisco: The answer from my perspective is 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.
NARRATOR: And when the OCC contacted June
Cravett, she says instead of cooperation, they issued a challenge.
CRAVETT: There were a couple of meetings where
the subject of preemption was raised.
CRAVETT: Yeah. That's where they say, "Because we're the federal
regulator," that they have exclusive authority over the national banks, and
therefore, we don't have jurisdiction.
BERGMAN: You, in San Francisco, don't have
BERGMAN: The San Francisco district attorney
says to us that they were told, "You don't have real jurisdiction, we have real
jurisdiction," and indicated to them that they might want to get out of the
WILLIAMS, Acting Comptroller, OCC: The way that that worked out was we worked together with the San
Francisco district attorney's Office. It was a collaborative process.
BERGMAN: But they say once you got involved, it
was very fruitful.
BERGMAN: 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 contact with the
WILLIAMS: We worked cooperatively with them when
we got information about what was going on.
NARRATOR: 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."
Washington, the OCC has been increasingly asserting its authority and
attempting to curb consumer enforcement actions by local prosecutors. This has sparked a nationwide battle,
led by the attorneys general in all 50 states.
SPITZER, NY State Atty. General: 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
NARRATOR: Elliot Spitzer is the attorney general
of New York state.
SPITZER: We get thousands of complaints every
year about credit card issues relating to the major banks, the 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."
BERGMAN: Isn't this just a turf battle between
the states and a federal agency?
SPITZER: It's a one-way turf battle. And by that, what I 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.
BERGMAN: 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 them out of the business of
WILLIAMS: We don't want to push them out of the
business. We are both there protecting consumers. What we have been striving to do is to
individually, and in developing arrangements with the states, work out the best
way to work cooperatively with them.
NARRATOR: In January of 2004, the OCC declared
itself the exclusive regulator of all the national banks, effectively
immunizing the big credit card issuers from most state consumer protection
laws. The OCC cited the Providian
case as proof of its commitment to consumers.
CRAVETT: I was dismayed that they used Providian
as the prime example of their ability and their will to enforce the laws that
pertain to consumers.
BERGMAN: To you, they weren't the white knight
who came into San Francisco and saved consumers from Providian.
CRAVETT: No, we were.
NARRATOR: 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 zero percent introductory rates
and universal default.
ELIZABETH WARREN, Harvard Law School: The OCC itself has acknowledged that these 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!
BERGMAN: Why don't you simply stop them? Why don't you ban these practices?
WILLIAMS: When we see practices that are
potentially problematic, we take a variety of actions.
BERGMAN: So you could tell them to stop, and
they would have to do it.
WILLIAMS: If we had a basis for a concluding that
a bank was involved in a practice that was unfair or deceptive, if it violated
any of the other many consumer protection standards that applied to them, we
can tell them to stop it immediately.
NARRATOR: Whatever the OCC is doing, Pat Wallace
says it hasn't stopped the Better Business Bureau from being deluged with
WALLACE, Bay Area Better Business Bureau: 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 1,000 industries that we track,
they're number one. I'd say
there's a problem here. These
things aren't an anomaly. All
these complaints have some basis in fact. There are irritated, unhappy, dissatisfied customers in this
industry. And we see it.
BERGMAN: The Better Business Bureau tells us
credit cards and banking and credit cards together, number one problem.
WILLIAMS, Acting Comptroller, OCC: Of
all types of complaints?
WILLIAMS: I would have thought it was, like,
cable, and satellite installation or—
BERGMAN: No, I guess, you guys.
WILLIAMS: —used car dealers or something.
BERGMAN: Your members apparently are amongst
WILLIAMS: That's— I would not have thought that—
that that was the case.
NARRATOR: Critics like Elizabeth Warren believe
that there would be fewer complaints if the credit card industry clearly
disclosed how its business works, particularly when it comes to the minimum
ELIZABETH WARREN: 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.
BERGMAN: You advertise in your 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 payment. Why not?
YINGLING, American Bankers Association: The disclosure would be wrong 99 percent of the time because nobody —
almost nobody — pays exactly the minimum, that minimum, every month for 20
years and never charges another thing. This is going to be a hyper-technical, expensive disclosure that nobody
would understand. So we are
against disclosures that nobody would understand and that are wrong. We are for disclosures that help people
understand. It's that simple.
ELIZABETH WARREN: 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
months, "to pay off this bill."
NARRATOR: The man who takes credit for inventing
the 2 percent minimum payment thinks more disclosure is useless.
KAHR, Credit Card Industry Consultant: This is a fascination that every now and then, someone with an axe to
grind or someone who think he's going to help consumers has on his mind. But if we had a tape and we ran a
computer on transcripts of 10,000 customer service calls with questions, OK, 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.
BERGMAN: Do you know if you made the minimum
payment, for instance, on your bill, how long it would take you to pay it off?
CREDIT CARD USER: I'm not in a hurry to find out. I'm just going to pay it off.
BERGMAN: Would you like to know?
CREDIT CARD USER: Sure.
CREDIT CARD USER: It would inspire me to put down
more. It would inspire me. And I think that's probably why they
don't put it down. It would
inspire a lot more people to pay more than the minimum.
CHRISTOPHER DODD (D), Connecticut: 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.
BERGMAN: So what are you going to do about it?
CHRISTOPHER DODD: Well, I've got a legislation [laughs]. I've got a bill. That's 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.
Senate floor] 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.
NARRATOR: In the summer of 2004, Sen. 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 he is not
optimistic that the bill will pass. His many previous attempts to reform the credit card business have all
BERGMAN: Why haven't you or other lawmakers been
able to put some regulation into place? Is it their political power?
CHRISTOPHER DODD: Sure. There's no question about it. I mean, every time we've tried to offer legislation— this
industry's become very, very powerful, and it's very successful in defeating
every legislative attempt that's been made over the last several years to
inject some responsibility on the part of this credit card industry.
BERGMAN: Your critics say that you block every
attempt to pass industry reform or consumer protection legislation. You've blocked minimum monthly payment
legislation, interest cap rates, and a ban on marketing to college students.
YINGLING: We've done our best to block bad
bills. Those are bad bills. And we'll continue to do our best to
BERGMAN: Bad for?
YINGLING: Bad for consumers.
CHRISTOPHER DODD: I want to promise you something
today. You know, keep on defeating
me and keep on defeating ideas like this, and you'll look back and wish we had
passed this 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.
ELIZABETH WARREN: 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 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.
NARRATOR: Even an industry insider like Duncan
MacDonald, who worked at Citibank for nearly 30 years, is deeply concerned.
MacDONALD, Fmr. Citibank General Counsel: I know enough about the industry and the lawyers in the
industry and— there have to be people 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 on. What a
tragedy it would be if there isn't.
BERGMAN: The tragedy would be what?
MacDONALD: The status quo gets worse. The status quo is bad, and then it gets
BERGMAN: Profits keep increasing-
MacDONALD: So 25 percent bad rates become 30
percent bad rates, and late fees become $50 and $60, and so on.
NARRATOR: Back in South Dakota, the man who
helped the industry take off in the 1980s has mixed feelings about what he
BERGMAN: Do you ever reflect on the fact that
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?
JANKLOW, Fmr. Governor, South Dakota: I
think the answer to that is yes. I
mean, it's— we've become a plastic society. We've become a plastic society. A lot of times, you want to give people cash, they look at
you. "Cash? Cash?"
BERGMAN: You were instrumental in making this
happen, in many ways.
JANKLOW: I didn't think of any of this when it
happened. And I'm still glad,
what— 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 and 18, 19, 20-plus percent interest, do I think that's a
healthy thing for human beings? The answer is no. I don't
think that's healthy at all.
HISTORY OF THE CREDIT CARD
NEW YORK TIMES
NEW YORK TIMES TELEVISION
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