The Secret History of the Credit Card

Courtesy of FRONTLINE (used without permission). FRONTLINE and The New York Times join forces to investigate an industry few fully understand. In this one-hour report, correspondent Lowell Bergman uncovers the techniques used by the industry to earn record profits and get consumers to take on more debt.

"The almost magical convenience of plastic money is critical to our famously compulsive consumer economy," Bergman says. "With more than 641 million credit cards in circulation and accounting for an estimated $1.5 trillion of consumer spending, the U.S. economy has clearly gone plastic."

Millions use their personal, general-purpose credit cards such as Visa, Mastercard, American Express and Discover to make ends meet; credit cards have been a discreet lifeline for families in financial straits.

But other consumers, like actor and author Ben Stein, use plastic purely for convenience. While it would appear that Stein -- who says he charges a small fortune every month on his credit cards -- is the ideal customer, in reality, he is what some in the industry call a "deadbeat." That's because he pays his balance in full every month.

The industry's most profitable customers, the ones being sought by creative marketing tactics, are the "revolvers:" the estimated 115 million Americans who carry monthly credit card debt.

Ed Yingling, incoming president of the American Bankers Association, tells FRONTLINE that revolvers are "the sweet spot" of the banking industry. This "sweet spot" continues to grow as the average credit card debt among American households has more than doubled over the past decade. Today, the average family owes roughly $8,000 on their credit cards. This debt has helped generate record profits for the credit card industry -- last year, more than $30 billion before taxes.

Some experts say the profitability of credit cards really began twenty-five years ago, when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower. 

Deregulation, coupled with a revolution in technology that enables the almost real-time tracking of personal financial information and the emergence of nationwide banking, has facilitated the widening availability of credit cards across the economic spectrum. But for some, the cost of credit is often far greater than it appears.

According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print," Warren tells FRONTLINE.

Warren and other critics say that a growing share of the industry's revenues come from what they call deceptive tactics, such as "default" terms spelled out in the fine print of cardholder agreements -- the terms and conditions of which can be changed at any time for any reason with 15 days' notice.

Penalty fees and rates are sometimes triggered by just a single lapse -- a payment that arrives a couple of days or even hours late, a charge that exceeds the credit line by a few dollars, or a loan from another creditor which renders the cardholder "overextended" as defined by the nation's three all-powerful credit bureaus. This flurry of unexpected fees and rate hikes come just when consumers can least afford them.

"[Banks are] raising interest rates, adding new fees, making the due date for your payment a holiday or a Sunday on the hopes that maybe you'll trip up and get a payment in late," says Robert McKinley, founder and chairman of Cardweb.com and Ram Research, a payment card research firm. "It's become a very anti-consumer marketplace."

Banking Association spokesman Yingling defends industry practices. Because the credit card business is basically unsecured lending, he says, the risks associated with the business must be offset.

But that's of little consolation to consumers who may be in trouble. According to the Better Business Bureau, credit card and banking companies are the subject of a record numbers of complaints. "It's not an accident that the banking and credit card business generates more complaints nationally, across the country, than any other industry…Out of one thousand industries that we track, they are number one," says Pat Wallace, head of the San Francisco Bay Area Better Business Bureau. "There are irritated, unhappy, dissatisfied customers in this industry.

(Advanced appreciation is rendered for materials used without express permission of copyright owners. Tommy Peters – April 15th 2011)