Make credit cards work for you

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1:10Jonquilyn Hill:Americans are in serious debt. Together, we owe nearly$1.3 trillion in credit card debt alone. and our average balance, around$6 ,500 each. Owing that much can get really scary and overwhelming. I know firsthand that you can make your way out of it, but it can be really hard. Spent about$15 ,000 on furniture when I moved into a new place and I'm still paying that off. I didn't know what a credit score was. I didn't know what my credit report was. I had no idea what it would affect in the future and that credit card ended up in collection. I ended up having around$24 ,000 in credit card debt within two years of being in grad school.

1:57And it has ruined my life. I am now donating my eggs to be able to pay off that debt.

2:05Jonquilyn Hill:I'm John Glenn Hill. It's Explain It To Me from Vox. And this week, how did we get in so much debt? And is there a way to work the cards instead of the cards working us? For a lot of people, getting your first credit card is a rite of passage into real adulthood. When Angel Sevilla was 18, he walked into the credit union where he had an account and asked about getting a card. And they essentially just handed me one. It took no time at all. The woman is really friendly, and she brings me these forms, and I sign away my life and not knowing what I'm signing. And it really only took about, I think, 15 minutes.

2:46And I walked out with a credit card and I felt empowered. I was like, wow, that was easy. Being an adult is great.

2:51Jonquilyn Hill:Do you remember what your credit limit was, what it was for your first card? The first card was$1 ,500. It felt like I could put all of the little expenses on there. All of the$2 and$3, you know, McDonald runs or coffee shop runs. Swipe. Everything that adds up really quickly that you don't realize, I was like, oh, you can easily just throw that on the credit card and I'll pay it next month. Woohoo, swipe. I was working at a coffee shop at the time, I think. And I mean, I was making, I think, eight bucks an hour. I later got a raise for 10 bucks an hour. And this was 2005. My rent was$450. So let's stop and marvel at that for a second.

3:33So I was doing fine for a single person, but I wasn't bringing any type of extra income in. And I definitely hadn't learned how to save yet either. So I'd buy myself lunch every day. Swipe. And I'd treat my friend to coffee. Like, no, I've got this one. Swipe. Swipe. Later on in the year, when Christmas time came around, I was like, oh, I've got Christmas gifts for everybody. Swipe. Swipe. Swipe. Stuff like that, where I thought I was just being this really great, generous person. And I was, but I was just digging myself into a hole. Woohoo. Swipe. I was getting bills, and I'm paying the bills, minimum balance, thinking that I'm going to be able to make a fatter payment later on down the line.

4:14And some weeks I'd have overtime and I'd have a little extra. But it was slowly, slowly creeping up higher and higher above my head.

4:22Jonquilyn Hill:When were you like, wait, this isn't just a thing that I can do? So I was reaching the higher end of my credit limit, and I needed more because I wasn't able to pay it off. And I had luckily seen a newscast where they were talking about credit cards, and they're like, you can easily call them and ask for more. So I did that, and they gave me more. Yeah, how deep did you get into that? So about$3 ,500, something like that, which at this time, I'm like 20 years old. And that's an unattainable mountain that I can't summit. I was compartmentalizing the feeling of being overwhelmed by my debt and just shoving it away.

5:12And I started college at the time. So for those four years, I just didn't even think about it. because now I've signed up for all these student loans. So I've got an additional load of debt. I'm like, you know what? Just put it all in the back of your mind. Someday you'll be a millionaire and you'll pay it all off. I get a wake-up call when I try to apply for an apartment and I am denied, which was super confusing. I was like, what happened? What's wrong? And I was told that the reason was because my credit score was too low. I'll be transparent. It was 490. Ooh, okay. At this point, I'm like, oh my God, if they're denying me for this apartment, they're going to deny me at the next one that I apply for.

5:51And so I ended up having to move in with a boyfriend at the time who I had not been with that long. So I got put in the situation that I didn't really want to be in because I needed a place to live.

6:07I'm working at a restaurant and there's one of my coworkers who's a real estate agent. and I see him just slinging all these homes. And I'm like, well, I want a home someday. And now knowing that my credit is bad enough where I can't even get an apartment, I'm like, how do I repair this situation? He actually put me in contact with a loan officer who was great. And she sat me down, she printed out my credit report, and she used a highlighter line by line. I'm just like, what are these? Why are these here? Can you pay some of these off? And it will help increase your score. And there's a bunch of like$15 charges from like the leftover that my insurance didn't cover for therapy sessions for two years.

6:51Oh, wow. They were mailing the wrong address. She's like, can you pay these off? So I start with those. I start with an old Verizon bill that had gone to collections because the account had closed and I didn't pay it off. So that's kind of how I began knocking things off and chipping things off of the list. I was also advised to open a secure card, which is the type of credit card where you put forward your own money into an account that pulls up on your credit report as if it was the bank's money. And it looks like you're being given a loan, a credit card, but it's your own cash. And it helps build your credit.

7:25So I kept that secure card for a few years, maybe like two years. And after that time, I think I was up to the 560s. So we're making progress.

7:35Jonquilyn Hill:Yeah. And I know when you're paying off debt, a lot of it comes down to sacrifice. Are there changes that you made in your spending habits or you're like, okay, I can't do this thing anymore? Well, I learned that all of the little expenses, the$5 and$10 and$15 expenses add up very quickly. So those kind kind of took a cut back. Not as many McDonald's runs, not as many lunches, bought while at work, maybe pack my own lunch and take it to work. And then less Christmas gifts for everyone. I have a huge family. JQ, I have 12 siblings. Woo! Yeah, you're making some cards. We're going to make some cards this year.

8:13Yes, handmade gifts. I wasn't buying new clothing. I wore the same clothing for like six years. And my friends dubbed me having the worst style of the entire group. But I needed to cut back on these things so that I could have money to start making payments toward all of the items that were needing attention.

8:34Jonquilyn Hill:How's your financial situation now? Yeah, it's way better now. I was able to qualify for my house. I had a credit score of 698 when we closed, which was in April of 2020. Oh, that's awesome. Yep. And since then, I think the highest it's been, you know, it fluctuates, but the highest it's been has been like 760. Okay, that's good. That's like you went from, wow, you turned it around. Started from the bottom, now we're here. Yes. Oh, my gosh. Do you still use credit cards or have you sworn them off? I have three credit cards currently. I really only ever use one of them. And I keep that balance low.

9:19Jonquilyn Hill:How do you feel about the idea of giving 18-year-olds credit cards? If you're lucky enough to have parents that will set you up for success and give you that knowledge so that you know what to do when you get it, that's great. But maybe the people handing out the credit cards should find out if you have that knowledge first before just giving you free reign to dig yourself a hole that's going to affect you in the future.

9:46Jonquilyn Hill:So if so many of us find ourselves in this hole, why is the system set up like this? That's next.

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12:24Jonquilyn Hill:I'm JQ. This is Explain It To Me. and we're talking credit card debt. And so is President Donald Trump. I'm asking Congress to cap credit card interest rates at 10 % for one year. And it turns out the cap is one of the few things Trump, Bernie Sanders, and Josh Hawley can all agree on. You know who's not into it? Banks. So how did credit card interest rates end up being so high in the first place? That's a question for Sean Venata. I teach financial history at the University of Glasgow, and I'm the author of a book called Plastic Capitalism, which is a history of the credit card industry in the United States.

13:09Where does that story start? So it really starts in department stores. So you can think about big city department stores, something like Macy's in downtown New York. And it really starts at the turn of the 20th century. So these are huge kind of palaces of consumption. They're in part marketing themselves on the availability of credit. Why pay cash? This popular store affords you an opportunity to make your selection of its immense stock of wearing apparel at any time you wish and to take advantage of our liberal credit system, paying the account by the week or month. Ad for the National Outfitting Company, 1910.

13:49You initially get something called like a credit token. they eventually are cards that have your name, your account number, your address embossed on them. And this connects with a kind of mechanical billing system that then creates your bill that goes to your house. Department stores after World War II begin to expand outside of the central cities. They begin to compete with small local merchants. The modern department store with a great variety of merchandise from all over the world. One of a million bargains at Alberts during their anniversary sale. And so what begins to happen in the 1950s and then the 1960s is banks get into the credit card market.

14:29And they do so because they're making loans, they're dealing with businesses, and in this case, small retailers, who feel the competition from the department stores that can offer credit. And what the banks do is they go around to the small stores and say, listen, we can pull you all together into a centralized credit plan, and then you'll be able to offer credit that competes with department stores. The Bank of AmeriCard will soon be coming to Southern Ohio as another service of the Citizens National Bank of Ironton. At the same time, there's the development of what are called travel and entertainment cards.

15:01So you have business executives who need to wine and dine clients who are traveling all the time. For them, it's cards like Diner's Club and American Express. Wherever business takes you, Diner's Club can help. American Express. It's the only credit card you really need for travel and entertainment. Which are really built on enabling you to more easily manage your expense account, to entertain clients, to impress people that you have, you know, a gold American Express card. Swipe. In the 1950s and 1960s, banks are increasingly looking to consumers as a new source of making loans, so making home mortgages or auto loans.

15:41But if you're the biggest bank in Chicago and all of the affluent customers are moving out to the suburbs, you have a problem. Banks under state laws in some states couldn't build more than one branch. So all the biggest banks are built in the city center where the businesses are. And so banks like Continental Illinois, like the First National Bank of Chicago, all begin to see credit cards as a way to attract these affluent customers to get them to continue to do their banking with central city banks. And so it's really about kind of like suburbanization. It's about white flight out of cities that is part of what's driving banks into the credit card market in the 1960s.

16:24Jonquilyn Hill:You know, at the moment when credit cards came out, were there any rules around the types of interests that could be charged? In the 1960s, when a lot of banks really get into the market, one of the reasons why banks find credit cards attractive is because it's a new technology, it's not regulated. Banks were charging very high rates on credit cards. Consumers would tend to pay between one and a half and two percent a month. And, you know, people are not very good at math. So that just that seems cheap, right? Two percent. That's great. What happened is in 1968, Congress enacted something called the Truth in Lending Act, which says you have to present interest rates as a simple annual rate.

17:06It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. And so all of a sudden, then people are seeing, oh, I'm being charged 18 percent or 24 percent. And that is a huge shock. And so what happens is the states tend to limit rates to between 15 and 18 percent. The rules in each state are kind of different and kind of complicated. And so as banks are developing their sort of credit card networks, they begin to mail cards across state lines.

17:46And there's a big fight centered around a bank called the First National Bank of Omaha, which is still a going bank in Omaha, Nebraska. but the First National Bank of Omaha begins mailing cards into Iowa and they're mailing cards into Minnesota. And the interest rates in Nebraska are not especially high, but they're a little bit higher than what's allowed in Iowa and what's allowed in Minnesota. But from, you know, a consumer's perspective, if you live in Iowa and you only ever use your card in Iowa, why would you expect that Nebraska interest rates are what would apply to you. And the state attorney generals and individual consumers begin to sue the First National Bank of Omaha saying that they're charging too much.

18:30And so this kind of creates a whole slew of legal cases that end up in the Supreme Court. Oh, yay. Oh, yay. Oh, yay. First of Omaha claims our main office is in Omaha, Nebraska. We can charge the Nebraska rate and go anywhere in the country and charge that rate because we're located in Nebraska. The Supreme Court says, well, you know, the law is pretty clear. The Omaha Bank, for the purposes of this statute, was located in Nebraska, therefore authorized to charge the Nebraska 18 percent rate. The bank is in Nebraska, so the transactions are in Nebraska, and so Nebraska law applies.

19:10Jonquilyn Hill:So the Supreme Court rules that it's where a bank is based, that all of this is factored on, not where the customer is? That's right. A bank can then locate itself in whichever state has the most favorable regulations and then solicit cardholders across the country. South Dakota didn't have any restrictions on credit card interest rates. Citibank relocates to South Dakota and then is able to charge whatever interest rate they want. Delaware enacts a law that enables the same thing, So most big banks actually move their credit card operations to Delaware. And that in turn leads to things that we recognize where it's really hard to get a card with a decent interest rate.

19:52And banks have the freedom to change those rates as they will.

19:56Jonquilyn Hill:I'm curious, when I don't pay my credit card in full and I got to pay that interest, where does that interest go? What's it spent on? It goes to the banks. So the first thing is that credit card lending is consistently one of the highest profit areas for banks. And you see that banks that specialize in credit cards make much more money than banks that don't. So part of it is just like profits to stockholders. And then there's all sorts of things like credit card points, which help, you know, the most affluent people just get further rewards, right, for spending money they were already going to spend.

20:34A lot of it goes to advertising. So a lot of the interest that you're paying as a consumer just goes back into a system that advertises to you again the credit cards that you're using to go into debt, right? So there's this kind of circuitry to it where you are paying for advertising to encourage you to do the thing that you probably don't want to do. But the banks would say, if people who have lower credit scores, if we're going to grant them credit, they're riskier. And for the most people to have access to credit, we need to charge them higher rates. What you see if you look at U.S. history over the last 70, 80 years is the economy runs on household borrowing.

21:18right? Mortgages, car loans, credit cards, now, buy now, pay later. You see that household debt goes up and up and up and up. You add student loans into that mix. And people feel, you know, they feel that precarity. They feel that risk. They feel the weight of all of that debt. But it's the most affluent, the people who have access to the airport lounges, who have the high points cards, who get all the benefits, and the rest of us pay all the costs.

21:53Jonquilyn Hill:There are some benefits the rest of us can access if we know how to play the game. That's next.