FOLLOWER: Elizabeth Warren is a Harvard law professor. He has researched growing credit card debt by middle-class families and how it can lead to big problems.
Prof. ELIZABETH WARREN: And what families find, even when mom and dad are at work, is usually not able to get to the end of the month, so they usually use credit cards to cover the gap.
They borrowed to survive. And then something happens that goes wrong. One loses his job, another gets sick, the family splits in death or divorce. FOLLOWER: Like many Americans, Jim and Juanita Mueller have been able to pay off their credit card debt every month, even losing their jobs.
JUANITA MUELLER: We didn't have any emergency money set aside, so it became our emergency fund, to support our lives while we waited for the staff to come. And so you borrow from a credit card and pay off in that month, and then the work doesn’t happen, so now you have to borrow more.
And we kept getting deeper and deeper. We started robbing Peter to pay Paul, as the saying goes, you know, take money from a credit card to pay off other credit cards. And that just grew, and that's where it started to freeze.
FOLLOWER: As the Mueller fell behind, their credit card companies began charging fines interest rates, and debt repayments.
LOWELL BERGMAN: Do you remember when interest rates started to rise? JUANITA MUELLER: Some of them, one payment is late and you forget the old interest rate agreement you had, so JIM MUELLER: And forget the fact that you had a credit card for several years and paid on it regularly, you never drank.
And if you miss one payment, it is as if all the deals were canceled. It all goes up. I mean, some credit cards
that we had were 9 percent or less. Suddenly, they were 24, 25 percent because, “Oh, that's fine, he is drunk.
You have been left for a few months, and now we will increase your interest rate, and we will charge you late fees. " Mullers eventually grew to about $ 80,000 on 10 cards that they could no longer continue their payments and had to apply for a refund.
It was one of a record seven million families to set in the last five years.
JIM MUELLER: Not that we didn’t want to pay our credit cards, but we got to where it was impossible. It was just — I mean, a shortage of a wealthy relative, who neither of us had, died and left us $ 100,000, nothing would happen because the credit card companies were not there they did not want to work with us unless.
See get all their money as soon as possible. Prof. ELIZABETH WARREN: The main causes of loss of income are job loss, health problems, or family breakups. Without these things, many American families could face their credit card debt.
But high credit card debt puts them at such a high risk that if they stumble upon one of the strikes, they fall into the same high-interest rate and drown.
JIM MUELLER: "A zero percentage of life on transfer rates, and a 3 to 3 percent refund bonus." FOLLOW: It's weird that Muller still gets offers for extra credit cards.
LOWELL BERGMAN: You are still receiving requests via email. JUANITA MUELLER: Yes. JIM MUELLER: We received one yesterday from a credit card company who told me I would never be in debt to them again.
One of the last times I talked to them, I told them what our situation was, and they said, "Well, we cancel your card. And, in fact, you've been imprisoned with us for life. You'll never have credit.
The card from us again." Yesterday, they received a request from them, a zero percentage for life, and a debt line of up to $ 50,000.
TV COMMERCIAL: Diapers, milk, and laundry items, $ 25. Spend a lot of time with your family, which is precious. FOLLOW: Encouraging Americans to take out a credit card is an important for-profit industry.
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FOLLOW: To make it easier and more attractive to use it is the work of Madison Avenue traders. TV COMMERCIAL: New tool belt and chrome toolset, $ 126.
Finding its use, which is valuable. There are things that money cannot buy. On Father's Day, there is a Mastercard. FOLLOWER: But the success of the industry also depends on the same financial founders the man, Andrew Kahr, his strange expert, insiders say, has helped shape the way the credit card business operates. Kahr, who is a rare consultant, only agreed to talk to us if we did not identify his clients or where he currently lives.
LOWELL BERGMAN: Give me an idea, from the time you got involved, in the late 1970s, about credit cards, ideas, new things you came up with.
ANDREW KAHR, Credit Card Industry Coordinator: Well, I convinced the customer that instead of having a 5 percent balance as a small payment, we should reduce that to 2 percent.
It's a big change, in less than half. FOLLOWER: Before Andrew Kahr became involved in the industry, most banks required customers to pay 5 percent of their credit card balance every month. Kahr realized that if customers who can pay less, will borrow more.
LOWELL BERGMAN: He was able to explain that it was the low-paying people who were the most profitable.
ANDREW KAHR: Having a small down payment allows you to offer high credit lines, first of all, make your card product more attractive because people are judging, or not intending to use the whole line, they would like a top line.
High-balance accounts will be much more profitable than accounts with a lower balance. LOWELL BERGMAN: Because they pay interest? ANDREW KAHR: Because they pay interest at a high rate.
FOLLOWER: Today at least 2 percent of Kahr's is a common denominator in the millions of credit card debt, and every month, some 35 million Americans pay only a small amount.
LOWELL BERGMAN: However, while you are using the balance on your credit cards, or currently have balances on your credit cards, do you have any money in the bank?
CREDIT CARD USERS: Oh, yes. Yes. Yes. ELLIOT: I can clear my debt. LOWELL BERGMAN: So why not do it? LISA: I feel like a nest egg. You never know what tomorrow may bring. You may need that money for something else.
LOWELL BERGMAN: So even though you pay two-digit interest and you can deduct the balance, or most of it— LISA: That's right. LOWELL BERGMAN: You will still make those payments and keep the cash in your bank account.
LISA: FOLLOW Right: Andrew Kahr's research has shown that making small payments eases consumer concerns about carrying a large amount of credit card debt.
They believed that they were financially wise. DESIRES: If you lose your job or you know, something bad is happening, you should have money, and you do not want to live with a credit card. So you need to have that money, you know, kept somewhere in case something happens.
FOLLOWER: In fact, the industry was reaping huge profits from Andrew Kahr's view of human behavior. However, in the late 1990s, Kahr claims to have had a new understanding.
Customers were full of competitive offerings of low-interest rates. ANDREW KAHR: People were giving 12.9 percent interest on the first six months, 10.9 percent on the balance transfer, and I made the client direct to zero percent as the presentation value. It gave them a competitive advantage.
It led, of course, to others and goes to zero percent. FOLLOWER: Kahr knew that although the zero percentage may change easily, people would still be attracted to the practice.
ANDREW KAHR: If you receive something in the mail several times a week that gives you zero percent for six months — they look at the application titles in the mail, spend 30 seconds on it, and, “OK, please.
I'll get better at first. They will give me something. They will give me a zero percentage. ” People believe what they want to believe LOWELL BERGMAN: "Zero percentage APR" - what does this mean?
I mean that doesn't mean anything. ROBERT B. McKinley, CEO, Web Card: In most cases, if you were to sign up for this card, the bank would respect that standard within that time But there are many good points associated with the possibility. For example, if you do not miss a single payment, this rate will move faster.
FOLLOWER: According to McKinley, the key to understanding how credit cards are sold is in a major digital revolution, data collection for American consumers. ROBERT B. McKINLEY: There is a gold mine of information that lives out there on these information centers through consumer reporting agencies, credit bureaus.
They collect information about what kind of accounts you have created, balances, whether or not you make those payments on time.
And that is a great source of information where they can get into it and be able to get an idea of whether the buyer is a pistol or not, someone who does not pay the full balance each month. So they can filter those, and today, it's almost surgery.
FOLLOW: The ability to identify consumers through surgery and to track their financial behavior has become a thriving business run by three joint credit bureaux information. All of that data is then summarized by a well-known company called Fair Isaac, which counts a number called FICO points for almost all Americans with a credit history.
TOM QUINN, Fair Isaac Corp .: We are not a credit reporting agency like Equifax, Trans-Union, or Experian, which collects daily information about consumers and creates consumer records. FOLLOWER: Tom Quinn is a spokesman for Fair Isaac.
TOM QUINN: We just work with credit reporting agencies, and they submit their data to our math formula to build that school.
FOLLOW: The average FICO average is 720 out of about 850. The most dangerous customers with less than 600 points. School is an indication of the likelihood of your paying a debt.
TOM QUINN: Lenders use that term almost as a thermometer to determine if they will lend it or not. So the algorithm is an indication of the future risk of that consumer, regarding debt behavior.
LOWELL BERGMAN: Algorithm, which means mathematical formula. TOM QUINN: Yes, mathematical formula. LOWELL BERGMAN: And how many people have this number?
TOM QUINN: We estimate that about 75 percent of U.S. citizens Credit eligible, i.e., those 18 years or older, have FICO points at any time.
LOWELL BERGMAN: Do you know your credit score? GROUP: No. No. LOWELL BERGMAN: Don't you know you have credit points? MATTHEW: I know I have it, I don't know what it is. LISA: That's right.
DESIRE: Yes, yes. LISA: I don't know what it is. DESIRE: I also don't know what it is. LOWELL BERGMAN: So when I told you the words, "FICO School," you know what FICO school is?
ELLIOT: I know the goals. I do not specify what they are. I never got my credit score. FOLLOWER: A person's FICO school usually decides how much interest he or she will pay with a credit card.
The terms and conditions of the card are set out in the good terms of this contract. LOWELL BERGMAN: When I get a credit card, there is a contract that goes with it. What kind of contract is this? Because I never read it.
Have you ever read it, when it comes to you? ROBERT B. McKINLEY: I'll have to admit, in most cases, I can only guess. You know, it's full of so many legal terms and so many pages and so little writing it might be scary, I think. LOWELL BERGMAN: It says I am guaranteed a loan policy as long as I have a card.
ROBERT B. McKINLEY: Well, yes, things — one thing that is unique about the credit card business is that the issuer can change the terms and conditions at will. LOWELL BERGMAN: Without asking my permission? ROBERT B. McKINLEY: Absolutely.
They can change everything. It only takes 15 days' notice to make those changes. I mean you can get 5 or 6 percent interest today and maybe get it. Two months later, that may be as much as 30 percent.
There are no exceptions to the rule in changing those terms. Q: Even Professor Elizabeth Warren, a specialist in contract law, says she has a problem explaining her contract. Prof. ELIZABETH WARREN: I've read my credit card agreement, and I can't find the terms.
I teach contract law, and the basis of contract law is that both parties to the contract understand what the terms are LOWELL BERGMAN: Have you ever read the contract you are sent to with your credit card?
EDWARD YINGLING: Yes. But I'm a lawyer LOWELL BERGMAN: Do you understand? EDWARD YINGLING: I understand. I think it will be very difficult for a lot of people to understand.
And I think it’s an ongoing battle to try to figure out how to do the disclosure and those kinds of things in simple English for someone to read.
FOLLOWER: Ed Yingling says the fact that it is difficult to understand contracts is not the industry's fault. EDWARD YINGLING: Our disclosures are clearly set out in the laws and regulations, more often than the contracts of most buyers.
Ours is highly regulated. LOWELL BERGMAN: They say the contract contains information, even typeface, which is authorized by law Prof. ELIZABETH WARREN: But the rules that are right now, the rules are not enough.
It is not enough there. These guys have found a great way to compete with putting a smiley face on your ads, a low level of presentation, and hiring an MBA team to set traps in good printing.
FOLLOWER: One of those traps, according to Warren and other critics, is a so-called universal default.
