Modern credit cards and personal debt the result of deregulation of state usury laws
Posted by silentarchimedes on October 9, 2008
Time line of the history of credit cards
1920s – The Great Depression introduces the credit card model to the general public.
1950s – Diners Club evolves into the first credit card company.
1978 – Marquette National Bank of Minneapolis vs. First of Omaha Service Corp. – Supreme Court rules that companies can export their state interest rates on loans to customers in other states. In essence, deregulating long usury laws that regulated the ceiling on interest rates.
Early 1980s – Sioux Falls and South Dakota remove long usury laws regulating interest rates on all types of loans.
Early 1980s – Citibank moves credit card headquarters in New York City to Sioux Falls because NYC had a 12% limit on loan interest rates. Sioux Falls soon becomes the credit card capital of the West.
Early 1980s – Delaware copies South Dakota and relaxes many state usury laws. Wilmington soon becomes the credit card capital of the East.
The rest is history. With further deregulation approved by the Reagan administration and their belief that debt is good, the general public began accepting credit cards as a major alternative to already earned money. Competition increased and customers were issued credit cards with minimal background credit checks. Banks began lowering rates to risky customers because they can cover their defaults and risks by spreading the costs to their new base of stable customers. This is similar to how insurance companies work. Credit bureaus began collecting tons of data on consumers and banks would analyze them to target specific consumers. Credit cards became the most profitable section of the banking industry with $30 billion in profits in 2003.
Personal debts skyrocketed. Other forms of credit cards were freely issued. Stores began issuing them. To stay competitive, banks began offering cash back and rewards programs. In essence, the entire profit of the credit card industry was based on taking money from the future livelihoods of consumers. For the first time ever, the savings rate of Americans became negative.
Before credit cards, Americans were known to be good savers. Since the deregulation of interest rates, Americans have less money than ever. They have mortgaged their futures to support their current exorbitant living standards.
Not all regulation is bad, and not all regulation is good. It has to be done carefully and with plenty of oversight. There has been or is regulation everywhere in our lives. When we were kids, our parents and teachers regulated what we ate, how much money we had, and how to spend our time. When we are at work, companies and labor laws regulate our actions. When we are in public places, there are laws and regulations. It has been shown that people as an entity are not responsible and disciplined enough to regulate all their individual needs. When most of us don’t know how credit cards work or how mortgages work or how our health care works, is this really the time to deregulate more? As our daily lives become more complicated, the last thing that people want to worry about is monitoring their 401k everyday, deciding which health plan to buy and wondering which mortgage to get. Some things we want the government to do for us, and to look out for us, and to make things easier in our lives. We don’t always want to make decisions and tough choices. Look at the obesity rate in this country. You think most people can take care of themselves? There needs to be a balance of both. There has been too much deregulation the past 30+ years and it has led to many of the major problems in this country right now.
Don’t think deregulation is always in the interest of consumers either. Yes, there is usually more competition which leads to lower prices, but you have to remember, that these super-humans…err.. corporations still need to make a profit. At the end of the day, they will find a way to pass that cost onto you, either by cutting corners (airlines), or charging for non-necessities. Have more faith in our government that it can still do the right thing. Bring more faith to the government by voting in people that actually are practical and look out for the interests of middle class America.