One aggrieved credit card user sums up, "It's not fair. It's deceptive."
I didn’t think [the banks] would be as blatant as they were about doing this. There’s no justification for raising rates retroactively. This is really just a way for them to make more money.
"People treat you differently when you have a credit card!" No doubt. But what you don't hear from the happy-happy character who makes this pronouncement in a credit industry advertisement is how differently you'll be treated -- especially by the bank that has issued the card.
This week's installment of Frontline, The Card Game, looks at that treatment. Reporter Lowell Bergman turns first to Shailesh Mehta, the former Providian Prudential CEO who came up with the practice known as "stealth pricing," also known as "penalty pricing." The card is pitched as free in solicitations that come in the mail, but the price for no annual fee includes penalties for late payments and fluctuating interest rates. When Bergman interviews Mehta -- no longer with Providian -- at his estate (designed to "resemble the White House"), he asks him to describe the scheme. Mehta says it was designed to "meet the needs of these people who do not qualify" for usual sorts of credit, the so-called "un-banked market." Bergman rephrases, wondering whether the banks are "going after the people who weren't going to pay their bill often," with the aim to "keep them paying almost in perpetuity." Mehta can only agree.
On its face, the practice is much like the subprime mortgage schemes that enticed home buyers into contracts they could not afford. Given the fact that so many people use credit -- the number of transactions is something like 100,000 per minute, producing some trillion dollars in debt -- the potential for bank profits appears exponential. The most frequently stated rationale holds that because the risk is also high, because so many consumers end up unable to pay their bills at all, those who do pay, however slowly, must pay more.
Frontline interviews several consumers who have been victimized by escalating rates or surprise fees: a high school teacher charges a pizza for $7 and ends up paying over $300 in overdraft penalties (penalties that amount to a 24,000% annual interest rate). And a man is forced into bankruptcy following a bout with cancer and the loss of his job, which initiated "a downward spiral of missed payments and fees," even though he made minimum card payments on time). While Mehta points out that banks regularly disclose how the system works in documents that also come in the mail, when Bergman adds, "Your average consumer isn’t going to be able to translate" the language in these documents. Mehta agrees: "The pricing was designed so it would require a degree of some sort" to understand it. And when one card raises rates, all the other companies contracted with that consumer tend to follow suit, within the system known as "universal default." One aggrieved user sums up, "It's not fair. It's deceptive."
According to Harvard law professor Elizabeth Warren (recently seen in Michael Moore's Capitalism: A Love Story), "This is one of the dark secrets of the industry, [that] people who are operating closer to the margin, these are the people who get trapped. Those are the people who produce the enormous revenues in the system." Indeed, as Bergman puts it, these are the people who are exploited -- intentionally and repeatedly.
It's not precisely news that the banks take advantage of customers and legal loopholes. Neither is the excuse articulated by legislators like chairman of Senate Banking Committee Chris Dodd (and onetime deregulation supporter), that is, "The banks are one of the most powerful lobbies on the Hill." Likewise, Treasury Secretary Tim Geithner now says the free market system has not functioned to protect consumers, but has instead ensured profits for banks at "Main Street"'s expense.
It's easy to be mad at lobbyists, for instance the American Bankers Association's Nessa Feddis, who smiles and nods her way through her interview with Bergman, asserting that the new rules imposed by Congress caused the current swift rise in rates, with the specter of ostensible limits looming in February of 2010. (Congresswoman Carolyn Maloney almost laughs at the banks' suggestion that Congress has caused these increases: "Who are they kidding? What have they been doing?") But the problem, as Frontline insists, is not simple to solve, and neither are the sides neatly laid out. For all the talk about adjusting the system, Bergman observes, no one in the Obama administration is arguing for limiting interest rates per se.
The credit card industry remains what Robert McKinley, CEO of CardWeb.com, calls "the Wild West," in which "card issuers... do anything they want." Just so, Joe Nocera of the New York Times makes the issue clear: at the same time that interest rates are at an historic low, when "treasury bills are practically at zero interest," the banks continue to raise their APR pretty much however they want. "This is not the normal workings of the market vis-à-vis interest rates," Nocera says. "These are phony rates that are ginned up by the banks to maximize their profitability." While The Card Game doesn’t point out exactly who is in bed with whom inside this system, it makes clear that none of it is changing in the near future.