- yesterday
Lowell Bergman looks at how credit cards have become the most profitable sector of the American banking industry, whose marking, techniques, and political influence have contributed to a rise in personal debt and bankruptcies.
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00:00Frontline is made possible by contributions to your PBS station from viewers like you.
00:15With major funding from the John D. and Catherine T. MacArthur Foundation,
00:20helping to build a more just world.
00:23And additional funding from the Park Foundation, committed to raising public awareness.
00:29With additional funding for this program from the Nathan Cummings Foundation.
00:40Tonight on Frontline, the average American family has eight.
00:44Zero percent for life on transfer balances.
00:47Credit cards, plastic money, have become both a necessity and a ticket to a better life.
00:53Hawaii!
00:55A credit card is an extraordinary, unbelievably great convenience for the consumer.
01:01But the credit card industry plays by its own rules.
01:04I don't know any merchant in America who can change the price after you've bought the item, except a credit card company.
01:10Credit card banks earn record profits.
01:13MB&A's profits last year, one and a half times that of McDonald's.
01:17Well McDonald's did too well last year.
01:20But the profits come at a price.
01:22Now they've raised my rate to 19.98, and I have not been late ever.
01:27There are irritated, unhappy, dissatisfied customers in this industry.
01:32They are the new loan sharks in America.
01:35I certainly didn't imagine that someday we might have ended up creating a Frankenstein.
01:40Frankenstein, what do you mean Frankenstein?
01:42Tonight, in this 2004 report, Frontline correspondent Lowell Bergman and the New York Times investigate the secrets of your credit card.
01:52—
01:52In North Korea.
01:53—
01:56their original line of St,
01:57Transcription by CastingWords
02:27Transcription by CastingWords
02:57Transcription by CastingWords
03:27Today, Sioux Falls is one of the major credit card processing centers in the country.
03:34It all happened in Sioux Falls because a quarter of a century ago, times were hard in South Dakota.
03:40There was a nationwide recession with double-digit inflation.
03:44Money was very tight.
03:46South Dakota banks were issuing very few mortgages or loans of any kind.
03:52Interest rates were going into orbit.
03:55They were climbing all the time.
03:57Bill Janklow was then the governor of South Dakota.
04:00When I came to the governor's office, South Dakota had very tight historical laws on what you could charge to borrow.
04:09In other words, there was one interest rate by law that they could charge for new cars, another one for used cars.
04:17It was highly regulated what interest rates people could pay.
04:20What 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 money.
04:29To get the banks to issue loans, South Dakota decided to eliminate its historic cap on interest rates, known as a usury law.
04:37We 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.
04:52At the same time, across the country, in New York City, a legendary banker had his own problems.
04:59Well, it's very simple. We were going broke.
05:02Walter Riston, then chairman of Citibank, had a credit card division that was hemorrhaging money.
05:09New York's usury laws prohibited banks from charging more than 12 percent on most consumer loans.
05:15Interest rates went up to 20 percent.
05:18And 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.
05:27And it was costing Citibank 20 percent for money, and you were only getting 12 percent back?
05:32Certainly, yes.
05:33Because of the limit on interest?
05:35Yes. There was no way that you could continue.
05:38So Riston and Citibank began looking for a new place to do business.
05:42So we made a study of the five states that had either no usury law or very high amounts.
05:51One of them was South Dakota.
05:53So we said, look, we'll bring a couple of thousand jobs out here.
05:57In 1981, Citibank moved its credit card operation from New York to South Dakota.
06:04From the time I met them until we passed our legislation, it was just several weeks.
06:11I mean, we really moved.
06:13That was a good deal for us.
06:15It was a hell of a deal for them.
06:16What did they get out of this?
06:17What Citibank got out of it?
06:18They got to stay alive.
06:19But what really attracted Citibank to South Dakota was an obscure Supreme Court decision
06:26that said a bank could now export its interest rate to other states.
06:30It was called the Marquette decision.
06:33The Marquette Bank decision was a U.S. Supreme Court decision that said, forget where the bank
06:39is chartered.
06:40Wherever the credit decision is made, in whatever state, that's the place where you can apply
06:46interest wherever you make the loan.
06:50In other words, if South Dakota had a 25 percent ceiling, then you could charge 25 percent even
06:56to a loan in Florida.
06:58Jack Lowe realized that the Marquette decision meant that South Dakota could become the credit
07:02card capital of America.
07:04In a very short period of time, a matter of a few months, I was meeting with the chairman
07:10of the board of Bank of America, with First Chicago of Illinois, Chase Manhattan Bank,
07:16Manufacturers Hanover Bank, Chemical Bank, Bank of New York, all the big banks in America,
07:21because only South Dakota at that point in time appeared to be willing to move forward
07:27to invite people to come in.
07:29But soon, another state got into the act.
07:33Delaware copied South Dakota's legislation, and Wilmington soon became the credit card
07:38center of the East, luring other New York banks and giving rise to new companies like
07:43MB&A.
07:45For the first time in American history, there were no legal restrictions on the interest
07:50rates banks could charge on credit cards nationwide.
07:53You could look at the Marquette decision and say, all right, maybe it took the lid off,
07:56but what it did was it had a very egalitarian effect.
08:00Duncan MacDonald is the former general counsel of Citibank's credit card division.
08:04He says the Marquette decision allowed bankers to charge higher interest rates to riskier
08:09customers.
08:11The minute Marquette came along, you could jack the price up a little bit more to cover
08:15those people, and as a result, tens of millions of people who were paying 30 and 35 percent
08:20interest rates to small loan companies all of a sudden got the product at 19 percent interest
08:25rate and an annual fee of $20.
08:27So in that sense, it was very egalitarian and very good.
08:31And very good for banking.
08:33As the deregulation of interest rates enabled more people to get credit cards, the industry
08:38began to expand and became the most profitable sector of banking, with $30 billion in profits
08:45last year.
08:46However, we wanted to talk to the executives of the major credit card banks about their
08:51business, but were directed instead to the American Bankers Association.
08:57We've asked for interviews with all the major credit card companies.
09:01They won't talk to us.
09:04Why?
09:05That's our job.
09:07They pay us dues to handle these kinds of sometimes difficult assignments.
09:12Ed Yingling is the incoming president of the American Bankers Association and the industry's
09:17top lobbyist.
09:19How profitable is the credit card business?
09:22The credit card business is profitable.
09:25You would expect the credit card business to be somewhat more profitable than the rest of
09:29the industry or parts of the industry because it's riskier.
09:34It is an unsecured loan, and so you would expect the returns to be a little higher.
09:39It wasn't last year record profits for this industry, and they're expected again this
09:43year?
09:43Yeah, but compared to what?
09:45It is not an unusually profitable business compared to other businesses.
09:49MB&A's profits last year, one and a half times that of McDonald's.
09:54Well, McDonald's did do too well last year.
09:56MB&A is a big company.
09:58Citibank more profitable than Microsoft, Walmart, and the executives are highly paid.
10:04Right, right.
10:05These are really big businesses, and they do make money.
10:11Today, nearly 144 million Americans have credit cards, and they are using their cards like
10:18never before, charging $1.5 trillion last year alone.
10:23Credit cards have become an essential part of the American economy.
10:26I really can't say that I love my credit card, but I would hate to live without it.
10:33I use it a lot for work.
10:34It's easy access.
10:36I can take clients out for dinner.
10:38I take advantage of the miles.
10:40We fly first class on vacations.
10:43It's nice to be able to spend what you don't have.
10:46Can you imagine living without a credit card in this society?
10:50It's hard to imagine.
10:50We sat down with a group of credit card customers to talk about how they use their cards.
10:56We're consumers.
10:57America loves to consume in our blood.
11:00It is like an addiction.
11:01I mean, I have this new credit card in my pocket, and look at that great dress.
11:06I can do it.
11:07I really shouldn't do it all.
11:08I'll just pay it off later.
11:09And you do it.
11:10If I don't have that iPod, I'm not cool.
11:13Yeah.
11:13So I can charge and pay it off.
11:15And Christmas is just around the corner.
11:18There's always something.
11:19They're just a gift.
11:22For the traveler, which I am, a very, very, very frequent traveler indeed is what I am,
11:28they are indispensable.
11:30Actor and author Ben Stein loves the convenience of using his credit cards.
11:35Credit cards are an incredible deal for me.
11:37I mean, I have lots and lots of different cards.
11:39I mean, my wallet is just stuffed with cards.
11:42It's just insane.
11:43It's just ridiculous.
11:44I look like I've got a third breast from my carrying around my wallet with so many credit cards in it.
11:52Thank you very much, Mr. Stein.
11:53Have a nice afternoon.
11:54Thank you very much.
11:55Stein says he charges thousands of dollars a month in business expenses on his credit cards.
12:01Well, I use all their good services, and they don't make any money from me.
12:04I mean, none to speak of.
12:06Oh, wait.
12:06Here's a kind of cute one.
12:07The credit card companies do make a percentage on each transaction, but Stein is not their ideal customer
12:14because, like 55 million Americans, he pays his bills off every month and doesn't pay any interest.
12:22The credit card companies hate people like me who pay off our bills every month,
12:26and I know that because I ran into a fellow I went to high school with on the street,
12:29and he told me he worked for a credit card company,
12:31and I told him about how much I use credit cards now.
12:34I pay them off every month, and he said, oh, we hate you.
12:38We hate you guys.
12:39We call you deadbeats.
12:41Deadbeats, in the upside-down world of the credit card business,
12:44are the people like Ben Stein who pay off their bills on time.
12:49The industry's best customers are the 90 million Americans who don't pay off their credit card debt.
12:55They're called the revolvers.
12:56People in the industry tell us that revolvers, people who borrow money basically with their credit card,
13:03that's where the profits are.
13:05I don't think that's where all the profits are.
13:06I think it is generally understood that those that use the revolving part of the credit card
13:13are kind of the sweet spot.
13:17Today, the sweet spot, as Mr. Yingling calls it, continues to grow,
13:22and the top interest rates charged are higher than ever before.
13:26According to Robert McKinley, who founded CardWeb, a research firm that tracks the industry.
13:32The top ten issuers in the country are charging interest rates of 25 to 30 percent to some of their customers.
13:40And this is in a market where interest rates are at a 40-year low.
13:44We have consumers paying interest rates that would be considered loan sharks in my day.
13:49At the same time, Americans with credit card balances are carrying a record amount of debt.
13:55How much credit card debt is the average American family carrying?
14:00About $8,000 for those who are carrying some debt.
14:05Elizabeth Warren is a Harvard law professor.
14:07She has researched the growing credit card debt held by middle-class families
14:11and how it can lead to big trouble.
14:14And what families are discovering, even with mom and dad in the workplaces,
14:19they often can't make it to the end of the month.
14:22And so they often use credit cards to bridge the gap.
14:26They borrow to make ends meet.
14:29And then what happens is something goes wrong.
14:32Somebody loses a job.
14:34Somebody gets sick.
14:36Family breaks apart through death or divorce.
14:38Like most Americans, Jim and Juanita Mueller managed to pay their credit card bills each month
14:48until they both lost their jobs.
14:51We didn't have any emergency funds set aside,
14:54so they kind of became our emergency fund to fund our life
14:58while we were waiting for the employment to come along.
15:02So you borrow from the credit card and pay that month,
15:05and then the job doesn't happen.
15:07So now you've got to borrow more.
15:08And we just kept digging deeper and deeper.
15:11And we started robbing Peter to pay Paul, as the expression goes,
15:15you know, take money from a credit card to pay other credit cards.
15:19And that just increases it.
15:23And that's where it really started to snowball.
15:25As the Mueller's fell behind,
15:27their credit card companies began to apply penalty interest rates and fees to their bills.
15:33Do you remember when the interest rates started to rise?
15:36Some of them, one late payment, and forget your old interest deal that you had.
15:44And forget the fact that you had the credit card for a number of years
15:47and were paying on it regularly.
15:49We're never late.
15:51And as soon as you miss one payment, it's like all deals are off.
15:55Everything goes up.
15:56I mean, some of the credit cards we had were 9% or less.
16:00All of a sudden, they're 24%, 25%.
16:02Because, oh, well, you're late.
16:04You've been late several months, and now we're going to raise your interest rate,
16:07and we're charging you the late fee.
16:09And now because the interest rate and the late fees have accumulated,
16:13now you're over your limit, so there's an over-of-limit fee.
16:15The Mueller's credit card debt eventually grew to nearly $80,000 on 10 cards.
16:21They found that they could no longer keep up with their payments
16:23and had to file for bankruptcy.
16:26They were one of a record 7 million families to file in the last five years.
16:31It wasn't that we didn't want to pay off our credit cards.
16:35We got to the point where it was impossible.
16:37It was just, I mean, short of a rich relative,
16:43which neither one of us have, dying and leaving us $100,000,
16:47nothing was going to happen because the credit card companies weren't,
16:50they weren't willing to work with us unless they got all their money as fast as possible.
16:57The main things that trigger a bankruptcy filing are a job loss,
17:01a medical problem, or a family breakup.
17:04Without those things, most American families can deal with their credit card debt.
17:11But high credit card debt puts them at much greater risk so that if they stumble,
17:17if they get hit by one of the other blows,
17:20they get their feet tangled up in those high interest rates and they just get sunk.
17:250% for life on transfer balances and up to 3% cash back bonus.
17:30Ironically, the Muellers are still getting offers for more credit cards.
17:35You're still getting solicitations in the mail.
17:38Yeah.
17:38We got one yesterday from a credit card company that told me I would never have credit with them again.
17:44One of the last times I talked with them and told them what our situation was,
17:47they said, well, we're canceling your card and you are, in essence, blackballed with us for life.
17:52You'll never have a credit card from us ever again.
17:54Yesterday, we received a solicitation from them, 0% for life, with up to a $50,000 line of credit.
18:03Diapers, milk, and laundry detergent, $25.
18:06Oh, yeah, and that stuff he just said.
18:08Spend more time with your family, priceless.
18:11Encouraging Americans to take on credit card debt is critical to the profitability of the industry.
18:18Hawaii!
18:19Yay!
18:19Call now to request the City Advantage World MasterCard and you can earn free award travel, plus get 10,000 bonus miles.
18:26Making it easier and more attractive to spend has been the job of Madison Avenue marketers.
18:31New tool belt and chrome tool set, $126.
18:37Getting some use out of it, priceless.
18:40There are some things money can't buy.
18:42For Father's Day, there's MasterCard.
18:44But the success of the industry has also relied on financial innovators like this man, Andrew Carr,
18:51whose peculiar genius, industry insiders say, has helped shape the way the credit card business works.
18:57Carr, 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.
19:07Give 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.
19:16Well, I convinced the client that instead of having 5% of the balance as a minimum payment, we should reduce that to 2%,
19:25which is a very dramatic change, less than half.
19:29Before Andrew Carr got involved in the industry, most bankers required that customers pay 5% of their credit card balance every month.
19:37Carr realized that if customers were able to pay less, they would borrow more.
19:42You were able to explain that it was people making low payments who were the most profitable.
19:49Having a lower minimum payment allows you to offer higher credit lines, which, first of all, makes your card product more attractive,
19:58because people judge, even if they don't intend to use the whole line, they would rather have a higher line.
20:04The high balance accounts will be much more profitable than the low balance accounts.
20:08Because they're paying interest?
20:10Because they're paying interest on a higher balance.
20:13Today, Carr's 2% minimum is a common feature on millions of credit card bills.
20:18And every month, some 35 million Americans pay only the minimum payment.
20:23By the way, while you're running up balances on your credit cards, or currently have balances on your credit cards,
20:31do you have cash in the bank?
20:34Oh, yeah.
20:35Yeah.
20:36I can wipe my debt out.
20:38So why don't you do it?
20:39I feel like it's a nest egg.
20:41You never know what's going to happen tomorrow.
20:42You might need that money for something else.
20:44So even though you're paying double-digit interest, and you could get rid of the balance, or most of it,
20:52you're going to still make those payments and keep the cash in your bank account.
20:56Right.
20:57Andrew Carr's research showed that making the minimum payment eased consumers' anxiety about carrying large amounts of credit card debt.
21:06They believed they were being financially prudent.
21:09If you lose your job or something bad happens, you have to have money, and you don't want to live off of a credit card.
21:15So you need to have that money saved somewhere in case something happens.
21:20In fact, the industry was reaping huge profits from Andrew Carr's intuition about people's behavior.
21:28But then in the late 90s, Carr says he had a new insight.
21:32Customers were being flooded with competitive offers for low-interest cards.
21:36People were offering 12.9% interest for the first six months, 10.9% unbalanced transfers,
21:46and I convinced a client to go straight to 0% as an introductory rate.
21:52It gave them competitive advantage.
21:53It led to, of course, the others also going to 0%.
21:56Carr knew that even though the 0% offer could easily change, people would still be attracted to the bait.
22:03When you're getting something in the mail several times a week that offers you 0% for six months,
22:10they look at the headlines of the solicitation in the mail, they spend 30 seconds on it,
22:14and, okay, I'm going to be better off at the beginning.
22:18They're going to give me something.
22:19They're going to give me a 0% rate.
22:21People believe what they want to believe.
22:230% APR.
22:25What does this mean?
22:26I mean, you're saying that's meaningless.
22:28In most cases, if you were to sign up for this card, the bank will honor that rate through that period of time.
22:35But there's a lot of fine print that goes with what could happen.
22:38For example, if you were to miss one payment, this rate will go away immediately.
22:45According to McKinley, the key to understanding how credit cards are marketed
22:49lies in the great digital revolution, the amassing of data on American consumers.
22:55Well, there's a goldmine of information residing out there in these databases
23:00by the consumer reporting agencies, the credit bureaus.
23:04They're collecting information about what kind of accounts you have open, the balances,
23:09whether or not you make those payments on time,
23:11and that's a huge reservoir of information there that they can tap into
23:14and be able to get a sense as to whether or not a consumer is a revolver,
23:18someone who doesn't pay the balance off in full each month.
23:21So they can kind of sift those out,
23:23and today it's really become almost surgical.
23:26The ability to surgically target consumers and track their financial behavior
23:31has become a booming business dominated by three credit reporting agencies
23:36which gather information.
23:38All that data is then crunched by a little-known company called Fair Isaac,
23:43which calculates a number called a FICO score
23:46for almost every American with a credit history.
23:49We're not a credit reporting agency like an Equifax, a TransUnion, or Experian
23:54that's gathering information daily on consumers and building up consumer records.
23:58Tom Quinn is a spokesman for Fair Isaac.
24:01We simply work with the credit reporting agencies,
24:04and they deploy their data onto our mathematical formula to create that score.
24:10The median FICO score is 720 out of a possible 850.
24:14The riskiest customers have scores below 600.
24:19The score is an indication of how likely you are to pay your bills.
24:23Lenders use that score almost like a thermometer
24:26to determine if they're going to grant credit or not.
24:30So the algorithm is an indication of that consumer's future risk in terms of credit behavior.
24:36Algorithm meaning a mathematical formula?
24:39Yes, mathematical formula.
24:40And how many people have this number?
24:43We estimate that approximately 75% of the U.S. population that is eligible for credit,
24:49i.e. those who are 18 years or older, have a FICO score at any given time.
24:54You know your credit score?
24:56Mm-hmm.
24:56You're not aware that you have a credit score?
24:59I'm aware that I have one. I don't know what it is.
25:01Right.
25:01Yeah.
25:02I don't know what it is.
25:02I don't know what it is either.
25:04So if I said to you the words FICO score, do you know what a FICO score is?
25:08I know the terms. I'm not clear on what they are.
25:11I've never gotten my credit score.
25:13An individual's FICO score often determines how much interest he will pay on a credit card.
25:18The terms and conditions of the card are laid out in the fine print of this contract.
25:25When I get a credit card, there's a contract that goes along with it.
25:30What kind of contract is this? Because I never read it. Have you ever read it when it came to you?
25:35I'd have to admit, in most cases I may have just glanced at it.
25:38You know, it's filled with so many legal terms and so many pages and such small print.
25:43And it can be intimidating, I think.
25:45It says that I'm guaranteed the terms of a loan for as long as I have the card.
25:51Yeah, well, you know, things that...
25:53The one unique thing about the credit card business is that the issuer can change the terms and conditions at will.
26:00Without asking my permission?
26:01Absolutely. They can change it all. It only takes 15 days' notice to make those changes.
26:07I mean, you could be offered a 5% or 6% interest rate today and perhaps get it.
26:11Two months later, that could be 30%.
26:13There's nothing to prevent the issuer from changing those conditions.
26:18Even Professor Elizabeth Warren, an expert on contract law, says she has a hard time deciphering her contract.
26:25I've read my credit card agreement, and I can't figure out the terms.
26:30I teach contract law.
26:31And the underlying premise of contract law is the two parties to the contract understand what the terms are.
26:39Have you ever read the contract that's sent to you with your credit card?
26:44Yes, but I'm a lawyer.
26:47Do you understand it?
26:48I do understand it.
26:50I think it would be very hard for a lot of people to understand.
26:55And 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.
27:05Ed Yingling says the fact that the contracts are difficult to understand is not the industry's fault.
27:11Our disclosures are very explicitly set forth in law and in regulation,
27:17much more so than in most consumer contracts, ours are heavily regulated.
27:23They say the contract contains information, even the typeface, that's mandated by law.
27:30But the laws, that's the point now.
27:32The laws are inadequate.
27:33There's not enough there.
27:35These guys have figured out the best way to compete is to put a smiley face in your commercials,
27:41a low introductory rate, and hire a team of MBAs to lay traps in the fine print.
27:49One of those traps, according to Warren and other critics, is something called universal default.
27:55If you do miss a mortgage payment, you do miss a car payment, any other, it can trigger what is called a universal default.
28:02They actually have the right to change it if you miss a payment with another creditor.
28:07Or, in some cases, even if there's a change in your credit worthiness.
28:10In fact, you don't have to miss a payment.
28:12You don't have to go over your credit limit to be in default.
28:15You could have, for example, or maybe your balances are too high.
28:20You've seen one of these, right, before?
28:22I want to read you something from a contract.
28:25Your APRs also may vary if you are in default under this agreement or any other agreement that you have with us
28:34or any other related companies for any of the following reasons.
28:38You fail to make a payment to another creditor when due.
28:42Do you understand what this means?
28:44I do.
28:45You do?
28:46Do you know that it means that if you fail to make a payment and are late on anything else that you're paying on,
28:52your house, your car, anything else, they will find out and they can change your interest rate?
29:00Did you know that?
29:01I had no idea.
29:02I had no idea.
29:03This is the first I've ever heard that.
29:05Why is it legal?
29:07Well, because it's disclosed in the contract.
29:11It doesn't seem fair.
29:11You've done no harm to the company themselves.
29:14You're late with someone else.
29:15You haven't affected your standing with that company.
29:19No, it doesn't seem fair that they would suddenly say, oh, well, now I can raise a rate.
29:23They're taking advantage of someone who is in that position.
29:28That's what Andrew Guile of Wilmington, Delaware, says happened to him.
29:32Yes.
29:34I had gotten a letter from MBNA several months ago that my rate was going to be increased.
29:39MBNA raised his 8.9% interest rate to 19.9%,
29:45and his minimum monthly payments nearly doubled.
29:48They told me the first time that my rate had been raised because they found an occasion back in 1998
29:56when I'd gone 60 days past due on a competitor's credit card.
30:01And I asked them, what in the world does that have to do with MBNA, especially being six years ago?
30:08I said, that has nothing to do with my account here.
30:10I mean, that absolutely took my breath away.
30:13When Guile protested, he says he was given another reason for the change.
30:17He had become riskier, he was told, because his account balances with other creditors were too high.
30:24I was a great customer at MBNA.
30:26Always paid my balances on time.
30:29Paid more than the minimum balance.
30:31You know, many times paying it down completely.
30:34But I was never late.
30:36I used the card in a wise and responsible manner.
30:38Frontline wanted to ask MBNA about Guile's problem.
30:42But we were told they never comment on an individual's account.
30:47But just two months after our interview,
30:49Guile says he got a call from the office of the president of MBNA
30:53saying they would move his interest rate back to 8.9%.
30:57The real question here is whether or not you can change the price,
31:02not for new items you buy after your credit score has changed,
31:06but for old credit that you've already taken out.
31:10My mortgage company agreed to an interest rate,
31:13and if I lost my job, my mortgage company does not get to double my mortgage.
31:17Credit card companies can say,
31:20remember how you bought the big screen TV at 9.8% interest?
31:24We've decided we want 29.9% interest,
31:29and there's not a darn thing you can do about it right now.
31:32The contract allows a credit card company
31:34to change the interest rate on money you borrow from them
31:40after you've borrowed it.
31:44Some do.
31:45It depends on the contract, but a lot of them do.
31:47If they find out through this information system
31:52that you've been late on your payment for your automobile,
31:55they can notify you and that you're going to change the interest rate
31:59on the money they've already lent you.
32:02And I think there is a misunderstanding about what the credit card agreement is.
32:08My agreement with you is you've come to me,
32:10you have a certain credit score,
32:12and based on that credit score I'm going to charge you 12%.
32:17If in the future it turns out that your credit score has deteriorated
32:22and you now are more risky to me,
32:26I'm going to charge you the interest rate I would charge to somebody
32:30that has that credit score.
32:32Is it fair to change the price of the deal after the fact?
32:38The product is not a promise to somebody
32:40that we will lend you that amount of money forever at that interest rate.
32:46It is a very short-term revolving line of credit.
32:51It's dishonest.
32:52Plain and simple, it's dishonest.
32:55They may say it's good business for their financial bottom line,
32:59but it is a very poor way to treat a customer.
33:05In 1996, another important Supreme Court decision
33:09opened the door to bigger profits for the credit card industry
33:12and a raft of new complaints from their customers.
33:16That decision, Smiley v. Citibank,
33:19much like the Marquette decision before it,
33:22lifted state restrictions this time
33:24on the fees that credit card banks could charge.
33:26We were working this thing here for a good cause, free market pricing.
33:31Duncan MacDonald was one of the lawyers who worked on the Smiley case.
33:35The late fees that were common across the industry
33:38up until Smiley were in the $5 and the $10 range.
33:43And the economic thinking was that there had to be flexibility
33:47to allow up to $15.
33:49But when Smiley came along and took the lid off it,
33:52it went from $5 to $10 to $15 to $29.
33:56And recently it's gone up to $39.
33:58I would guess that it's probably going to go up to $50
34:00a year and a half from now.
34:02I certainly didn't imagine that someday
34:04we might have ended up creating a Frankenstein.
34:06Frankenstein. What do you mean, Frankenstein?
34:08I look at that and I say to myself,
34:10it's $50, a fair fee,
34:12plus a 25% interest rate
34:14and all these other fees that are thrown on
34:15for folks who are probably not that risky.
34:19Is that fair?
34:19I look at it and I say to myself,
34:22there's the Frankenstein.
34:23We've created something that has to be dealt with.
34:27Since Smiley, credit card companies
34:29have doubled the amount of revenue they generate from fees.
34:33Late fees, over-the-limit fees,
34:35return check fees, and the like.
34:38Fee income has gone up much, much faster
34:41than interest income in the business.
34:44So the fees are meant as a penalty
34:47to make sure that you pay on time.
34:49Or are they a profit stream?
34:52Well, they really have become a profit stream.
34:53It's not just the fees that they charge,
34:56even though they're three and four times higher
34:58than they were less than 10 years ago.
35:01That's the tip of the iceberg
35:02when it comes to the penalty
35:03that's inflicted on consumers
35:05with these situations where they make a late payment.
35:08It's the penalty interest rate
35:09that really does the damage.
35:11Your interest rate could double overnight.
35:12But just so I understand,
35:14the interest rates are not regulated.
35:18They can change the interest rate relationship
35:20that you have with them
35:21for 15 days' notice.
35:23So that's a major source of profit for them.
35:26And the fees are now no longer regulated.
35:28That's exactly right.
35:29It's wide open.
35:32We're beginning to see banks do all this tweaking
35:34where they're changing the interest rates
35:37and raising fees, adding new fees,
35:41all kinds of ways they calculate interest,
35:45setting the due dates on a Sunday and a holiday
35:47on the hopes that maybe you'll trip up
35:49and get a payment in late.
35:50It's become a very anti-consumer marketplace.
35:54Even the industry's top lobbyist is concerned.
35:58I think it would be short-sighted
36:00for a credit card company to have fees
36:02that would make somebody angry
36:06because they're likely to lose that customer.
36:08And I think it's going to cost them more
36:10to replace that customer
36:12than they're likely to get out of the fee.
36:15You have bankers who have skyrocketed rates
36:19from 14% to 25% and $40 late fees
36:24and bad check fees and so on
36:26that fall on the shoulders of the less well-off.
36:29Yes, there's something bad has happened.
36:32So we need regulation.
36:33We have regulation.
36:34We have regulation already.
36:36The control of the currency
36:38regulates all the national banks.
36:40And they have very vast powers.
36:42The Office of the Comptroller of the Currency,
36:46the OCC,
36:47is an obscure Washington agency,
36:49part of the Treasury Department,
36:51and it regulates the national banks,
36:53banks like Chase, Citibank, and MBNA
36:56that issue most of the credit cards in this country.
36:59Julie Williams is the Acting Comptroller of the Currency.
37:03We have three goals,
37:05to make sure that the banks don't fail,
37:07to ensure the integrity
37:09of how the banks operate their corporate governance,
37:13and to make sure that they deal fairly
37:16and honestly with their customers.
37:19At the extreme,
37:20we have the ability to take enforcement actions,
37:23and we have done that.
37:24We have taken enforcement actions.
37:26Can you give us an example
37:27of how you have brought a large institution to task?
37:32Well, I think probably the most conspicuous example of that
37:37would be the action that we took
37:40in connection with Providian.
37:43That's not the story they tell in San Francisco,
37:46where in the late 1990s,
37:48the credit card company Providian Financial
37:50was experiencing double-digit growth.
37:53Providian specialized in the riskiest customers
37:56with the lowest credit scores.
37:58They were targeting people
38:00with questionable credit or marginal credit,
38:04people that couldn't get bank cards elsewhere.
38:06Pat Wallace is the head
38:08of the Better Business Bureau
38:09in the San Francisco area.
38:11First thing that got our attention, of course,
38:13were the numbers,
38:15and the numbers of complaints.
38:17Providian was involved
38:19in all kinds of questionable offers
38:23and policies and procedures and operations.
38:28Complaints about Providian
38:29from around the country
38:31came here to Wallace's office.
38:33Providian, for example,
38:35was accepting payments from consumers
38:39on their accounts,
38:40depositing the checks,
38:42but not crediting the account
38:44for sometimes up to several weeks.
38:48What was the net result of that?
38:50Invariably, the consumer got a late charge.
38:52They were holding payments
38:55so that they could charge late fees
38:57and they could charge overdraft fees
39:00and, in a sense...
39:01Overlimit fees.
39:0250% of their income were fees,
39:05not interest on the money loan.
39:07Well, they were pushing the envelope.
39:09And they got by with it for a period of time,
39:12and they made a lot of money.
39:13The Office of the Comptroller of the Currency
39:15is the main federal agency
39:18that takes complaints.
39:19Did they come to your assistance?
39:20No, they just simply weren't interested.
39:23You know, the response was,
39:24well, you know, we'll take it from here,
39:26we'll watch it from here.
39:28You know, it's not a problem
39:29at this time for us.
39:32Complaints about Providian
39:34were also coming to June Crevette
39:35at the San Francisco District Attorney's
39:38Consumer Protection Unit,
39:39and she began to investigate,
39:41eventually drawing local press attention
39:43and then a phone call from the OCC.
39:46Had you ever heard of the Office of the Comptroller
39:50of the Currency?
39:51The answer, from my perspective,
39:53is no.
39:55Didn't really know much about it,
39:57didn't know exactly what they did
39:59and exactly who they regulated.
40:01We've never heard of them being very active
40:03in the area of consumer litigation
40:06or consumer enforcement actions
40:09against the banks.
40:11And when the OCC contacted June Crevette,
40:14she says instead of cooperation,
40:17they issued a challenge.
40:19There were a couple of meetings
40:21where the subject of preemption was raised.
40:25Preemption?
40:26Yeah.
40:27That's where they say,
40:29because we're the federal regulator,
40:31that they have exclusive authority
40:34over the national banks
40:37and therefore we don't have jurisdiction.
40:41You, San Francisco, don't have jurisdiction?
40:43Yes.
40:44The San Francisco District Attorney says to us
40:47that they were told,
40:49you don't have real jurisdiction,
40:50we have real jurisdiction,
40:52and indicated to them
40:53that they might want to get out of the case.
40:55The way that that worked out
40:57was we worked together
41:00with the San Francisco District Attorney's Office.
41:03It was a collaborative process.
41:05Well, they say once you got involved,
41:07it was very fruitful.
41:09Right.
41:09But what they're telling us
41:10is that the OCC only got involved
41:13once this whole situation became public,
41:15that prior to the news publicity
41:17that they were responsible for,
41:20they had no contact with the OCC.
41:23We worked cooperatively with them
41:27when we got information
41:29about what was going on.
41:31The joint investigation
41:32eventually culminated
41:34in a $300 million settlement.
41:37Providian declined to be interviewed
41:38and issued a statement saying,
41:40rather than revisit the past,
41:42the company is focused on services
41:44that provide real benefits today.
41:48In Washington,
41:49the OCC has been increasingly
41:50asserting its authority
41:52and attempting to curb
41:53consumer enforcement actions
41:55by local prosecutors.
41:56This has sparked a nationwide battle,
41:59led by the attorneys general
42:00in all 50 states.
42:03The OCC is now trying
42:05to squeeze out the state presence
42:08to prevent us from protecting consumers,
42:11which I think is ultimately
42:13very injurious to consumers.
42:16Elliot Spitzer is the attorney general
42:17of New York State.
42:19We get thousands of complaints
42:20every year about credit card issues
42:23relating to the major banks,
42:25the major card issuers.
42:26And so we get these complaints
42:27and we try to deal with
42:29the credit card companies.
42:30But increasingly over
42:31the past number of years,
42:33what we have heard back
42:34from the major banks
42:36in a variety of contexts
42:38is that we don't need
42:39to deal with you
42:40because the OCC has told us,
42:44indeed has directed us,
42:46not to deal with
42:47state enforcement entities.
42:48Isn't this just a turf battle
42:50between the states
42:51and a federal agency?
42:52It's a one-way turf battle.
42:54And by that, what I mean is
42:55we are more than happy
42:57to acknowledge that the OCC
42:58has jurisdiction
42:59across the financial system
43:01when it comes to certain issues.
43:03What the OCC is trying to do
43:05is squeeze the states out
43:07in the one area
43:08where we have been incredibly useful,
43:11which is consumer protection.
43:13The state attorneys general,
43:15Mr. Spitzer and others,
43:16say that people in our state
43:18know who we are.
43:19We have a consumer complaint office.
43:21And our beef is
43:23is that you guys, the OCC,
43:25want to push them out of the business
43:27of consumer complaints.
43:30We don't want to push them
43:31out of the business.
43:32We are both there
43:34protecting consumers.
43:36What we have been striving to do
43:39is to individually
43:42and in developing arrangements
43:47with the states
43:48work out the best way
43:50to work cooperatively
43:51with them.
43:52In January of 2004,
43:55the OCC declared itself
43:56the exclusive regulator
43:58of all the national banks,
44:00effectively immunizing
44:01the big credit card issuers
44:03from most state consumer
44:05protection laws.
44:06The OCC cited
44:07the Providian case
44:08as proof of its commitment
44:10to consumers.
44:11I was dismayed
44:14that they used Providian
44:16as the prime example
44:19of their ability
44:21and their will
44:22to enforce
44:25the laws
44:27that pertain to consumers.
44:29To you,
44:29they weren't the white knight
44:30who came into San Francisco
44:32and saved consumers
44:33from Providian.
44:34No, we weren't.
44:36Since the Providian case,
44:38the OCC says
44:39it has been more aggressive
44:40recently issuing
44:41an advisory
44:42admonishing the banks
44:44for misleading the public
44:45about practices
44:46like 0% introductory rates
44:48and universal default.
44:50The OCC itself
44:52has acknowledged
44:53that these practices
44:55are,
44:56as they describe it,
44:57very troubling.
44:58But notice
44:59what they didn't do.
45:00They didn't say,
45:01and we're going
45:02to prohibit them,
45:03stop them.
45:04Those are unfair practices.
45:06They are unsafe
45:07and unsound
45:08and don't do them.
45:09Instead,
45:10they said,
45:11it's a problem.
45:12Look,
45:12if they think
45:13it's a problem,
45:13then tell the credit card companies
45:15to stop doing it.
45:18Why don't you simply
45:19stop them?
45:21Why don't you
45:21ban these practices?
45:23When we see practices
45:24that are potentially problematic,
45:26we take a variety
45:28of actions.
45:29So you could tell them
45:30to stop
45:30and they would have to do it?
45:31If we had a basis
45:33for concluding
45:35that a bank
45:36was involved
45:36in a practice
45:37that was unfair
45:38or deceptive,
45:40if it violated
45:41any of the other
45:42many consumer protection
45:45standards
45:45that apply to them,
45:46we can tell them
45:47to stop it immediately.
45:52Whatever the OCC
45:53is doing,
45:54Pat Wallace
45:55says it hasn't stopped
45:56the Better Business Bureau
45:57from being deluged
45:59with complaints.
46:00It's not an accident
46:01that the banking
46:03credit card business
46:04generates more complaints
46:06nationally,
46:08across the country,
46:09than any other industry.
46:12Now,
46:12what does that say to you?
46:13Out of a thousand industries
46:15that we track,
46:16they're number one.
46:17I'd say there's
46:17a problem here.
46:18These things
46:19aren't an anomaly.
46:20All these complaints
46:21have some basis
46:23in effect.
46:23There are irritated,
46:25unhappy,
46:26dissatisfied customers
46:27in this industry.
46:29And we see it.
46:30The Better Business Bureau
46:31tells us credit cards
46:33and banking
46:33and credit cards
46:34together,
46:35number one problem.
46:37Of all types
46:38of complaints?
46:38Yeah.
46:39I would have thought
46:40it was like cable
46:41satellite installation
46:42or used car dealers.
46:44Your members
46:45apparently are amongst...
46:46That's...
46:47I would not have thought
46:48that that was the case.
46:52Critics like Elizabeth Warren
46:54believe that there
46:55would be fewer complaints
46:56if the credit card industry
46:57clearly disclosed
46:58how its business works,
47:00particularly when it comes
47:02to the minimum
47:02monthly payment.
47:03If people knew
47:05that the cost
47:06of minimum monthly payments
47:07was that they would
47:08still be paying
47:09for yesterday's trip
47:10to the shopping mall
47:11for the next 35 years,
47:14some people might decide
47:16to pay a lot more
47:16than the minimum.
47:18And the industry knows that.
47:20That's why they don't
47:21want to tell.
47:21You advertise in your bills
47:23what the minimum
47:25monthly payment is.
47:27But you don't tell people
47:29how much that might cost you
47:31if you stuck
47:31to that minimum payment.
47:32Why not?
47:33The disclosure would be wrong
47:3599% of the time
47:37because nobody,
47:39almost nobody,
47:41pays exactly the minimum,
47:43that minimum,
47:43every month
47:44for the 20 years
47:46and never charges
47:47another thing.
47:48This is going to be
47:49a hyper-technical,
47:50expensive disclosure
47:51that nobody would understand.
47:54So we are against disclosures
47:56that nobody would understand
47:57and that are wrong.
47:59We are for disclosures
48:00that help people understand.
48:03It's that simple.
48:05This is a nonsense argument.
48:07In the line,
48:08directly under the line
48:09that says minimum monthly payment,
48:11there's a simple sentence
48:13that can be added.
48:14If you make
48:16minimum monthly payments,
48:18it will take you
48:20how many years,
48:2235 years,
48:23and how many months
48:25to pay off this bill.
48:29The man who takes credit
48:30for inventing
48:31the 2% minimum payment
48:32thinks more disclosure
48:33is useless.
48:35This is a fascination
48:37that every now and then
48:38someone with an axe to grind
48:42or someone who thinks
48:43he's going to help consumers
48:45has on his mind.
48:46But if we had a tape
48:49and we ran a computer
48:50on transcripts
48:52of 10,000 customer service calls
48:54with questions,
48:55okay,
48:56I don't think you'd ever
48:57hear that question.
48:58So I'm kind of baffled
49:01at the artificiality of it.
49:03I don't think that's
49:04what consumers want to know
49:05because they don't expect
49:06to make minimum payments
49:07forever.
49:08Do you know
49:09if you made the minimum payment,
49:10for instance,
49:11on your bill,
49:12how long it would take
49:13you to pay it off?
49:14I'm not in a hurry
49:15to find out.
49:16I'm just going to pay it off.
49:17Would you like to know?
49:18Sure.
49:19Curious, yeah.
49:20Mm-hmm.
49:20It would inspire me
49:22to put down more.
49:24It would inspire me.
49:26And I think that's probably
49:27why they don't put it down.
49:29It would inspire
49:29a lot more people
49:30to pay more
49:31than the minimum.
49:32Virtually everyone
49:34who holds a credit card
49:35one way or the other
49:36under existing laws today
49:38and provisions
49:39can be completely
49:40taken advantage of
49:41by the credit card industry.
49:43So there is a deception
49:44going on
49:44to get you into the game.
49:46Once you're in
49:46and I've got you in,
49:48then if you get out,
49:49I charge you.
49:50If you don't meet
49:50your obligations,
49:51I charge you.
49:52You move left,
49:52you move right,
49:53I've got you.
49:54So what are you
49:55going to do about it?
49:56Well, I've got legislation.
49:57So I got a bill.
49:58There's always a quick answer here
50:00and I don't know
50:00how far it'll go
50:01because I've tried this
50:02in the past.
50:02I'm not new to the issue.
50:04A good deal of the blame
50:05for the crisis
50:06of credit card debt
50:06we're seeing in America
50:08lies in how the practices
50:10are followed
50:11by credit card companies.
50:12In the summer of 2004,
50:15Senator Dodd introduced
50:16a credit card reform bill
50:17that would,
50:18among other things,
50:20require credit card companies
50:21to disclose
50:22how long it would take
50:23consumers to pay off
50:24their balance.
50:25But he is not optimistic
50:27that the bill will pass.
50:29His many previous attempts
50:31to reform the credit card business
50:32have all failed.
50:34Why haven't you
50:35or other lawmakers
50:36been able to put
50:37some regulation into place?
50:39Is it their political power?
50:41Sure.
50:42There's no question about it.
50:43I mean,
50:43every time we've tried
50:44to offer legislation,
50:45this industry has become
50:46very, very powerful.
50:47And it's very successful
50:49in defeating
50:50every legislative attempt
50:51that's been made
50:52over the last several years
50:53to inject some responsibility
50:55on the part
50:56of this credit card industry.
50:57You critics say
50:59that you block
50:59every attempt
51:00to pass industry reform
51:02or consumer protection legislation.
51:04You've blocked
51:05minimum monthly payment
51:06legislation,
51:07interest cap rates,
51:09and a ban on marketing
51:10to college students.
51:13We've done our best
51:14to block bad bills.
51:16Those are bad bills.
51:18And we'll continue
51:19to do our best
51:19to block them.
51:21Bad for?
51:22Bad for consumers.
51:24I want to promise you
51:25something today.
51:26You know,
51:26keep on defeating me,
51:27keep on defeating ideas
51:28like this,
51:29and you'll look back
51:30and wish we had passed
51:31this legislation.
51:32Because I'll tell you,
51:32Congress will come along
51:33and they'll take steps
51:35far more egregious
51:36in their view
51:37than anything I'm suggesting.
51:38I'm discussing disclosure.
51:40Just let people know
51:41what the deal is.
51:42I think there's a time
51:43when the American consumer
51:45is going to hit
51:48the tipping point
51:49on this issue.
51:50And it's no longer
51:51going to be all right
51:53for credit card companies
51:54once they're in
51:56financial trouble
51:56to change the interest rates,
51:59to load them on
52:00with fees and penalties,
52:02to just decide
52:03that the terms
52:04of the contract
52:05they originally signed
52:06are no longer
52:07the terms of the contract.
52:09I think that day
52:10is coming.
52:11Even an industry insider
52:13like Duncan McDonald,
52:15who worked at Citibank
52:16for nearly 30 years,
52:18is deeply concerned.
52:19I know enough
52:20about the industry
52:21and the lawyers
52:22in the industry,
52:23and there have to be
52:24people sitting there
52:25saying,
52:26we've got to find
52:27a way to deal with this.
52:29Have we reached
52:29that point?
52:30I don't know.
52:31But my guess is
52:33there's a debate
52:33going on.
52:36And I hope
52:37there's a debate
52:37going on what a tragedy
52:38it would be
52:38if there isn't.
52:40The tragedy
52:41would be what?
52:42The status quo
52:43gets worse.
52:44The status quo
52:45is bad
52:45and then it gets worse.
52:46Profits keep
52:4725% of bad rates
52:49become 30% bad rates
52:51and late fees
52:52become $50
52:52and $60
52:53and so on.
52:57Back in South Dakota,
52:59the man who helped
53:00the industry take off
53:01in the 1980s
53:02has mixed feelings
53:03about what he helped create.
53:06Do you ever reflect
53:07on the fact
53:08that this great success,
53:11which has been
53:11a great benefit
53:12to your state,
53:13at the same time
53:14has helped create
53:16a way of
53:16borrowing money,
53:19spending money
53:19that may have
53:21gotten out of control?
53:22I think the answer
53:23is yes.
53:24I mean,
53:25we've become
53:25a plastic society.
53:27We've become
53:27a plastic society.
53:29A lot of times
53:29you want to give people
53:30cash,
53:30they look at you.
53:31Cash?
53:32Cash?
53:33You were instrumental
53:35in making this happen
53:37in many ways.
53:37I didn't think
53:38of any of this
53:39when it happened
53:39and I'm still glad
53:41what we,
53:41I still like
53:42what we did
53:43and I still think
53:43it was a huge
53:44opportunity
53:45for my state.
53:46Now,
53:46if we're talking
53:47about the industry
53:48and 18, 19, 20
53:50plus percent interest,
53:52do I think
53:53that's a healthy thing
53:54for human beings?
53:54The answer is no.
53:55I don't think
53:56that's healthy at all.
54:08Since this program
54:10first aired,
54:10a new federal
54:11bankruptcy law
54:12made it more difficult
54:13to erase credit card
54:15debt by filing
54:16for bankruptcy.
54:18Household credit card
54:19debt is now
54:20at an all-time high.
54:21next time on Frontline.
54:379-11 clears the stage
54:38for the first time
54:40the whole story
54:41in one television event.
54:43When somebody hijacks
54:45the system
54:45just like a hijacked
54:47airplane,
54:47no good comes out of it.
54:48Bush's war.
54:50Next time
54:51on Frontline.
54:56Frontline's
54:57secret history
54:58of the credit card
54:59is available on DVD.
55:00To order,
55:01call PBS Home Video
55:02at 1-800-PLAY-PBS
55:05or order online
55:07at shoppbs.org.
55:08Frontline is made possible
55:13by contributions
55:14to your PBS station
55:15from viewers like you.
55:16With major funding from the John D.
55:38and Catherine T.
55:39MacArthur Foundation
55:40helping to build
55:41a more just world.
55:44And additional funding
55:46from the Park Foundation.
55:49With additional funding
55:50for this program
55:51from the Nathan Cummings Foundation.
55:53of the Park Foundation.
Recommended
54:52
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