Handout on Consumerism and Credit : In 1898, Most Americans bought everything with cash. There was no such thing as consumer credit, no credit card, no interest rates. Credit at banks for things like farm equipment, car loans became popular in the 1920s. In the 1920s Radio also became popular. Broadcasting was free to the listener and radio stations made their money by selling advertising time to “sponsors.” With the growth of broadcasting into TV in the 1950s and beyond, more and more advertising was presented to the consumer. Messages to buy were embedded in children’s programming during the baby boom years. With Billions of dollars being spent on advertising every year, the industry started using studies, surveys, rating services to determine how effective certain types of ads were, and how they could be made more persuasive. Manipulating the public became an art and a science. There was even some use of “Subliminal Advertising.” Credit and Credit Cards The concept of using a card for purchases was described in 1887 by Edward Bellamy in the utopian novel Looking Backward. But it was more of a citizen’s dividend card. The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1940s, in the United States, specifically to sell gasoline to car owners. In 1938 several companies started to accept each others cards. In 1934, American Airlines introduced the Air Transport Air Travel Card: passengers could buy now, and pay later for a ticket against their credit and receive a fifteen percent discount at any of the accepting airlines. By the 1940s, all of the major domestic airlines offered Air Travel Cards that could be used on 17 different airlines. By 1941 about half of the airlines revenues came through the Air Travel Card agreement. The airlines had also started offering installment plans to lure new travelers into the air. Of course most air travel then was for business or by the wealthy. The concept of customers paying different merchants using the same card was expanded in 1950 by Diners Club, which was the first general purpose charge card and required the entire bill to be paid with each statement. American Express followed this pattern…pay all at the end of the month. However, until 1958, no one had been able to create a working revolving credit financial instrument issued by a third-party bank that was generally accepted by a large number of merchants (as opposed to merchant-issued revolving cards accepted by only a few merchants). In September 1958, BankAmericard became the first successful recognizably modern credit card (although it underwent a troubled gestation during which its creator resigned), and with its overseas affiliates, eventually evolved into the Visa system. In 1966, the ancestor of MasterCard was born when a group of banks established Master Charge to compete with BankAmericard Early credit cards in the U.S.were mass-produced and mass mailed unsolicited to bank customers who were thought to be good credit risks. They were also mailed off to unemployables, drunks, narcotics addicts and to compulsive debtors, a process President Johnsons Special Assistant Betty Furness found very like giving sugar to diabetics. These mass mailings were known as drops in banking terminology, and were outlawed in 1970 due to the financial chaos they caused, but not before 100 million credit cards had been dropped into the U.S. population. After 1970, only credit card applications could be sent unsolicited in mass mailings. In 1966 Barclaycard in the UK launched the first credit card outside of the U.S. Although credit cards reached very high adoption levels in the US, Canada and the UK in the mid twentieth century, many cultures were more cash-oriented, or developed alternative forms of cash-less payments, such Germany, France, Switzerland, and others. In these places, adoption of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the US, Canada, or UK. Interest charges Some experts say the profitability of credit cards really began twenty-five years ago, when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower. Deregulation, coupled with a revolution in technology that enables the almost real-time tracking of personal financial information and the emergence of nationwide banking, has facilitated the widening availability of credit cards across the economic spectrum. But for some, the cost of credit is often far greater than it appears. Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. High interest and bankruptcy Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. Forst Premier Bank once offered a credit card with a 79.9% interest rate, however they discontinued this card February 2011 because of persistent defaults Some consumers, like actor and author Ben Stein, use plastic purely for convenience. While it would appear that Stein -- who says he charges a small fortune every month on his credit cards -- is the ideal customer, in reality, he is what some in the industry call a deadbeat. Thats because he pays his balance in full every month. The industrys most profitable customers, the ones being sought by creative marketing tactics, are the revolvers: the estimated 115 million Americans who carry monthly credit card debt. revolverPeope who carry over credit card debt are the sweet spot of the banking industry. This sweet spot continues to grow as the average credit card debt among American households has more than doubled over the past decade. Today, the average family owes roughly $8,000 on their credit cards. This debt has helped generate record profits for the credit card industry -- last year, more than $30 billion before taxes. Elizabeth Warren has said the credit card companies are misleading consumers and making up their own rules. 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, Warren and other critics say that a growing share of the industrys revenues come from what they call deceptive tactics, such as default terms spelled out in the fine print of cardholder agreements -- the terms and conditions of which can be changed at any time for any reason with 15 days notice. Penalty fees and rates are sometimes triggered by just a single lapse -- a payment that arrives a couple of days or even hours late, a charge that exceeds the credit line by a few dollars, or a loan from another creditor which renders the cardholder overextended as defined by the nations three all-powerful credit bureaus. This flurry of unexpected fees and rate hikes come just when consumers can least afford them.
Posted on: Fri, 15 Nov 2013 14:25:55 +0000
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