Sioux Falls, South Dakota= credit card processing
Interest rates used to be fixed and people weren’t lending so they eliminated cap on
interest rates, known as a usury law
Usury Laws = laws that state that interest should not be charged a certain percent
Usury is defined as the act of lending money at unreasonablely high interest rates
Walter Riston,chairman CitiBank
NY had usury laws that prevented charging over 12% on consumer loans, and the banks
were charging 12% but paying 20% to borrow money so they were losing $ big time
5 states with no or high usury laws and one was SD,
1981 Citibank moves from NY to SD. SD got jobs and CitiBank got to stay alive
Supreme Court decision said that a bank could export its interest rate to other state, this
was called the Marquette Decision
All big banks want to go to SD
Delaware copied SD and became credit card center of the east, gave rise to MBNA
No legal restriction on interest rates for 1st time in history
Banks could charge higher int rates to riskier people, as a result many people could get
loans and thus it was very egalitarian and good
The cc industry expanded as more and more people were able to get cards and it became
the most profitable sector of banking, with 30 billion in profits last year
All major cc companies declined interviews and instead referred to American Bankers
Assoc and Mr Edward Yinling
144 million Americans have cc and charged 1.5 trillion dollars alone last year
cc are essential part of Amercian society
people use miles
cc companies make a percentage on each transaction
55million Americans pay off bills every month and thus pay no interest
cc companies call people “deadbeats” if they pay off their bills on time
90 million people who don’t pay off their cc every month are called the “revolvers”
CardWeb is a company that tracks the cc industry
Americans are carrying a record amount of debt
Average American family carrying 8000 in debt
Many people can’t make end meet so they borrow then something happens, illness, loss
of job, divorce, death, etc and they get in trouble
In last 5 yrs, 7 million families filed for bankruptcy
Its not that people didn’t want to pay it off, they couldn’t
Still get solicitation for credit cards even though they said they can never get it again
Encouraging people to take on cc debt it critical to the survival of the industry
Marketers have the job of making it easier and more attractive to spend
“priceless” commercials
success of cc industry has also laid with financial innovators like Andrew Carr
Andrew Carr suggested cc company reduce minimum payment from 5% to 2%. If
customers could pay less they could borrow more
Having lower min pay allows them to offer higher credit line and thus makes that
company more attractive
35 million Americans only pay the minimum payment
people keep money in the bank even when they have debt
Carr’s research showed that if consumers could make the minpay, it eased the anxiety
about carrying large amounts of cc debt. 2% idea made consumers feel they could make
the min. pay. And that thy were being financially prudent
In late 90s, people had lots of offers from competitive cards and Carr convinced his client
to offer 0% which made other cards follow
Carr knew it would bait people to have 0% for introductory offer,
Lots of fine print like late payments lead to high rates
Databases by consumer reports of what kind of accounts you have and if you pay on
time, so they can find the “revolvers”
Idea that you can surgically target comsumers and track financial behavior has become a
huge business , dominated by 3 credit reporting agencies (Equifax, experian, transunion)
FairIsaac crunches all the numbers and calculates FICO score for almost every American
with a credit history
Median FICO score is 720 out of 850, riskiest have scores below 600
FICO score is an indication of how likely you are to pay you bills
Lenders use the FICO score like a thermometers to determine if they will give credit or
not
The algorithm is a indication of future risk in terms of credit behavior
75% of US population eligible for credit (over 18yrs of age) have a FICO score at any
given time
FICO score can determine how much interest he will pay
Terms and conditions are spelled out in small, fine print in pamphlet.
Unique to cc industry, the issuer can change the terms at any given time, only need to
give 15 day notice (THIS JUST CHANGED)
One trap in the fine print is “universal default.”
If you miss one payment or if you have a change in your credit worthiness (i.e. balanced
too high) this can affect all of your int rates
1996, supreme court said in Smiley vs CitiBank lifted restrictions on fees that cc
companies could charge, which led to bigger profits for cc industry and complaints from
customers
Snice Smiley, the cc companies have double the amount of $ they make from fees, late
fees, return check fees, over the limit fees, etc
The penalty interest rate really does the damage
Banks do tweaking to change interest rates, raise fee, adding new fees, set dues dates on
Sundays and Holidays hoping you miss a payment or are late
Fees can make customers angry and are likely to make them lose the customer and it will
cost more to replace the customer than the fee was
The OCC is part of the Treasury Dept and it regulates National Banks, (ie Chase,
CitiBank, MBNA)
Providian targeted risky customers, had questionable offers, procedure, etc. Tons of
complaints came in. They held payments so they could charge fees. 300 million $
settlement
OCC has jurisdiction and they are trying to squeeze states and Att. Generals out of
business of consumer complaints
OCC declared itself exclusive regulator of all the national banks, effectively immunizing
the big credit cards issuers from most state consumer protection laws, citing the Providian
case to demonstrate its (the OCCs) commitment to consumers
Cc industry gets the most complaints out of 100o tracked industries
Cc companies do not tell customers how long it would take to pay off it they stuck to min
monthly payment
The cc argues that the disclosure isn’t accurate since people will charge more and don’t
always pay exactly
Dodd has tried to change the industry and propose legislation but the cc industry blocks
these
Where will the tipping point be?
We have become a “plastic society”
UPDATE as of 2010:
1) Raising Rates on Existing Balances will be banned in all but a few cases, ie
paying 30 days late
2) If an account has balances w/ diff int rates, new rules will prevent lenders from
applying a payment to only the lowest –int balance
3) Payments won’t be late unless people have 21 days to pay
4) 45 day (not 15 day) notice to raise interest rates
Industry says this will raise rates and make credit harder to get but others say this protects
the consumer
Eliot Spitzer resigned after getting caught up in high-priced prostitution ring (paid
$80,000)