Secret History of the Credit Card

The Secret History of the Credit Card

On March 17th (in most markets) PBS's Frontline will feature The Secret History of the Credit Card, a documentary that looks at how credit cards came to be a nearly ubiquitous part of our lives.

Credit, particularly in the form of credit cards, is an essential element of consumerism. The story of how they went from being a loss-leader to one of the banks' most profitable services is in some ways the story of consumer society itself.

It's hard to believe that in the late 1970s banks were losing money on credit cards: the big banks, all headquartered in New York, were handicapped by that state's usury laws from raising their interest rates enough to stay ahead of inflation. A Supreme Court ruling, though, determined that banks could operate under the usury laws of whichever state they had their headquarters in, no matter where their debtors were, and so the stampede began as states like South Dakota and Delaware loosened their lending laws. Soon the interest rates on credit cards neared twenty per cent, and when inflation dropped the rates stayed high.

Today, as The Secret History of the Credit Card shows, banks are competing with one another to offer higher and higher lines of credit. Surprisingly, though, these high lines of credit are as much to the bank's advantage as to yours: by raising the credit limit while lowering the minimum payment, banks encourage debtors to carry a heavier load on the card than they would otherwise.

Therein lies the most hidden secret of the credit card's history: banks don't want you to pay off your credit card – or at least, not too much or too quickly. In fact, banks have a name for people who pay their balances off every month, in full: “deadbeats.” That's because they only make money from a card when at least part of the debt is left unpaid. The result is a bit of a dance between encouraging people to carry more debt – through tricks like lowering the minimum payment – while keeping them from defaulting completely.

This realization – that it's most profitable to allow customers to carry a fairly large debt load – led, in the 1990s, to credit card companies targeting people they'd previously spurned. Long gone are the days when a credit card application might be turned down; now students, teenagers and even people with poor credit history became one of the fastest-growing credit card markets.

Is it possible to live without plastic? Greg Daugherty, a columnist for Consumer Reports Money Advisor, recently celebrated thirty years of living without a credit card. Even he, though, carries American Express – not technically a credit card, since it has to be paid off in full every month – so he can do things like rent a car or book a hotel room.

If credit cards have gone from conveniences held mostly by traveling businessmen to a modern necessity, how has that affected our spending habits? Duncan Simester, a professor at MIT's Sloan School of Management and another Frontline interviewee, reviewed research on the subject from the 1970s and '80s as well as conducting his own study in 2000. All of the research suggested the same thing: people spend more when buying with credit cards – up to twice as much, according to Simester's own research. Moreover, people who make purchases with credit cards are more likely to forget how much they've spent.

There's no question that credit cards are intimately tied into consumerism. Some scholars, such as Claudette Levesque Ware, have suggested that things like credit cards train us to define our lives in terms of what we buy. As Ware puts it, “the influences of corporate politics, the commercialization of culture, and the impact of the mass media have given rise to artificial material wants that many consumers tend to interpret as genuine human needs.” This idea has been around for a while, of course – at least since the 19th Century, when Thorstein Veblen first coined the phrase “conspicuous consumption” – but the explosion of mass media, particularly television, has made people more keen than ever to emulate the wealthy and fashionable. Harvard professor Juliet Schor, in her book Do Americans Shop Too Much?, suggests that television has led consumers to compare themselves to TV characters rather than their neighbours, and to borrow money to do it.

Perhaps that's why credit is society's last taboo subject: though nearly all of us carry a significant amount of consumer debt, it's hardly ever discussed outside of the business pages. In fact, it may be the most important facet of adult life that we don't address at all in school: at a time when teens are being targeted with MTV-branded credit cards, few young people know that a bad credit rating can follow you for life – few, indeed, even know what a credit rating is. (Perhaps it's time to teach “safe credit” along with “safe sex.”)

To the banks, of course, ignorance is bliss – as the CBC found when they ran an experiment in which they asked ten shoppers, chosen at random, to phone their banks and read a script asking for a lower interest rate. Six of those ten succeeded, with one having his rate cut in half, from eighteen to nine per cent. The market is now so saturated that many banks will offer such cuts to avoid losing you to a competitor – so long as you carry a balance, that is. After all, if you're a “deadbeat,” it doesn't matter how much or how little interest they charge: eighteen per cent of zero is still zero.

If you miss Secret History of the Credit Card on air, you can view the entire program online here. The Teacher's Guide is available here.