How the credit card bosses wreck lives for profit
May 25, 2001 | Pages 8 and 9
IN THIS special report, MATT NICHTER exposes the credit card crooks--and their servants in Washington.
SEAN O'DONNELL dreamed of becoming a lawyer. A National Merit finalist at his high school in Oklahoma, Sean was awarded a full scholarship to go to the University of Texas at Dallas.
"I remember the day his father and I took him to college," recalls Sean's mom. "We were so full of excitement about his future. The excitement about living on campus, being in the big city, his classes and the opportunities he would have."
Like many students from a working-class background, Sean got a part-time job wrapping gifts at Marshall Field's to help pay for school. But because he only made the minimum wage, he faced a real dilemma: extra hours at the store drained his energy for schoolwork.
That's why Sean decided to stop by the credit card booth at the student center. The young reps at the booth joked with him about dating and beer, gave him a free T-shirt--and explained the benefits of charging his expenses.
According to their sales pitch, Sean could focus on his grades and have fun while in school--and pay off his bills after graduation, once he was earning a decent salary. So Sean signed up.
It seemed strange at first that the more he charged, the higher the companies raised his credit limits. And as his debt accumulated, so did the stack of letters soliciting him to sign up for more plastic.
Sean assumed their willingness to extend additional credit was a sign of confidence in his future earning potential. That is, until the corporations cut him off--and demanded repayment.
"Sean tried to pay off his debts," recalls his mother. "He went through credit counseling but fell further behind. When he was 21, he realized he couldn't afford Dallas and moved back home with us to attend the University of Oklahoma. He was working two jobs while attending OU. Still he couldn't make ends meet. His father and I were appalled that he had gotten into so much debt, but we also didn't have an extra $10,000 to pay his bills."
"A week before Sean killed himself, we had a long talk about his debts and about his future. He told me he had no idea how to get out of his financial mess and didn't see much of a future for himself. He had wanted to go to law school but didn't think he could get a loan to pay tuition because he owed so much.
"By the time he died, he had 12 cards, including one MasterCard, two Visas, Neiman-Marcus, Saks Fifth Avenue, Macy's, Marshall Field's, Conoco and Discover. How those companies can justify giving credit to a person making $5.15 an hour is beyond me."
But the "justification" is simple. Credit card loan sharking is a billion-dollar business for VISA, Chase, MBNA and the rest of the financial industry.
And to make sure they could squeeze out every possible dime, the credit card bosses looked to their friends in Washington for a little help earlier this year. In March, Congress passed bankruptcy "reform" legislation that will make it much harder for working families to escape from huge debts.
Under the law, bankrupt individuals would have to keep paying off debts to banks and credit card companies--even before mothers and children could get money from bankrupt fathers, for instance.
The companies hope to rake in an additional $4 billion when the law goes into effect. Meanwhile, ordinary people will be left, in the words of Elizabeth Warren of Harvard Law School, "at the mercy of the credit card companies until they die."
How the credit card bosses wreck lives for profit
FEDERAL RESERVE Chair Alan Greenspan joked recently that "children, dogs, cats and moose are getting credit cards." But for millions of working-class people struggling to make their payments on time, personal debt is no laughing matter.
Of the 78 million credit card users in the U.S. today, the majority are unable to pay off their monthly balances--and carry an average debt of $11,575. That's a 6.7 percent increase compared to just a year ago. All this during the "miracle" economy of the 1990s.
But the economy wasn't so miraculous for everyone. As corporate layoffs continued at an unprecedented pace during the 1990s, most of the new jobs created over the decade were low-wage service positions.
Though unemployment dropped to 40-year lows, it became common for workers to take two and even three jobs to scrape by. To fill the gap, many people turned to credit cards or other forms of debt.
"In a period of stagnant wages, working people are increasingly living beyond their means by borrowing in order to make ends meet--or, in some cases, in a desperate attempt to inch up their living standards," wrote the editors of Monthly Review.
Total outstanding bank and retail credit card debt has risen tenfold since 1980--to an incredible $600 billion. Add in mortgages, student loans, car loans and other forms of debt, and the figure rises to $6.5 trillion.
The result? What economists call the "savings rate"--the ratio of personal debt to disposable income--last year sank to zero for the first time since the Great Depression of the 1930s.
But the explosion of personal debt has been a godsend for the credit card bosses. In a two-year period from 1998 to 2000, their profits rose a whopping 50 percent. They mailed out nearly 3.3 billion credit card solicitations last year--30 cards per household, a dozen for every man, woman and child in the U.S.
At the heart of the credit boom is the government's steady loosening or elimination of restrictions on how banks operate--known as "deregulation." Under deregulation, the financial industry has become concentrated into fewer and fewer hands.
Plus checks on financial giants charging outrageous rates or fees were removed. "Over the 1990s, industry concentration proceeded at a breakneck pace," writes Robert Manning, author of Credit Card Nation. "Today, the top 10 card issuers control nearly 77 percent of the card market."
The bosses' deregulation binge began under Ronald Reagan--and reached a culmination under Bill Clinton, when the Depression-era banking law known as the Glass-Steagall Act was abolished.
That paved the way for mega-mergers like the one between Citibank and Travelers Group. "Industry mergers and acquisitions have reduced the number of major corporate players and thus contributed to the costly increase in consumer banking services in general (e.g. ATM fees) and credit card finance charges and fees in particular," Manning writes.
Manning calculates that the average "spread" on consumer credit cards--that is, the difference between the interest rate that the card companies charge customers and the rate that they borrow money at--shot up from just 1.4 percent in 1980 to 14.3 percent in 1992. Meanwhile, typical late fees and over-the-limit fees have tripled since 1994.
Deregulation has encouraged price gouging in the energy and telecommunications industries. And it's clearly failed bank and credit card customers as well.
Now, the slowdown of the U.S. economy and the prospect of a recession have become a threat to all workers--but especially those deep in debt. For them, sudden job losses could spell financial disaster.
The bosses robbed us blind during the "good" times. And they want to tighten the screws even more during the coming recession.
Specialists in fleecing the poor
"LOOKING AT TVs?" asked John, a neatly dressed salesman who made a point of shaking my hand. "Yeah, pretty much," I replied, scanning the prices of the sets on display.
"We've got great deals on these," he explained. "They come with free delivery, and you can have it for just a penny down." John must have sensed my surprise. "Have you ever gotten anything from Rent-A-Center before?" he asked.
I hadn't--and I hope I never have to. If I had chosen the store's "$2-a-day" plan, the 27-inch JVC that I was eyeing could have been mine for "only" 91 weekly payments of $15.99--a total of $1,455 and almost four times the list price of the set.
That may be highway robbery, but for millions of people with bad credit histories--or none at all--stores like Rent-A-Center are often the only way to get major household items like TVs, washing machines and bedroom furniture.
Where else can they "get the good stuff" with "no embarrassing credit checks" and "easy payment plans"?
Rent-to-own chains are just one component of a rapidly growing--and quickly consolidating--wing of the financial industry that specializes in fleecing the poor. This "second tier" of the credit world--which includes everything from pawnshop chains to payday advance counters and car title loan offices--preys on people who don't have access to bank loans or credit cards.
As author Robert Manning points out, such operations have rushed to fill a vacuum in poor neighborhoods. "Banks have increased their highly profitable consumer financial services in affluent suburbs while they have reduced their low-profit retail banking services in low-income--especially urban--communities," Manning explains. "In the poverty-stricken South Bronx of New York City, Citicorp has only one branch bank for approximately 500,000 residents."
Indeed, the Federal Reserve estimates that 40 percent of all households in the U.S. have no bank account at all. Many of those forced into the waiting arms of the scam artists are illegal immigrants--who have no choice but to fork over $5 check-cashing fees every time they are paid.
Even more lucrative are payday advances, where those facing eviction or shutoffs for late payment of bills are charged the equivalent of 500 percent annual interest to cash a postdated check. The number of payday advance counters has increased thirty-fold over the last decade--with revenues reaching $2 billion in 2000.
Despite their often modest-looking appearance and quirky names beginning with "A-All," few second-tier loan outfits are mom-and-pop shops. Several pawnshop chains are publicly traded on the New York Stock Exchange.
And increasingly, the same financial institutions whose departure from poor neighborhoods fueled the growth of high-interest fleecing operations are trying to buy them up.
For example, the banking giant Wells Fargo is part owner of Mr. Payday. ACE Check Cash is underwritten by American Express. Union Bank of California bankrolls the Nix check-cashing stations of South Central Los Angeles. And Title Loans of America, which will seize your car if your don't pay back your debt on time, is underwritten by Fleet Bank.
"As long as the proliferation of corporate loan sharks is not effectively regulated," Manning argues, "the most economically disadvantaged will find themselves ensnared in new forms of debt peonage."
Debt counselors or collection agents?
"OVERDRAWN, OVEREXTENDED and overwhelmed? Get the professional help you need to repay your debts, rehabilitate your credit and take control of your finances." So reads an ad for Genus Credit Management.
For those in dire need of debt relief, offers like these sound too good to be true. They usually are.
That's because the educational efforts of debt counseling agencies are sorely underfunded--because they're dependent on donations from the credit bosses for most of their operating income.
What's more, any actual debt reduction that counselors manage to negotiate for their clients is limited to what creditors themselves are willing to write off.
Take the National Foundation for Credit Counseling (NFCC), for example. With nearly 1,500 affiliated agencies, the NFCC is the largest network of debt counseling offices in North America, "offering free or low-cost services [to] 1.6 million families in 1999."
Sounds great. But like a credit card offer, the catch is in the fine print. "Most funding for member agencies comes from voluntary contributions by creditors participating in Debt Solver Programs," reads the NFCC's mission statement.
"A [Debt Solver Program] is a voluntary repayment program administered by the agency [that] serves the dual role of helping consumers pay their debts and helping creditors receive the money owed them. Since creditors have a financial interest in getting paid, most are willing to make a contribution to help fund member agencies. These contributions are usually calculated as a percentage of payments made through repayment plans."
In other words, the credit industry pays these charities a commission to serve as friendly neighborhood collection agents.
The most important benefit that these agencies have to offer their indebted clients--on top of moral support and lessons in household budgeting--is the opportunity to reschedule and consolidate debt payments.
Many creditors have traditionally been willing to negotiate easier repayment terms for those enrolled in counseling--if only to make sure these desperate individuals don't try to erase their balances in bankruptcy court.
"As a result of repayment programs, in 1999, clients repaid more than $2.352 billion to banks, retailers, finance companies and credit unions that otherwise may have been lost to bankruptcy," boasts the NFCC.
But once the credit bosses' drive for stricter bankruptcy guidelines gained the support of influential lawmakers, the industry became noticeably stingier with its "charitable contributions."
"The largest credit card issuers are becoming increasingly unwilling to reduce interest rates for consumers who enter debt management programs," reported the Consumer Federation of America in 1998. "Major banks have instituted across-the-board funding cuts of at least a third for the nation's credit counseling agencies."
"They're telling people to sink or swim"
TRAVIS PLUNKETT of the Consumer Federation of America talked to Socialist Worker about Washington's bankruptcy "reform" law.
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WHO REALLY declares bankruptcy?
THE AVERAGE filer isn't sitting on a beach in Florida somewhere while their accountant does the paperwork. That's a PR ploy coming from creditors who want us to think about rich deadbeats scamming while they clamp down on low-income debtors.
The average Chapter 7 bankruptcy filer makes about $20,000 a year, with credit card debt to virtually match that. The top three reasons people file for bankruptcy are unemployment, high medical bills and divorce costs.
The new legislation sets up complicated screening mechanisms to determine who can afford to pay. The problem for the typical person won't be passing the means test--but taking it.
The devil is in the details, which are so involved that they require serious legal expertise to successfully navigate. As a result, the process will become more expensive, more burdensome and, as a result, less possible for many people.
It's ironic that the same interests who say they're for streamlining government have created a new web of bureaucracy. Through red tape and legal traps, the new laws will definitely weed out people who in reality deserve relief.
HOW DID the credit industry succeed in pushing the changes through?
THE INDUSTRY used a combination of tactics. First, they funded a mass of questionable research. Then they hired the best lobbyists in town to hawk the findings.
They stuffed congressional war chests with millions of dollars. And they embarked on a slick, expensive PR campaign to convince everyone that bankruptcies are out of control.
Much like the welfare issue, the current debate places responsibility on the individual. But few people genuinely choose to go deep into debt.
If you put food in front of a hungry man, he's going to eat it--and everyone knows it. Yet the reform bill contains nothing to address the abusive extension of credit. The credit industry's role in fostering bankruptcy is absolved.
GIVEN THE signs that the economy is slowing down, what will the impact of the bankruptcy law be on ordinary people?
THIS IS the worst possible time for something like this. People are being told, in effect, to sink or swim.
It's noteworthy that our president is happy to use the possibility of a recession as ammunition for his tax cut--and happy to overlook it when it comes to bankruptcy legislation.