It’s estimated that the average American family has eight different credit card accounts. How did this happen? Having just watched the Frontline special “Secret History of the Credit Card“, I was quite amazed at the evolution of the modern Credit Card Industry. It seems that South Dakota was the State where the credit card industry really began to prosper. Sioux Falls South Dakota is one of the major credit card processing locations in America, processing millions of pieces of mail daily. From credit card offers to incoming payments, the Post Office in Sioux City is quite the hot spot.
**Disclaimer – Debtprison.net does not administer legal or financial advice. The contents of this website are my opinions on collection agencies and how to deal with them. Nothing on this website should be interpreted as legal advice or council. No opinions on this website should be used to replace the advice of your financial advisor or your legal council.
Why South Dakota?
Prior to 1979, South Dakota had many laws dictating the interest rates that loan agencies and banks could charge for certain items. For example, they had one interest rate for new cars and another for used cars. At the time South Dakota, like all of America, was in a recession. So to encourage banks to loan money they removed these caps on interest rates. Meanwhile in New York, the Chairman of Citibank Walter Wriston, was looking for another state in which to do business. New York had ‘usury’ laws which permitted a credit card company from charging more than 12% interest. Walter claims that at the same time Citibank was going broke because they were borrowing the money at 20% from Federal Reserve District Banks.
In 1981 Citibank moved its credit card division from New York to South Dakota. Almost simultaneously there was a U.S. Supreme Court decision ruling that a Bank could ‘export’ its interest rate to other states (The Marquette Decision). This allowed South Dakota to become the credit card capital of America. In other words, if state law in South Dakota allowed banks to charge 25%, then they could send out credit card offers to all 50 states with wild interest rates, protected by South Dakota law. Also, Delaware copied South Dakota’s usury laws and soon Wilmington, Delaware became the credit card King of the East.
For the first time in U.S. history there was no limit to the interest rates that banks could charge nationwide. This permitted credit card companies to expand; soon becoming the most profitable sector in overall banking. Citibank has been more profitable than Microsoft or Wal-Mart.
Why are credit cards so profitable?
Currently about 145 Million Americans have revolving accounts with credit card companies. In 2003 alone 1.5 trillion dollars was charged onto credit cards. Approximately 55 million Americans pay off their credit card balance at the end of each month, preventing the banks from making profits off of them. The top ten credit card companies charge some of their customers 25 to 30% interest, some even pay more than this. Meanwhile interest rates from the Federal Reserve have been at or near record lows since 9/11, enabling these companies to make sick profits off the 90 million Americans who don’t pay their balance at the end of each month.
On top of this already highly profitable situation, Americans are carrying a record high amount of credit card debt. The average American family is carrying around $8,000 in revolving credit card debt. Not to mention that the savings rate of Americans is at it’s lowest since 1933 (The Great Depression). During the late eighties Andrew Kahr (a banking consultant) convinced many credit card companies to lower their minimum payment from 5% of the balance to 2%. This allowed the debt to ‘revolve’ longer as the balance would often increase. In Andrew’s words “Having a lower minimum payment allows you to offer higher credit lines.” Often customers would carry a higher balance and pay the minimum, allowing the credit card company to maximize their profit making potential. Every month about 35 million Americans pay only the minimum payment.
Many borrowers seem alright with the idea of high balances so long as they can pay the minimum payment. And at 2% of the balance this may not prove too difficult.
The Fine Print
Credit card companies use the three major credit history report agencies (Expirian, Transunion, and Equifax) to target borrowers who don’t pay their balances off at the end of each month. Fair Issac reviews credit histories and issues the FICO scores banks use to determine loan eligibility. Your FICO score often determines how much interest you will pay on a credit card. As the issuer of the credit card, the bank can change the terms of your credit card agreement at any time, and for any reason they see fit. There’s no law that prevents the issuer from changing the conditions of the loan.
Universal Default Rate
If you were to miss a car payment or get behind a month on your mortgage, this can trigger a Universal Default. This loop hole allows your credit card issuer to raise your interest rate for being a month behind on your car note, house note, or any other financial obligation they become aware of. It’s in your credit card contract. These banks rationalize that if you’ve fallen behind on another creditor, you are now considered high risk to them as well (credit card issuer). Also, if you have high balances with other credit cards, you could fall into the ‘high risk’ zone. This agreement allows the credit issuer to raise your interest rate on items already purchased. So if you bought a flat screen TV. last year, and your interest rate was 9%, they can increase it to 20% just six months later if they’d like. What other organizations are allowed to do this?
Smiley VS. Citibank
In 1996 the U.S. Supreme Court ruled on Smiley vs. Citibank. The Supreme Court ruled that credit card companies could increase the ‘fees’ associated with their debtors. So what might have been a $10 late fee has now become a $35. Since the Smiley ruling, credit card issuers have doubled the amount of revenue they bring in from fees. Late Fee’s, Over the limit fees, return check fees and on and on. And once these fees are applied, the bank now has the option to increase your overall interest rate – often doubling it as well.
The Office of the Comptroller of the Currency (OCC) is part of the Treasury Department. This office regulates the National Banks, including the ones that issue credit cards. The acting Comptroller of the Currency in 2004, Julie Williams, stated that the OCC has three main purposes.
1. To make sure the banks don’t fail.
2. To insure the integrity of how the banks operate their corporate governance.
3. To make sure that they deal fairly and honestly with their customers.
This office has the ability to take enforcement actions against banks if they deem it necessary. When asked if she could give an example of when she brought a large institution to task, Julie responded “the action we took against Providian.” During the late 1990’s San Francisco based Providian was experiencing double digit growth. They were offering credit to the riskiest of customers with the lowest of credit scores. Much like the sub prime housing market, Providian was targeting customers that had no business seeking credit in the first place. Providian would receive payment and deposit the check, but not apply the payment to their customers account, sometimes for weeks. This would result in late fees and over the limit fees for Providian customers. Almost 50% of Providian’s profit was made from fees, not interest on the revolving debt.
Pat Wallace, head of the better business bureau in San Francisco, says that the OCC was contacted and offered no help. In fact, it wasn’t until the local media got involved that the OCC contacted the San Francisco District Attorney’s office. But the OCC didn’t exactly help. They informed this D.A. that the OCC was the Federal Authority for these National Banks, and therefore, “You don’t have any jurisdiction.” Meaning that the D.A. could not prosecute Providian for fraud. Eventually Providian was slapped with a 300 million dollar judgment, which the OCC took credit for. The OCC’s main order of business seems to be to restrict local prosecutors from suing National Banks for their ‘loan shark’ practices. The OCC is trying to eliminate the individual States Attorney Generals from pursuing legal action against these banks.
In 2004 the OCC declared itself the ‘regulator’ of all National Banks. This is an attempt to insulate the National Banks from the consumer protection laws of individual states. The OCC trotted out the Providian case as proof of their determination to protect consumers. The Credit Card Industry receives more complaints than any other industry in the country.
Watch the entire PBS investigation by clicking here.
Related Articles
* Reasons not to file Bankruptcy or Settle Your Debts
* Can you go to jail for not paying your debts?
* How to settle your debts on your own
* How to deal with collection agencies
* Sample Debt Validation Letter
* Information on Credit Card Balance Transfers
If you refuse to borrow money, hundreds of thousands of dollars will be saved over the course of your life time. Most people will finance a car for 60 months. Currently the average car loan is probably close to $30,000. For this discussion we’ll keep it at a conservative $20,000 price tag. We’ll assume the interest rate is 6% for 60 months. The total amount paid in interest over the course of the loan is $3,199. If you buy eight new vehicles over the course of your life, that’s just over $25,000. And keep in mind that you bought a lower end car. Of course this discussion assumes that inflation is null (if only)! You can download the spreadsheet that I use to compare loans by 
Recent Comments