SECRET HISTORY OF THE CREDIT CARD

PRODUCED BY David Rummel & Nelli Kheyfets

CORRESPONDENT Lowell Bergman

WRITTEN BY Lowell Bergman & David Rummel

DIRECTED BY David Rummel

ANNOUNCER: Tonight on FRONTLINE: The average American family has eight.

JIM MUELLER: "Zero percent for life on transfer balances"—

ANNOUNCER: Credit cards, plastic money, have become both a necessity and a ticket to a better life.

[television commercial]

ACTOR AND ACTRESS: Hawaii!

BEN STEIN, Actor/Author: A credit card is an extraordinary, unbelievably great convenience for the consumer.

ANNOUNCER: But the credit card industry plays by its own rules.

Prof. ELIZABETH WARREN, Harvard Law School: I don't know any merchant in America who can change the price after you've bought the item, except a credit card company.

ANNOUNCER: Credit card banks earn record profits.

LOWELL BERGMAN, FRONTLINE Correspondent: MBNA's profits last year— one-and-a-half times that of McDonald's.

EDWARD YINGLING, American Bankers Association: Well, McDonald's didn't do too well last year.

ANNOUNCER: But the profits come at a price.

ANDREW GUILE, Consumer: Now they've raised my rate to 19.98, and I have not been late ever.

PAT WALLACE, Bay Area Better Business Bureau: There are irritated, unhappy, dissatisfied customers in this industry.

Prof. ELIZABETH WARREN: They are the new loan sharks in America.

DUNCAN MacDONALD, Fmr. Citibank General Counsel: I certainly didn't imagine that someday we might have ended up creating a Frankenstein.

LOWELL BERGMAN: Frankenstein? What do you mean, Frankenstein?

ANNOUNCER: Tonight, FRONTLINE correspondent Lowell Bergman and The New York Times investigate the secrets of your credit card.

NARRATOR: This may seem an unlikely place to begin a modern history of the credit card, more than 1,000 miles from Wall Street and the paneled halls of the Federal Reserve in Washington, but this is where the credit card business first began to really take off.

This is Sioux Falls, South Dakota, a modest town of 140,000 known for its cattle auctions and meat-packing industry. It's a town which boasts a huge post office, big enough to service a city several times its size. Every day, millions of pieces of mail pass through here, and from here millions of credit card solicitations and bills are sent to mailboxes across America and billions of dollars in credit card payments come in from around the world. Today, Sioux Falls is one of the major credit card processing centers in the country.

It all happened in Sioux Falls because a quarter of a century ago, times were hard in South Dakota. There was a nationwide recession with double-digit inflation. Money was very tight. South Dakota banks were issuing very few mortgages, or loans of any kind.

BILL JANKLOW, Fmr. Governor, South Dakota: Interest rates were going into orbit. They were climbing all the time.

NARRATOR: Bill Janklow was then the governor of South Dakota.

BILL JANKLOW: When I came to the governor's office, South Dakota had very tight historical laws on what you could charge to borrow. In other words, there was one interest rate by law that they could charge for new cars, another one for used cars. It was highly regulated, what interest rates people could pay. And what I'm trying to say is, we may have a law that said you could charge 9 percent, but money cost 11 percent, so banks weren't loaning money.

NARRATOR: To get the banks to issue loans, South Dakota decided to eliminate its historic cap on interest rates, known as a usury law.

BILL JANKLOW: We had actually changed some of our laws in '79, and we had previously introduced legislation and passed legislation, or were passing legislation, to lift the ceilings on usury so we could free up and get capital in South Dakota.

NARRATOR: At the same time, across the country in New York City, a legendary banker had his own problems.

WALTER WRISTON, Fmr. CEO, Citibank/Citicorp: Oh, it was very simple. We were going broke.

NARRATOR: Walter Wriston, then chairman of Citibank, had a credit card division that was hemorrhaging money. New York's usury laws prohibited banks from charging more than 12 percent on most consumer loans.

WALTER WRISTON: Interest rates went up to 20 percent. And if you are lending money at 12 percent and paying 20 percent, you don't have to be Einstein to realize you're out of business.

LOWELL BERGMAN: It was costing Citibank 20 percent for money, and you were only getting 12 percent back?

WALTER WRISTON: Well, sure. Certainly.

LOWELL BERGMAN: Because of the limit on interest.

WALTER WRISTON: There was no way that you could continue.

NARRATOR: So Wriston and Citibank began looking for a new place to do business.

WALTER WRISTON: So we made a study of the five states that had either no usury law or very high amounts. One of them was South Dakota. So we said, "Look, we'll bring a couple of thousand jobs out here."

NARRATOR: In 1981, Citibank moved its credit card operation from New York to South Dakota.

BILL JANKLOW: From the time I met them until we passed our legislation, it was just several weeks. I mean, we really moved. That was a good deal for us. It was a hell of a deal for them.

LOWELL BERGMAN:: What did they get out of this?

BILL JANKLOW: What Citibank got out of it? They got to stay alive.

NARRATOR: But what really attracted Citibank to South Dakota was an obscure Supreme Court decision that said a bank could now export its interest rate to other states. It was called the Marquette decision.

BILL JANKLOW: The Marquette Bank decision was a U.S. Supreme Court decision that said, forget where the bank is chartered. Wherever the credit decision is made, in whatever state, that's the place where you can apply interest, wherever you make the loan. In other words, if South Dakota had a 25 percent ceiling, then you could charge 25 percent, even to a loan in Florida.

NARRATOR: Janklow realized that the Marquette decision meant that South Dakota could become the credit card capital of America.

BILL JANKLOW: In a very short period of time, a matter of a few months, I was meeting with the chairman of the board of Bank of America, with 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 that point in time, appeared to be willing to move forward to invite people to come in.

NARRATOR: But soon, another state got into the act. Delaware copied South Dakota's legislation, and Wilmington soon became the credit card center of the East, luring other New York banks and giving rise to new companies like MBNA. For the first time in American history, there were no legal restrictions on the interest rates banks could charge on credit cards nationwide.

DUNCAN MacDONALD, Fmr. Citibank General Counsel: You could look at the Marquette decision and say, all right, maybe it took the lid off, but what it did was, it had a very egalitarian effect.

NARRATOR: Duncan MacDonald is the former general counsel of Citibank's credit card division. He says the Marquette decision allowed bankers to charge higher interest rates to riskier customers.

DUNCAN MACDONALD: The minute Marquette came along, you could jack the price up a little bit more to cover those people. And as a result, tens of millions of people, who were paying 30 and 35 percent interest rates to small loan companies, all of a sudden got the product at 19 percent interest rate and an annual fee of $20. So in that sense, it was very egalitarian and very good.

NARRATOR: And very good for banking. As the deregulation of interest rates enabled more people to get credit cards, the industry began to expand and became the most profitable sector of banking, with $30 billion in profits last year.

We wanted to talk to the executives of the major credit card banks about their business, but were directed instead to the American Bankers Association.

LOWELL BERGMAN: We've asked for interviews with all the major credit card companies. They won't talk to us. Why?

EDWARD YINGLING, American Bankers Association: That's our job. They pay us dues to handle these kinds of sometimes difficult assignments.

NARRATOR: Ed Yingling is the incoming president of the American Bankers Association and the industry's top lobbyist.

LOWELL BERGMAN: How profitable is the credit card business?

EDWARD YINGLING: The credit card business is profitable. You would expect the credit card business to be somewhat more profitable than the rest of the industry, or parts of the industry, because it's riskier. It is an unsecured loan, and so you would expect the returns to be a little higher.

LOWELL BERGMAN: Wasn't last year record profits for this industry, and they're expected again this year?

EDWARD YINGLING: Yeah, but compared to what? It's not an unusually profitable business, compared to other businesses.

LOWELL BERGMAN: MBNA'S profits last year— one-and-a-half times that of McDonald's.

EDWARD YINGLING: Well, McDonald's didn't do too well last year, and MBNA is a big company.

LOWELL BERGMAN: Citibank more profitable than Microsoft, Wal-mart. And the executives are highly paid.

EDWARD YINGLING: Right. Right. These are— these are really big businesses, and they do make money.

NARRATOR: Today, nearly 144 million Americans have credit cards, and they are using their cards like never before, charging $1.5 trillion last year alone. Credit cards have become an essential part of the American economy.

LISA: I really can't say that I love my credit card, but I would hate to live without it.

DESIREE: I use it a lot for work. It's easy— it's easy access. I can take clients out for dinner.

ELLIOT: I take advantage of the miles. We fly first class on vacations

MATTHEW: It's nice to be able to spend what you don't have.

LOWELL BERGMAN: Can you imagine living without a credit card in this society?

ELLIOT: It's hard to imagine.

NARRATOR: We sat down with a group of credit card customers to talk about how they use their cards.

ELLIOT: We're consumers. America loves to consume. It's in our blood.

DESIREE: It is like an addiction. I mean, "I have this new credit card in my pocket, and look at that great dress. I can do it. Oh, I really shouldn't do it, I'll just pay it off later." And you do it.

ELLIOT: If I don't have that IPod, I'm not cool. So I can charge it and pay it off.

LISA: And Christmas is just around the corner. There's always something.

BEN STEIN, Actor/Author: They're just a gift. And for the traveler, which I am — a very, very, very frequent traveler, indeed, is what I am — they are indispensable.

NARRATOR: Actor and author Ben Stein loves the convenience of using his credit cards.

BEN STEIN: Credit cards are an incredible deal for me. I mean, I have lots and lots of different cards. I mean, my wallet is just stuffed with cards. It's just insane. It's just ridiculous. I look like I've got a third breast from my carrying around my wallet with so many credit cards in it.

NARRATOR: Stein says he charges thousands of dollars a month in business expenses on his credit cards.

BEN STEIN: I use all their good services, and they don't make any money from me. I mean, none to speak of.

NARRATOR: The credit card companies do make a percentage on each transaction, but Stein is not their ideal customer because, like 55 million Americans, he pays his bills off every month and doesn't pay any interest.

BEN STEIN: The credit card companies hate people like me, who pay off our bills every month. And I know that because I ran into a fellow I went to high school with on the street, and he told me he worked for a credit card company. And I told him about how much I use credit cards and how I pay them off every month, and he said, "Oh, we hate you. We hate you guys. We call you deadbeats."

NARRATOR: "Deadbeats," in the upside-down world of the credit card business, are the people like Ben Stein, who pay off their bills on time. The industry's best customers are the 90 million Americans who don't pay off their credit card debt. They're called the "revolvers."

LOWELL BERGMAN: People in the industry tell us that revolvers, people who borrow money, basically, with their credit card, that's where the profits are.

EDWARD YINGLING: I don't think that's where all the profits are. I think it is generally understood that those that use the revolving part of the credit card are kind of the sweet spot.

NARRATOR: Today, the sweet spot, as Mr. Yingling calls it, continues to grow. And the top interest rates charged are higher than ever before, according to Robert McKinley, who founded Cardweb, a research firm that tracks the industry.

ROBERT B. McKINLEY, CEO, Cardweb: The top 10 issuers in the country are charging interest rates of 25 to 30 percent to some of their customers. And this is in a market where interest rates are at a 40-year low. We have consumers paying interest rates that would be considered loan sharks in my day.

NARRATOR: At the same time, Americans with credit card balances are carrying a record amount of debt.

LOWELL BERGMAN: How much credit card debt is the average American family carrying?

Prof. ELIZABETH WARREN, Harvard Law School: Oh, about $8,000, for those who are carrying some debt.

NARRATOR: Elizabeth Warren is a Harvard law professor. She has researched the growing credit card debt held by middle class families and how it can lead to big trouble.

Prof. ELIZABETH WARREN: And what families are discovering, even with Mom and Dad in the workplace, is they often can't make it to the end of the month, and so they often use credit cards to bridge the gap. They borrow to make ends meet. And then what happens is something goes wrong. Somebody loses a job, somebody gets sick, family breaks apart through death or divorce.

NARRATOR: Like most Americans, Jim and Juanita Mueller managed to pay their credit card bills each month, until they both lost their jobs.

JUANITA MUELLER: We didn't have any emergency funds set aside, so they kind of became our emergency fund, to fund our life while we were waiting for the employment to come along. And so you borrow from the credit card and pay that month, and then the job doesn't happen, so now you got to borrow more. And we just kept digging deeper and deeper. We started robbing Peter to pay Paul, as the expression goes, you know, take money from a credit card to pay other credit cards. And that just increases it, and that's where it really started to snowball.

NARRATOR: As the Muellers fell behind, their credit card companies began to apply penalty interest rates and fees to their bills.

LOWELL BERGMAN: Do you remember when the interest rates started to rise?

JUANITA MUELLER: Some of them, one late payment and forget your old interest deal that you had, so—

JIM MUELLER: And forget the fact that you had the credit card for a number of years and were paying on it regularly, were never late. And as soon as you make you miss one payment, it's like all deals are off. Everything goes up. I mean, some of the credit cards we had were 9 percent or less. All of a sudden, they're 24, 25 percent because, "Oh, well, you're late. You've been late several months, and now we're going to raise your interest rate, and we're charging you the late fee." And now because the interest rate and the late fees have accumulated, now you're over your limits, so there's an over-the-limit fee.

NARRATOR: The Muellers' credit card debt eventually grew to nearly $80,000 on 10 cards. They found that they could no longer keep up with their payments and had to file for bankruptcy. They were one of a record seven million families to file in the last five years.

JIM MUELLER: It wasn't that we didn't want to pay off our credit cards, it's we got to the point where it was impossible. It was just— I mean, short of a rich relative, which neither one of us have, dying and leaving us $100,000, nothing was going to happen because the credit card companies weren't— they weren't willing to work with us unless they got all their money as fast as possible.

Prof. ELIZABETH WARREN: The main things that triggers a bankruptcy filing are job loss, a medical problem or a family break-up. Without these things, most American families can deal with their credit card debt. But high credit card debt puts them at much great risk, so that if they stumble, if they get hit by one of the other blows, they get their feet tangled up in those high interest rates, and they just get sunk.

JIM MUELLER: "Zero percent for life on transfer balances, and 3— up to 3 percent cash back bonus."

NARRATOR: Ironically, the Muellers are still getting offers for more credit cards.

LOWELL BERGMAN: You're still getting solicitations in the mail.

JUANITA MUELLER: Yeah.

JIM MUELLER: We got one yesterday from a credit card company that told me I'd never have credit with them again. One of the last times I talked with them, told them what our situation was, they said, "Well, we're canceling your card. And you are, in essence, blackballed with us for life. You'll never have a credit card from us ever again." Yesterday, received a solicitation from them, zero percent for life, with up to a $50,000 line of credit.

[www.pbs.org: More on marketing to consumers]

TELEVISION COMMERCIAL: Diapers, milk and laundry detergent, $25. Spend more time with your family, priceless.

NARRATOR: Encouraging Americans to take on credit card debt is critical to the profitability of the industry.

[television commercial]

ACTOR AND ACTRESS: Hawaii! Yes!

ANNOUNCER: Call now to request the CitiAdvantage World Mastercard, and you can earn free award travel, plus get 10,000 bonus miles.

NARRATOR: Making it easier and more attractive to spend has been the job of Madison Avenue marketers.

TELEVISION COMMERCIAL: New tool belt and chrome tool set, $126. Getting some use out of it, priceless. There are some things money can't buy. For Father's Day, there's Mastercard.

NARRATOR: But the success of the industry has also relied on financial innovators like this man, Andrew Kahr, whose peculiar genius, industry insiders say, has helped shape the way the credit card business works. Kahr, a consultant who rarely consents to interviews, only agreed to talk with us if we did not identify his clients or where he is currently living.

LOWELL BERGMAN: Give me an idea of, from the time you got involved, the late '70s, with credit cards, the ideas, the innovations that you've come up with.

ANDREW KAHR, Credit Card Industry Consultant: Well, I convinced the client that instead of having 5 percent of the balance as a minimum payment, we should reduce that to 2 percent. It's a very dramatic change, less than half.

NARRATOR: Before Andrew Kahr got involved in the industry, most bankers required that customers pay 5 percent of their credit card balance every month. Kahr realized that if customers were able to pay less, they would borrow more.

LOWELL BERGMAN: You were able to explain that it was people making low payments who were the most profitable.

ANDREW KAHR: Having a lower minimum payment allows you to offer higher credit lines, which, first of all, makes your card product more attractive because people judge, even if they don't intend to use the whole line, they would rather have a higher line. The high-balance accounts will be much more profitable than the low-balance accounts.

LOWELL BERGMAN: Because they're paying interest?

ANDREW KAHR: Because they're paying interest on a higher balance.

NARRATOR: Today Kahr's 2 percent minimum is a common feature on millions of credit card bills, and every month, some 35 million Americans pay only the minimum payment.

[www.pbs.org: Consumer views on credit cards]

LOWELL BERGMAN: By the way, while you're running up balances on your credit cards, or currently have balances on your credit cards, do you have cash in the bank?

CREDIT CARD USERS: Oh, yeah. Yeah. Yes.

ELLIOT: I could wipe my debt out.

LOWELL BERGMAN: So why don't you do it?

LISA: I feel it's a nest egg. You never know what's going to happen tomorrow. You might need that money for something else.

LOWELL BERGMAN: So even though you're paying double-digit interest and you could get rid of the balance, or most of it—

LISA: Right.

LOWELL BERGMAN: —you're going to still make those payments and keep the cash in your bank account.

LISA: Right

NARRATOR: Andrew Kahr's research showed that making the minimum payment eased consumers' anxiety about carrying large amounts of credit card debt. They believed they were being financially prudent.

DESIREE: If you lose your job or you— you know, something bad happens, you have to have money, and you don't want to live off of a credit card. So you need to have that money, you know, saved somewhere in case something happens.

NARRATOR: In fact, the industry was reaping huge profits from Andrew Kahr's intuition about people's behavior. But then, in the late '90s, Kahr says he had a new insight. Customers were being flooded with competitive offers for low-interest cards.

ANDREW KAHR: People were offering 12.9 percent interest for the first six months, 10.9 percent on balance transfers, and I convinced the client to go straight to zero percent as an introductory rate. It gave them competitive advantage. It led to, of course, the others also going to zero percent.

NARRATOR: Kahr knew that even though the zero percent offer could easily change, people would still be attracted to the bait.

ANDREW KAHR: When you're getting something in the mail several times a week that offers you zero percent for six months— they look at the headlines of the solicitation in the mail, they spend 30 seconds on it, and, "OK, I'm going to be better off at the beginning. They're going to give me something. They're going to give me a zero percent rate." People believe what they want to believe

LOWELL BERGMAN: "Zero percent APR"— what does this mean? I mean, you're saying that's meaningless.

ROBERT B. McKINLEY, CEO, Cardweb: Most cases, if you were to sign up for this card, the bank will honor that rate through that period of time. But there's a lot of fine print that goes with what could happen. For example, if you were to miss one payment, this rate will go away immediately.

NARRATOR: According to McKinley, the key to understanding how credit cards are marketed lies in the great digital revolution, the amassing of data on American consumers.

ROBERT B. McKINLEY: Well, there's a gold mine of information residing out there in these databases by the consumer reporting agencies, the credit bureaus. They're collecting information about what kind of accounts you have open, the balances, whether or not you make those payments on time. And that's a huge reservoir of information there that they can tap into and be able to get a sense as to whether or not a consumer is a revolver, someone who doesn't pay the balance off in full each month. So they can kind of sift those out, and today, it's really become almost surgical.

NARRATOR: The ability to surgically target consumers and track their financial behavior has become a booming business dominated by three credit reporting agencies which gather information. All that data is then crunched by a little known company called Fair Isaac, which calculates a number called a FICO score for almost every American with a credit history.

TOM QUINN, Fair Isaac Corp.: We're not a credit-reporting agency like an Equifax, Trans-Union or Experian, that's gathering information daily on consumers and building up consumer records.

NARRATOR: Tom Quinn is a spokesman for Fair Isaac.

TOM QUINN: We simply work with the credit-reporting agencies, and they deploy their data onto our mathematical formula to create that score.

NARRATOR: The median FICO score is 720 out of a possible 850. The riskiest customers have scores below 600. The score is an indication of how likely you are to pay your bills.

TOM QUINN: Lenders use that score almost like a thermometer to determine if they're going to grant credit or not. So the algorithm is an indication of that consumer's future risk, in terms of credit behavior.

LOWELL BERGMAN: Algorithm, meaning a mathematical formula.

TOM QUINN: Yes, mathematical formula.

LOWELL BERGMAN: And how many people have this number?

TOM QUINN: We estimate that approximately 75 percent of the U.S. population that is eligible for credit, i.e., those who are 18 years or older, have a FICO score at any given time.

LOWELL BERGMAN: Do you know your credit score?

GROUP: No. No.

LOWELL BERGMAN: You're not aware that you have a credit score?

MATTHEW: I'm aware that I have one, I don't know what it is.

LISA: Right.

DESIREE: Right, yeah.

LISA: I don't know what it is.

DESIREE: I don't know what it is, either.

LOWELL BERGMAN: So if I said to you the words, "FICO score," do you know what a FICO score is?

ELLIOT: I know the terms. I'm not clear on what they are. I've never gotten my credit score.

[www.pbs.org: What determines your FICO score?]

NARRATOR: An individual's FICO score often determines how much interest he will pay on a credit card. The terms and conditions of the card are laid out in the fine print of this contract.

LOWELL BERGMAN: When I get a credit card, there's a contract that goes along with it. What kind of contract is this? Because I never read it. Have you ever read it, when it came to you?

ROBERT B. McKINLEY: I'd have to admit, in most cases, I may have just glanced at it. You know, it's filled with so many legal terms and so many pages and such small print that it can be intimidating, I think.

LOWELL BERGMAN: It says that I'm guaranteed the terms of a loan for as long as I have the card.

ROBERT B. McKINLEY: Yeah, well— yeah, things that— the one unique thing 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 it all. It only takes 15 days' notice to make those changes. I mean, you could be offered a 5 or 6 percent interest rate today and perhaps get it. Two months later, that could be 30 percent. There's nothing to prevent the issuer from changing those conditions.

NARRATOR: Even Professor Elizabeth Warren, an expert on contract law, says she has a hard time deciphering her contract.

Prof. ELIZABETH WARREN: I've read my credit card agreement, and I can't figure out the terms. I teach contract law, and the underlying premise of contract law is that the two parties to the contract understand what the terms are

LOWELL BERGMAN: Have you ever read the contract that's sent to you with your credit card?

EDWARD YINGLING: Yes. But I'm a lawyer. [laughs]

LOWELL BERGMAN: Do you understand it?

EDWARD YINGLING: I do understand it. I think it'd be very hard for a lot of people to understand. And I think it's a constant battle to try to figure out how you make disclosures and those types of things in plain English so that somebody will read them.

NARRATOR: Ed Yingling says the fact that the contracts are difficult to understand is not the industry's fault.

EDWARD YINGLING: Our disclosures are very explicitly set forth in law and in regulation, much moreso than in most consumer contracts. Ours are heavily regulated.

LOWELL BERGMAN: They say the contract contains information, even the typeface, that's mandated by law—

Prof. ELIZABETH WARREN: But the laws— that's the point now, the laws are inadequate. There's not enough there. These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print.

NARRATOR: One of those traps, according to Warren and other critics, is something called universal default.

ROBERT B. McKINLEY: If you do miss a mortgage payment, you do miss a car payment, any other— it can trigger what is called a universal default. They actually have the right to change it if you miss a payment with another creditor, or in some cases, even if there's a change in your credit worthiness. In fact, you don't have to miss a payment. You don't have to go over your credit limit to be in default. You could, for example— or maybe your balances are too high.

LOWELL BERGMAN: You've seen one of these, right, before? I want to read you something from a contract. "Your APRs also may vary if you are in default under this agreement or any other agreement that you have with us or any other related companies for any of the following reasons: You fail to make a payment to another creditor when due." Do you understand what this means?

GROUP: Uh-huh. Yes.

LOWELL BERGMAN: You do? Do you know that it means that if you fail to make a payment and are late on anything else that you're paying on — your house, your car, anything else — they will find out and they can change your interest rate? Did you know that?

ELLIOT: No, I had no idea.

LISA: I had no idea. This is the first I've ever heard that.

DESIREE: Why is it legal?

LOWELL BERGMAN: Well, because it's disclosed in the contract.

ELLIOT: It doesn't seem fair. You've done no harm to the company themselves. You're late with someone else. You haven't affected your standing with that company. No, it doesn't seem fair that they would suddenly say, "Oh, now I can raise your rate."

DESIREE: They're taking advantage of someone who is in that position.

NARRATOR: That's what Andrew Guile of Wilmington, Delaware, says happened to him.

ANDREW GUILE: Yes, I had gotten a letter from MBNA several months ago that my rate was going to be increased..

NARRATOR: MBNA raised his 8.9 percent interest rate to 19.9 percent, and his minimum monthly payments nearly doubled.

ANDREW GUILE: They told me the first time that my rate had been raised because they found an occasion back in 1998 when I had gone 60 days past due on a competitor's credit card. And I asked them, "What in the world does that have to do with MBNA, especially being six years ago?" I said, "That has nothing to do with my account here." I mean, that absolutely took my breath away.

NARRATOR: When Guile protested, he says he was given another reason for the change. He had become riskier he was told, because his account balances with other creditors were too high.

ANDREW GUILE: I was a great customer at MBNA, always paid my balances on time, paid more than the minimum balance— you know, many times paying it down completely. But I was never late, and I used the card in a wise and responsible manner.

NARRATOR: FRONTLINE wanted to ask MBNA about Guile's problem, but we were told they never comment on an individual's account. But just two months after our interview, Guile says he got a call from the office of the president of MBNA saying they would move his interest rate back to 8.9 percent.

Prof. ELIZABETH WARREN: The real question here is whether or not you can change the price, not for new items you buy after your credit score has changed, but for old credit that you've already taken out. My mortgage company agreed to an interest rate, and if I lost my job, my mortgage company does not get to double my mortgage. Credit card companies can say, "Remember how you bought the big-screen TV at 9.8 percent interest? We've decided we want 29.9 percent interest." And there's not a darn thing you could do about it right now.

LOWELL BERGMAN: The contract allows a credit card company to change the interest rate on money you borrow from them after you've borrowed it.

[www.pbs.org: Read the extended interview]

EDWARD YINGLING: Some do, yeah. It depends on the contract, but a lot of them do.

LOWELL BERGMAN: If they find out through this information system that you've been late on your payment for your automobile, they can notify you that they're going to change the interest rate on the money they've already lent you.

EDWARD YINGLING: I think there's a misunderstanding about what the credit card agreement is. My agreement with you is, you come to me, you have a certain credit score, and based on that credit score, I'm going to charge you 12 percent. If in the future, it turns out that your credit score has deteriorated and you now are more risky to me, I'm going to charge you the interest rate I would charge to somebody that has that credit score.

LOWELL BERGMAN: Is it fair to change the price of the deal after the fact?

EDWARD YINGLING: The product is not a promise to somebody that we will lend you that amount of money forever at that interest rate. It is a very short-term revolving line of credit.

ANDREW GUILE: It's dishonest. Plain and simple. It's dishonest. They may say it's good business for their financial bottom line, but it is a very poor way to treat a customer.

NARRATOR: In 1996, another important Supreme Court decision opened the door to bigger profits for the credit card industry and a raft of new complaints from their customers. That decision, Smiley vs. Citibank, much like the Marquette decision before it, lifted state restrictions, this time on the fees that credit card banks could charge.

DUNCAN MacDONALD, Fmr. Citibank General Counsel: We were working this thing here for a good cause, free-market pricing.

NARRATOR: Duncan MacDonald was one of the lawyers who worked on the Smiley case.

DUNCAN MacDONALD: The late fees that were common across the industry, up until Smiley, were in the $5 and the $10 range. And the economic thinking was that there had to be flexibility to allow up to $15. But Smiley came along and took the lid off it, it went from $5 to $10 to $15 to $29, and recently, it's gone up to $39. I would guess that it's probably going to go up to $50 a year-and-a-half from now. I certainly didn't imagine that someday we might've ended up creating a Frankenstein.

LOWELL BERGMAN: Frankenstein? What do you mean, Frankenstein.

DUNCAN MacDONALD: I look at that and I say to myself, "Is $50 a fair fee," plus a 25 percent interest rate and all these other fees that are thrown on, for folks who are probably not that risky? Is that fair? And I look at it and I say to myself, "There's the Frankenstein." We've created something that has to be dealt with.

NARRATOR: Since Smiley, credit card companies have doubled the amount of revenue they generate from fees: late fees, over-the-limit fees, returned check fees and the like.

ROBERT B. McKINLEY: Fee income has gone up much, much faster than interest income in the business.

LOWELL BERGMAN: So the fees are meant as a penalty to make sure that you pay on time, or are they a profit stream?

ROBERT B. McKINLEY: Well, they really have become a profit stream. It's not just the fees that they charge, even though they're three and four times higher than they were less than 10 years ago. That's the tip of the iceberg, when it comes to the penalty that's inflicted on consumers with these situations where they make a late payment. It's the penalty interest rate that really does the damage. Your interest rate could double overnight.

LOWELL BERGMAN: Just so I understand, the interest rates are not regulated. They can change the interest rate relationship that you have with them with 15 days notice. So that's a major source of profit for them. And the fees are now no longer regulated.

ROBERT B. McKINLEY: That's exactly right. It's wide-open. We're beginning to see banks do all this tweaking, where they're changing the interest rates and raising fees, adding new fees, all kinds of— the way they calculate interest, setting the due dates on a Sunday, on a holiday, on the hopes that maybe you'll trip up and get a payment in late. It's become a very anti-consumer marketplace.

NARRATOR: Even the industry's top lobbyist is concerned.

EDWARD YINGLING: I think it would be short-sighted for a credit card company to have fees that, that would make somebody angry because they're likely to lose that customer. And I think it's going to cost them more to replace that customer than they're likely to get out of the fee.

DUNCAN MacDONALD: You have bankers who have skyrocketed rates from 14 percent to 25 percent and $40 late fees and bad-check fees, and so on, that fall on the shoulders of the less well-off. Yes, there's— something bad has happened.

LOWELL BERGMAN: So we need regulation.

DUNCAN MacDONALD: We have regulation. We have regulation already. The Comptroller of the Currency regulates all the national banks, and they have very vast powers.

NARRATOR: The Office of the Comptroller of the Currency — the OCC — is an obscure Washington agency, part of the Treasury Department, and it regulates the national banks, banks like Chase, Citibank and MBNA that issue most of the credit cards in this country. Julie Williams is the acting comptroller of the currency.

JULIE WILLIAMS, Acting Comptroller, OCC: We have three goals, to make sure that the banks don't fail, to ensure the integrity of how the banks operate, their corporate governance, and to make sure that they deal fairly and honestly with their customers. At the extreme, we have the ability to take enforcement action, and we have done that. We have taken enforcement action.

LOWELL BERGMAN: Can you give us an example of how you have brought a large institution to task?

JULIE WILLIAMS: Well, I think the— probably the most conspicuous example of that would be the action that we took in connection with Providian.

NARRATOR: That's not the story they tell in San Francisco, where in the late 1990s, the credit card company Providian Financial was experiencing double-digit growth. Providian specialized in the riskiest customers with the lowest credit scores.

PAT WALLACE, Bay Area Better Business Bureau: They were targeting people with questionable credit, or marginal credit, people that couldn't get bank cards elsewhere.

NARRATOR: Pat Wallace is the head of the Better Business Bureau in the San Francisco area.

PAT WALLACE: The first thing that got our attention, of course, were the numbers, the numbers of complaints. Providian was involved in all kinds of questionable offers and policies and procedures and operations.

NARRATOR: Complaints about Providian from around the country came here to Wallace's office.

PAT WALLACE: Providian, for example, was accepting payments from consumers on their accounts, depositing the checks but not crediting the account for sometimes up to several weeks. What was the net result of that? Invariably, the consumer got a late charge.

LOWELL BERGMAN: They were holding payments so that they could charge late fees and they could charge overdraft fees and—

PAT WALLACE: And over-limit fees. Fifty percent of their income were fees, not interest on the money loaned. They were pushing the envelope. And they got by with it for a period of time, and they made a lot of money.

LOWELL BERGMAN: The office of the Comptroller of the Currency is the main federal agency that takes complaints. Did they come to your assistance?

PAT WALLACE: No. They just simply weren't interested. You know, the response was, "Well, you know, we'll take it from here. We'll watch from here." You know, "It's not a problem at this time for us."

NARRATOR: Complaints about Providian were also coming to June Cravett at the San Francisco district attorney's consumer protection unit, and she began to investigate, eventually drawing local press attention and then a phone call from the OCC.

LOWELL BERGMAN: Had you ever heard of the Office of the Comptroller of the Currency?

JUNE CRAVETT, Asst. DA, San Francisco: The answer from my perspective is no. Didn't really know much about it. Didn't know exactly what they did and exactly who they regulated. We never heard of them being very active in the area of consumer litigation or consumer enforcement actions against the banks.

NARRATOR: And when the OCC contacted June Cravett, she says instead of cooperation, they issued a challenge.

JUNE CRAVETT: There were a couple of meetings where the subject of preemption was raised.

LOWELL BERGMAN: Preemption?

JUNE CRAVETT: Yeah. That's where they say, "Because we're the federal regulator," that they have exclusive authority over the national banks, and therefore, we don't have jurisdiction.

LOWELL BERGMAN: You, in San Francisco, don't have jurisdiction?

JUNE CRAVETT: Yes.

LOWELL BERGMAN: The San Francisco district attorney says to us that they were told, "You don't have real jurisdiction, we have real jurisdiction," and indicated to them that they might want to get out of the case.

JULIE WILLIAMS, Acting Comptroller, OCC: The way that that worked out was we worked together with the San Francisco district attorney's Office. It was a collaborative process.

LOWELL BERGMAN: But they say once you got involved, it was very fruitful.

JULIE WILLIAMS: Right.

LOWELL BERGMAN: What they're telling us is that the OCC only got involved once this whole situation became public, that prior to the news publicity that they were responsible for, they had no contact with the OCC.

JULIE WILLIAMS: We worked cooperatively with them when we got information about what was going on.

NARRATOR: The joint investigation eventually culminated in a $300 million settlement. Providian declined to be interviewed and issued a statement saying, "Rather than revisit the past, the company is focused on "services ... that provide real benefits today."

In Washington, the OCC has been increasingly asserting its authority and attempting to curb consumer enforcement actions by local prosecutors. This has sparked a nationwide battle, led by the attorneys general in all 50 states.

ELLIOT SPITZER, NY State Atty. General: The OCC is now trying to squeeze out the state presence, to prevent us from protecting consumers, which I think is ultimately very injurious to consumers.

NARRATOR: Elliot Spitzer is the attorney general of New York state.

ELLIOT SPITZER: We get thousands of complaints every year about credit card issues relating to the major banks, the major card issuers. And so we get these complaints, and we try to deal with the credit card companies. But increasingly, over the past number of years, what we have heard back from the major banks, in a variety of contexts, is that, "We don't need to deal with you because the OCC has told us — indeed, has directed us — not to deal with state enforcement entities."

LOWELL BERGMAN: Isn't this just a turf battle between the states and a federal agency?

ELLIOT SPITZER: It's a one-way turf battle. And by that, what I mean is we are more than happy to acknowledge that the OCC has jurisdiction across the financial system, when it comes to certain issues. What the OCC is trying to do is squeeze the states out in the one area where we have been incredibly useful, which is consumer protection.

LOWELL BERGMAN: The state attorneys general, Mr. Spitzer and others, say that, "People in our state know who we are, we have a consumer complaint office. And our beef is, is that you guys, the OCC," want to push them out of the business of consumer complaints.

JULIE WILLIAMS: We don't want to push them out of the business. We are both there protecting consumers. What we have been striving to do is to individually, and in developing arrangements with the states, work out the best way to work cooperatively with them.

NARRATOR: In January of 2004, the OCC declared itself the exclusive regulator of all the national banks, effectively immunizing the big credit card issuers from most state consumer protection laws. The OCC cited the Providian case as proof of its commitment to consumers.

JUNE CRAVETT: I was dismayed that they used Providian as the prime example of their ability and their will to enforce the laws that pertain to consumers.

LOWELL BERGMAN: To you, they weren't the white knight who came into San Francisco and saved consumers from Providian.

JUNE CRAVETT: No, we were.

NARRATOR: Since the Providian case, the OCC says it has been more aggressive, recently issuing an advisory admonishing the banks for misleading the public about practices like zero percent introductory rates and universal default.

Prof. ELIZABETH WARREN, Harvard Law School: The OCC itself has acknowledged that these practices are, as they describe it, very troubling. But notice what they didn't do. They didn't say, "And we're going to prohibit them. Stop them. Those are unfair practices. They are unsafe and unsound, and don't do them." Instead they said, "It's a problem"? Look, if they think it's a problem, then tell the credit card companies to stop doing it!

LOWELL BERGMAN: Why don't you simply stop them? Why don't you ban these practices?

JULIE WILLIAMS: When we see practices that are potentially problematic, we take a variety of actions.

LOWELL BERGMAN: So you could tell them to stop, and they would have to do it.

JULIE WILLIAMS: If we had a basis for a concluding that a bank was involved in a practice that was unfair or deceptive, if it violated any of the other many consumer protection standards that applied to them, we can tell them to stop it immediately.

NARRATOR: Whatever the OCC is doing, Pat Wallace says it hasn't stopped the Better Business Bureau from being deluged with complaints.

PAT WALLACE, Bay Area Better Business Bureau: It's not an accident that the banking/credit card business, generates more complaints, nationally, across the country, than any other industry. Now, what does that say to you? Out of 1,000 industries that we track, they're number one. I'd say there's a problem here. These things aren't an anomaly. All these complaints have some basis in fact. There are irritated, unhappy, dissatisfied customers in this industry. And we see it.

LOWELL BERGMAN: The Better Business Bureau tells us credit cards and banking and credit cards together, number one problem.

JULIE WILLIAMS, Acting Comptroller, OCC: Of all types of complaints?

LOWELL BERGMAN: Yeah.

JULIE WILLIAMS: I would have thought it was, like, cable, and satellite installation or—

LOWELL BERGMAN: No, I guess, you guys.

JULIE WILLIAMS: —used car dealers or something.

LOWELL BERGMAN: Your members apparently are amongst them.

JULIE WILLIAMS: That's— I would not have thought that— that that was the case.

NARRATOR: Critics like Elizabeth Warren believe that there would be fewer complaints if the credit card industry clearly disclosed how its business works, particularly when it comes to the minimum monthly payment.

Prof. ELIZABETH WARREN: If people knew that the cost of minimum monthly payments was that they would still be paying for yesterday's trip to the shopping mall for the next 35 years, some people might decide to pay a lot more than the minimum. And the industry knows that. That's why they don't want to tell.

LOWELL BERGMAN: You advertise in your bills what the minimum monthly payment is, but you don't tell people how much that might cost you if you stuck to that minimum payment. Why not?

ED YINGLING, American Bankers Association: The disclosure would be wrong 99 percent of the time because nobody — almost nobody — pays exactly the minimum, that minimum, every month for 20 years and never charges another thing. This is going to be a hyper-technical, expensive disclosure that nobody would understand. So we are against disclosures that nobody would understand and that are wrong. We are for disclosures that help people understand. It's that simple.

Prof. ELIZABETH WARREN: This is a nonsense argument! In the line directly under the line that says "minimum monthly payment," there's a simple sentence that can be added. "If you make minimum monthly payments, it will take you," how many years, 35 years, and how many months, "to pay off this bill."

NARRATOR: The man who takes credit for inventing the 2 percent minimum payment thinks more disclosure is useless.

ANDREW KAHR, Credit Card Industry Consultant: This is a fascination that every now and then, someone with an axe to grind or someone who think he's going to help consumers has on his mind. But if we had a tape and we ran a computer on transcripts of 10,000 customer service calls with questions, OK, I don't think you'd ever hear that question. So I'm kind of baffled at the artificiality of it. I don't think that's what consumers want to know because they don't expect to make minimum payments forever.

LOWELL BERGMAN: Do you know if you made the minimum payment, for instance, on your bill, how long it would take you to pay it off?

1st CREDIT CARD USER: I'm not in a hurry to find out. I'm just going to pay it off.

LOWELL BERGMAN: Would you like to know?

1st CREDIT CARD USER: Sure.

2nd CREDIT CARD USER: It would inspire me to put down more. It would inspire me. And I think that's probably why they don't put it down. It would inspire a lot more people to pay more than the minimum.

Sen. CHRISTOPHER DODD (D), Connecticut: Virtually everyone who holds a credit card, one way or the other, under existing laws today and provisions, can be completely taken advantage of by the credit card industry. So there is a deception going on to get you into the game. Once you're in and I've got you in, then, then if you get out, I charge you. If you don't meet your obligations, I charge you. You move left, you move right, I've got you.

LOWELL BERGMAN: So what are you going to do about it?

Sen. CHRISTOPHER DODD: Well, I've got a legislation [laughs]. I've got a bill. That's always a quick answer here. And I don't know how far it'll go because I've tried this in the past. I'm not new to the issue.

[on the Senate floor] A good deal of the blame for the crisis of credit card debt we're seeing in America lies in how the practices are followed by credit card companies.

NARRATOR: In the summer of 2004, Sen. Dodd introduced a credit card reform bill that would, among other things, require credit card companies to disclose how long it would take consumers to pay off their balance. But he is not optimistic that the bill will pass. His many previous attempts to reform the credit card business have all failed.

LOWELL BERGMAN: Why haven't you or other lawmakers been able to put some regulation into place? Is it their political power?

Sen. CHRISTOPHER DODD: Sure. There's no question about it. I mean, every time we've tried to offer legislation— this industry's become very, very powerful, and it's very successful in defeating every legislative attempt that's been made over the last several years to inject some responsibility on the part of this credit card industry.

LOWELL BERGMAN: Your critics say that you block every attempt to pass industry reform or consumer protection legislation. You've blocked minimum monthly payment legislation, interest cap rates, and a ban on marketing to college students.

EDWARD YINGLING: We've done our best to block bad bills. Those are bad bills. And we'll continue to do our best to block them.

LOWELL BERGMAN: Bad for?

EDWARD YINGLING: Bad for consumers.

Sen. CHRISTOPHER DODD: I want to promise you something today. You know, keep on defeating me and keep on defeating ideas like this, and you'll look back and wish we had passed this legislation because, I'll tell you, Congress will come along, and they'll take steps far more egregious, in their view, than anything I'm suggesting. I'm just suggesting disclosure, just let people know what the deal is.

Prof. ELIZABETH WARREN: I think there's a time when the American consumer is going to hit the tipping point on this issue, and it's no longer going to be all right for credit card companies, once they're in financial trouble, to change the interest rates, to load them on with fees and penalties, to just decide that the terms of the contract they originally signed are no longer the terms of the contract. I think that day is coming.

NARRATOR: Even an industry insider like Duncan MacDonald, who worked at Citibank for nearly 30 years, is deeply concerned.

DUNCAN MacDONALD, Fmr. Citibank General Counsel: I know enough about the industry and the lawyers in the industry and— there have to be people sitting there saying, "We've got to find a way to deal with this." Have we reached that point? I don't know. But my guess is there's a debate going on. And I hope there's a debate going on. What a tragedy it would be if there isn't.

LOWELL BERGMAN: The tragedy would be what?

DUNCAN MacDONALD: The status quo gets worse. The status quo is bad, and then it gets worse.

LOWELL BERGMAN: Profits keep increasing-

DUNCAN MacDONALD: So 25 percent bad rates become 30 percent bad rates, and late fees become $50 and $60, and so on.

NARRATOR: Back in South Dakota, the man who helped the industry take off in the 1980s has mixed feelings about what he helped create.

LOWELL BERGMAN: Do you ever reflect on the fact that this great success, which has been a great benefit to your state, at the same time has helped create a way of borrowing money, spending money, that may have gotten out of control?

BILL JANKLOW, Fmr. Governor, South Dakota: I think the answer to that is yes. I mean, it's— we've become a plastic society. We've become a plastic society. A lot of times, you want to give people cash, they look at you. "Cash? Cash?"

LOWELL BERGMAN: You were instrumental in making this happen, in many ways.

BILL JANKLOW: I didn't think of any of this when it happened. And I'm still glad, what— I still like what we did, and I still think it was a huge opportunity for my state. Now, if we're talking about the industry and 18, 19, 20-plus percent interest, do I think that's a healthy thing for human beings? The answer is no. I don't think that's healthy at all.

SECRET HISTORY OF THE CREDIT CARD

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ANNOUNCER: This report continues on FRONTLINE's Web site, where you can explore eight things a credit card user should know, special reports on credit cards and personal responsibility, what's behind that deluge of credit card offers in your mailbox and how your own personal credit history is compiled and reported, plus advice on how to find out your own credit worthiness score and how to read your credit card agreement. Then watch the program again on line and then join in our discussion about credit cards at pbs.organization.

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ARTHUR AGATSTON, M.D., Author, The South Beach Diet: Fat doesn't necessarily make us fat.

JAMES J. KENNEY, Pritikin Longevity Center: What's the point of looking thin in a casket?

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