Once the privileged possession of the credit-worthy and the gamefully employed, charge cards now jut out of the wallets of unemployed college students, Social Security-dependent elderly persons and almost everybody in between. No fewer than 158 million Americans now walk around with 1.5 billion credit cards.
These shiny pieces of embossed plastic have become the currency of our culture, helping most of us acquire things we might not otherwise be able to afford, masking our financial woes and sinking us further and further into an enveloping pit of debt.
That's the view of Robert Manning, a senior fellow of the Institute for Higher Education Governance and Law at the University of Houston Law Center and author of the book Credit Card Nation: The Consequences of America's Addiction to Credit (Basic Books, 2000).
If the title seems to be an exaggeration, consider some real numbers: U.S. consumer debt is now at an astonishing $6.5 trillion, surpassing the federal debt of $5.8 trillion, which itself tops the nation's total corporate debt at $4.3 trillion. It's a "triangle of debt" that Manning sees as threatening the very future and economic security of the nation. To make matters worse, the situation is compounded by a negative national savings rate and an erosion of real wages and job security.
Manning has harsh words for the strategic marketing of the credit-card industry, but his strongest outrage is reserved for the largely unregulated predatory lending practices that have been unleashed on low-income communities across the nation.
In a recent interview, Manning addressed his concerns.
Orlando Weekly: Why did you write Credit Card Nation?
Robert Manning: The industry is out of control, and I was hoping that this book would provide some guidance on why `people` should be angry and why they should be afraid. The `industry` has been pretty successful in making sure people don't see the larger picture. `They present` the whole moral underpinning of the dramatic increase in consumer credit as an individual decision; if you play, you pay. In other words, if you don't want to pay 24 percent interest, you don't have to.
You explain that the transformation of America's Puritan-influenced ethos of thrift and savings toward an attitude embracing the regular use of credit was one of the most important "cultural revolutions" of the postwar era. What contributed to this transformation?
Number one was the sustained high rate of inflation in the late 1970s. ... Being in debt to pay off your washing machine or your car was financially feasible. At the same time, this is when the banks finally got deregulation, and they were not prepared for it. That's when they got clobbered by their Third World loans and their bad real-estate investments. Then the recession of 1981-82 hit `during the Reagan's era`. It was like a purging.
That's when banks realized that retail `financial` services would work, although in the past they had been looked down upon ... That's where the confluence really hit. Low wages, high inflation, banks desperate for new markets and people willing to pay unprecedented high interest rates for credit cards. Banks shifted their resources into marketing, going after displaced middle and working-class people. People losing their jobs ... were specifically targeted for credit cards, where before they would not have been approved. Banks transformed their underwriting criteria: Instead of only approving customers that would repay their loans, banks saw that their prime market was customers that cannot repay their loans.
When did the aggressive credit-card marketing to college students really start?
The late 1980s. That's the first time the industry allowed people to get credit without ever having a job. Banks are having a profound influence on this generation's attitude toward debt. ... Attitudes are shaped prior to parents being able to teach what is good `debt` and what is bad debt. Even during the slight dip in bankruptcy rates over the last two years, people 25 and under showed a sharp increase in bankruptcy. Using the term "graduating into debt" is now "graduating into bankruptcy." There are people just a couple of years out of college who can't pay their bills because of credit-card debt.
You've make the point that credit-using lower and middle classes are essentially subsidizing the "free credit" of more affluent groups. How does that work?
The bottom line is that there's no real reason why people who pay off their credit cards at the end of the month should get zero percent interest. The reality is that if someone pays off their debt at the end of the month, they forget that the cost of borrowing that money -- from the credit card company's perspective -- could be anywhere from 4 to 7 percent. ... That means the people who don't pay `off their credit cards` have to pay triple `in interest rates`. ... People who get a free ride are those who need it the least, and people who have to pay exorbitant rates are those who need it the most. ... How are you going to bash a single mother who just lost her job and is trying to pay for her kid's medical expenses and pay off her credit card bills, and say she deserves to pay 24 percent interest? The industry knows that those rates are not defensible. But they're so lucrative ...
Why would people subject themselves to these kinds of interest rates instead of, for instance, opening a bank account and then obtaining bank loans?
Banks started consolidating and ignoring the Community Reinvestment Act of 1977, which basically said that if a bank takes your money as a depositor, it has an obligation to loan some of the money back to the community. With bank mergers and consolidation, it's hard to figure out how a bank headquartered in Charlotte assumes its responsibility in Central Florida.
When banks left minority urban communities in the late '70s and '80s, white middle-class people really didn't care. But now that you have these conglomerate bank/financial services like Citibank, they're going to start abandoning lower-middle class neighborhoods. It's just a matter of time until the Citibank branch gets pulled out and gets replaced with a predatory lender that charges usurious rates for all its loans.