BROADCASTER: Tonight on FRONTLINE: The average American family has eight. JIM MUELLER: "The zero percentage of life in transfer balances"
BROADCASTER: Credit cards, plastic money, it has become a necessity and a ticket to a better life. CHARACTER AND ACTOR: Hawaii! BEN STEIN, Actor / Author: Credit card is a rare, incredibly simple thing for a consumer.
BROADCASTER: But the credit card industry is playing with its own rules. Prof. ELIZABETH WARREN, Harvard Law School: No retailer I know in America can change the price after buying an item, other than a credit card company.
BROADCASTER: Credit card banks receive record profits. LOWELL BERGMAN, FRONTLINE JOURNALIST: MBNA's profits last year — more than half of McDonald's.
EDWARD YINGLING, American Banking Association: Yes, McDonald's didn't do very well last year. BROADCASTER: But profit comes at a price.
ANDREW GUILE, Buyer: They have now raised my level to 19.98, and I have never been late. PAT WALLACE, Bay Area Better Business Bureau: There are angry, unhappy, dissatisfied customers in the industry.
Prof. ELIZABETH WARREN: They are new lenders in America.
DUNCAN MacDONALD, Fmr. Citibank General Counsel: I really didn't think we could one day create Frankenstein.
LOWELL BERGMAN: Frankenstein? What do you mean, Frankenstein?
BROADCASTER: This evening, FRONTLINE journalist Lowell Bergman and the New York Times are investigating your credit card secrets.
FOLLOWER: This may seem like an impossible place to start a modern credit card history, more than 1,000 miles from Wall Street and panel halls of the Federal Reserve in Washington, but that is where the credit card business began.
This is Sioux Falls, South Dakota, a small town of 140,000 people known for its cattle auction and meat processing industry.
It is a proud city with a large post office, large enough to serve the city as many times as its size.
Every day, millions of mail fragments pass through here, and from here millions of credit card applications are sent to mailboxes all over the United States and billions of dollars in credit card payments come from all over the world.
Today, Sioux Falls is one of the largest credit card processing centers in the country.
It all happened in Sioux Falls because, in the fourth quarter of the last century, times were hard in South Dakota. There has been a global recession with two-digit inflation.
Money was very hard. South Dakota banks were issuing loans or very few loans of any kind. JANKLOW BILL, Fmr. Governor, South Dakota: Interest rates went up in orbit. They were always going up.
FOLLOWER: Bill Janklow was then governor of South Dakota. JANKLOW BILL: When I arrived at the governor's office, South Dakota had strict historical rules about what you could charge to borrow.
In other words, there was one legal interest rate on new cars, one for used cars. It was very controlled, what interest rates people can pay.
What I am trying to say is that we can have a law that says you can charge 9%, but money costs 11%, so banks would not borrow money.
FOLLOWER: In order for banks to withdraw loans, South Dakota decided to end its landmark interest rate, known as the interest rate law.
JANKLOW BILL: We had changed some of our laws in 1979, and had previously introduced legislation and enacted, or passed, a law to raise interest rates so that we could free up and get money in South Dakota.
FOLLOWER: At the same time, all over the country in New York City, a well-known bank owner had his own problems. WALTER WRISTON, Fmr.
CEO, Citibank / Citicorp: Oh, it was so easy. We were going to break. FOLLOWER: Walter Wriston, then chairman of Citibank, had a credit card dividend.
New York laws prevent banks from charging more than 12 percent of consumer loans. WALTER WRISTON: Interest rates have risen to 20 percent.
And if you borrow 12 percent and pay 20 percent, you do not have to be an Einstein to see that you are no longer in business. LOWELL BERGMAN: It cost Citibank 20 percent of the money, and you only got it 12 percent back?
WALTER WRISTON: Yes, indeed. Certainly. LOWELL BERGMAN: Because of the interest rate. WALTER WRISTON: There was no way you could go on.
FOLLOWER: So Wriston and Citibank started looking for a new place to do business. WALTER WRISTON: So we did a study in five provinces that did not have a law of bribery or very high rates.
One of them was South Dakota. So we said, "Look, we're going to bring a few thousand jobs here." FOLLOWER: In 1981, Citibank canceled its credit card operation from New York to South Dakota.
JANKLOW BILL: From the time I met with them until we passed our law, it was only a few weeks. I mean, we moved. That was a good thing for us. It became hell for them.
LOWELL BERGMAN:: What did they get out of this? JANKLOW BILL: What does Citibank get from it? They have to stay alive.
FOLLOWER: But what attracted Citibank to South Dakota was the vague Supreme Court decision that the bank could now export its interest to other provinces.
It was called Marquette's decision. JANKLOW BILL: The Marquette Bank decision was a decision of the U.S. Supreme Court.
Forget where the bank is rented. Wherever a credit decision is made, in any case, that is the place where you can earn interest, wherever you borrow. In other words, if South Dakota has a 25 percent stake, you can charge 25 percent, even borrowing money from Florida.
FOLLOWER: Janklow realized that Marquette's decision meant that South Dakota could be the capital of credit cards in the United States.
JANKLOW BILL: In a very short time, a matter of months, I met with the chairman of the board of the Bank of America, First Chicago of Illinois, Chase Manhattan Bank, Manufacturers Hanover Bank, Chemical Bank, Bank of New. York, all the big banks in America, because only South Dakota, at the time, seemed determined to go ahead and invite people to come in.
FOLLOWER: But soon, another situation came into action. Delaware copied the law of South Dakota, and Wilmington soon became the Eastern Credit Card Center, attracted other New York banks, and created new companies such as MBNA.
For the first time in American history, there were no legal restrictions on the number of interest banks could charge on credit cards nationwide.
DUNCAN MacDONALD, Fmr. Citibank General Counsel: You can look at Marquette's decision and say, okay, maybe we removed the lid, but what she did, was a very equitable result. FOLLOWER: Duncan MacDonald is a former general adviser to the Citibank credit card division.
He says Marquette's decision has allowed banks to charge higher interest rates to at-risk customers. DUNCAN MACDONALD: The moment Marquette arrives, you can raise the price a bit to cover those people.
And as a result, tens of millions of people, who were paying 30 and 35 percent interest on small lending companies, suddenly found a product with an interest rate of 19 percent and an annual interest rate of $ 20.
So in that sense, it was very balanced and very good. FOLLOWER: And it's very good in the bank. With the withdrawal of interest rates enabling more people to access credit cards, the industry began to expand and become a highly profitable banking sector, with a profit of $ 30 billion last year.
We wanted to talk to the managers of major banks with credit cards about their business but we were directed to the American Bankers Association.
LOWELL BERGMAN: We asked for an interview with all the major credit card companies. They will not speak to us. Why? EDWARD YINGLING, American Banking Association: That's our job. They pay for our qualifications to handle these sometimes difficult assignments.
FOLLOWER: Ed Yingling is the future president of the American Bankers Association and a leading industry activist.
LOWELL BERGMAN: How profitable is the credit card business?
EDWARD YINGLING: The credit card business is profitable. You can expect the credit card business to be more lucrative than any other industry, or industry segment because it is risky. It is an unsecured loan, so you can expect the repayment to be slightly higher.
LOWELL BERGMAN: Wasn't that a recorded profit last year in this field, and is it expected again this year?
EDWARD YINGLING: Yes, but compared to what? It is not an unusually profitable business, compared to other businesses. LOWELL BERGMAN: MBNA benefits last year — half and a half times McDonald's.
EDWARD YINGLING: Well, McDonald's didn't do very well last year, and MBNA is a big company. LOWELL BERGMAN: Citibank is more profitable than Microsoft, Walmart. And managers are highly paid.
EDWARD YINGLING: That's right. All right. These_these are really big businesses, and they make money.
FOLLOW: Today, nearly 144 million Americans have credit cards, and use their cards more than ever, charging $ 1.5 trillion last year alone. Credit cards have become an integral part of the American economy.
LISA: I can't say I love my credit card, but I would hate living without it. DESIRE: I use it a lot at work. Easy — easy to reach. I can take clients out for dinner. ELLIOT: I use miles. Fly to the first class for the holidays MATTHEW: It's fun to be able to use what you don't have.
LOWELL BERGMAN: Can you imagine living without a credit card in this community? ELLIOT: It's hard to imagine.
FOLLOW: We sat down with a group of credit card buyers to talk about how they use their cards. ELLIOT: We are consumers. America loves food.
It's in our blood. DESIRE: It's like an addiction. I mean, "I have this new credit card in my pocket and I look at that beautiful dress. I can do it. Oh, I really shouldn't do it, I'll just pay for it later." And he does.
ELLIOT: If I don't have that iPod, I'm not cool. So I can charge it and pay for it. LISA: And Christmas is near. There is always something. BEN STEIN, Actor / Writer: They are just a gift.
And for the traveler, who I am - very, very, very frequent traveler, really, that's what I am - are important. FOLLOWER: Actor and author Ben Stein like to use his credit cards.
BEN STEIN: Credit cards are an incredible amount of money for me. I mean, I have a lot of different cards. I mean, my wallet is full of cards. It's just crazy.
That's right it's just ridiculous. Looks like I have a third breast in my wallet with a lot of credit cards. FOLLOW: Stein says he charges thousands of dollars a month on business expenses on his credit cards.
BEN STEIN: I use all their great resources, and they make no money for me. I mean, no one can talk about him. FOLLOW: Credit card companies make a percentage of every trade, but Stein is not their rightful customer because, like the 55 million Americans, he pays his bills every month and pays no interest.
BEN STEIN: Credit card companies hate people like me, who pay our bills every month. And I know that because I met a boy from high school on the street, and he told me he works for a credit card company.
And I told him how much it cost. I used credit cards and how I paid them every month, and he said, "Oh, we hate you. We hate you. We call you dead." FOLLOWER: "Deadbeats," in a country that looks down on the credit card business, people like Ben Stein, who pay their bills on time.
The best customers in the industry are 90 million Americans who do not pay their credit card debt. They are called "revolvers."
LOWELL BERGMAN: People in the industry tell us that revolvers, people who borrow money, basically, with their credit card, are where the profits come from. EDWARD YINGLING: I don't think that's where all the profit is.
I think it makes sense that those who use the credit card component are kind of a fun place.
FOLLOWER: Today, a wonderful place, as Mr. Yingling, as he called it, continues to grow. And higher interest rates are higher than before, according to Robert McKinley, founder of Card Web, a research company that tracks the industry.
ROBERT B. McKinley, CEO, Web Card: The world's top 10 issuers charge interest rates of 25 to 30 percent on some of their customers.
And this is in a market where interest rates are as low as 40 years. We have buyers who pay interest that can be considered a loan shark in my day.
FOLLOWER: At the same time, Americans with credit cards hold a credit record. LOWELL BERGMAN: How much is the credit card debt that the average American family holds? Prof. ELIZABETH WARREN, Harvard Law School: Oh, about $ 8,000, for those with some debt.
