The credit card companies have become increasingly sophisticated in their marketing schemes. Since the information boom in the 90’s, credit card companies pay data companies such as Experian, Equifax, and TransUnion large sums of money to create mini-files for potential customers. The profiles consist of spending habits, tendency to pay bills on time, credit history, and address information.
The top companies compete like mad for market share. A perks credit card war is going on in the credit card industry. There are cash rewards, points rewards, travel rewards, supermarket rewards, and drug store rewards. Some go as far as to offer one to design his/her own card or place a family picture on it.
In the decade between 1980 and 1990, the number of credit cards increased 500%, and the average household credit card balance rose from $518 to $2,700. 7 Today, the average American has eight credit cards, and the average household carries a rough balance of credit card debt between $7,500 and $8,000. 1
How did these mountains of debt pile up? A small modification in consumer finance laws changed family economics in an instant. A generation ago, the average family couldn’t borrow that much money. High-limit and all-purpose credit cards didn’t exist for the average person. There were no mortgages for 125% of a home's value. There were no stores for cash advances, pre-payday lenders, or instant money.
Families used to have to go to their local bank, sit down face-to-face with a banker, and provide pay stubs, tax returns, and credit references to prove they were ready and willing to repay the loan. The money of a home would typically require a 20% down payment. If the money was used for any other purpose than a home, one would be required to give the detailed purpose of the money, such as home renovation, a new car, or money for the kids to go to college.
Unlike today, banks were opposed to giving loans to those in financial trouble. The original purpose of states regulating interest rates was to protect the public. They wanted to make sure spending and debt didn’t get out of control. The state was also worried about aggressive lenders and back-alley loan sharks who would cost families their homes. This has happened today, but it was done by a legitimate bank.
To make a comparison of what the Supreme Court ruling did in 1978, we will consider prescription drug laws. Imagine California passed a law that made it legal to produce Vioxx inside the state. The federal government not only approved but also allowed the state to export the drug to other states. California would bear little social consequences from the export but reap 100% of the profits.
Suddenly, the downside of thousands dying from health complications might look pretty insignificant next to all the money being raked in from drug sales. Sure, the drug/law helped some people, but it is killing many others. The drug companies would lose money from those who had died from the drug, but those losses would be worth the incredible profits still being produced. Banks have done the same thing today. They can now lend money to anyone and everyone and still make handsome profits.
1. “Where You Can Go…” PBS Frontline article. November 23, 2004
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