Plastic Please
The high cost of credit cards, from students to seniors
By Silja J.A. Talvi

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Where is the stability in an economy that revolves around the acquisition of debt?Have we unwittingly, perhaps complacently, become so dependent on credit cards that we no longer see our national addiction to debt for what it is?

Today, there is no disputing that credit cards are everywhere. No less than 158 million Americans now own 1.5 billion shiny pieces of embossed plastic, ranging from retail cards to gasoline cards. Once the privileged possession of the credit-worthy and the employed, credit cards now jut out of the wallets of unemployed college students and Social Security-dependent elderly persons.

If the title of Robert Manning's book, Credit Card Nation: The Consequences of America's Addiction to Credit (Basic Books: 2000), seems to phrase the problem in exaggerated terms, then consider the real numbers: U.S. consumer debt is now at an astonishing $6.5 trillion, surpassing the federal debt of $5.8 trillion, which itself tops the nation's total corporate debt at $4.3 trillion. It's a "triangle of debt" that seems to threaten the very future and economic security of the nation. To make matters worse, the situation is compounded by a negative national savings rate, banking deregulation and conglomeration (starting in the Reagan-era 1980s and accelerated by the 1999 Financial Services Modernization Act), and the erosion of real wages and job security.

Credit cards have become the currency of our culture, argues Manning, helping us acquire the things we might not otherwise afford, masking our financial woes and sinking us further and further into the enveloping pit of debt. Manning has harsh words for the strategic marketing tactics of the credit card industry, but his strongest outrage is reserved for the largely unregulated predatory lending practices that have been unleashed on low-income communities across the nation.

Kid Stuff

"Banks shifted their resources into marketing, going after displaced middle and working class people. Banks transformed their underwriting criteria - instead of only approving customers that will repay their loans, they now see that their prime market are customers that cannot repay their loans. That's this whole, fundamental shift from installment loans to revolving credit, where real money is finding people who will never repay.

"It's very extraordinary for them, because they can go after much more risky sectors of the market, whereas before they would never have done that. You've got to give these guys credit, they've got some of the most sophisticated marketing campaigns you could ever imagine and they're darn good."

As for targeting students specifically, he refers to practices that began more than a decade ago, "The late 1980s. That's why I argue that it is so critical in terms of the transformation of American attitudes because what they have done is turned on its head the social responsibility [previously] associated with credit and debt. Before, you were only getting credit if you had proved yourself worthy by having a good credit history or by having job ... now the industry has allowed people to get credit without ever having a job.

"Banks are having a more profound influence on this generation's attitude toward debt. Now it even can precede the influence of parents ... these attitudes are shaped prior to parents being able to teach what is good [debt] and what is bad debt.

"Even during the slight dip in bankruptcy rates over the last two years, people 25 and under showed a sharp increase in bankruptcy. Using the term 'graduating into debt' is now 'graduating into bankruptcy.' There are people just a couple of years out of college who can't pay their bills because of credit card debt."

The Agenda

As for his own reform goals, he says, "I'm basically involved in trying to affect three pieces of legislation, the College Student Credit Card Protection Act, the Bankruptcy bill, and Predatory Lending issues which relate to these second-tier financial services, where it's very clear that there is bipartisan support.

"The industry knows that those rates are not defensible. But they're so lucrative, that they're just trying to figure out how to get a piece of it."

When it comes to second-tier practices, he says "Payday loans are the fastest growing component of second-tier financial services. Essentially, you're postdating a check at anywhere from 15-40 percent per two week loan. What's extraordinary about the second-tier financial services is that as long as it was poor people, nobody really cared. But now you're seeing more middle class that are heavily in debt ... we're now seeing second tier financial services becoming a normal part of the suburban landscape."

"Citibank has a goal of a billion customers by the year 2012, so it's very clear that their future agenda is worldwide expansion. It'll be a tweaking of the very successful marketing campaign in the US, [but] taking place in Europe.

"What they did in the US was their proving ground. And as the banking conglomerates have emerged and grown, the only way to sustain that growth is to go after the European middle class ...

"Citibank knows that there's not much more they're going to get out of the US other than going after college students, and the working poor doesn't take long to tap out. Their market penetration is pretty much done. So that's why for the future - to keep these double-digit growth rates - they've got to get much more aggressive overseas.

"Citibank is already starting to break away from Visa, and they're not going to keep paying all the fees of belonging to the association ... There's this whole myth that underlies the argument of the industry that there [are] over 6,000 issuers [of credit cards]. Most of the issuers are actually owned by the top ten credit card companies. There [are] a lot of very good reasons to file antitrust suits, but this administration isn't going to pursue them."