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Week of 1.2.2009

Elizabeth Warren on Credit Card
'Tricks and Traps'

Elizabeth Warren, an expert on debt and the middle class talks to NOW's David Brancaccio about the problems Americans are facing as a result of the "tricks and traps" she says are buried in credit card agreements. Warren is a Harvard Law professor and chairs the Congressional panel charged with monitoring the Treasury's spending of the money used to bail out the U.S. financial system.

The following is an extended, edited version of our broadcast interview.

David Brancaccio (DB): Some people think that default on credit cards could be the next big hurricane that hits. What's your view on that?

Elizabeth Warren (EW): I think this is a real danger area ... We have about 50 million American families who can't pay off their credit cards. They're rolling them from one month to the next and that's a bad sign. This is short term, high-interest debt with a lot of tricks and traps in those contracts. We have 50 million families who are walking around carrying sticks of dynamite and the fuse is lit ... This is a bad, bad storm brewing.

DB: What do you regard as tricks and traps?

"I teach contract law at Harvard Law School and I can't understand my credit card contract."
EW: Let me put it this way. In 1980, according to the Wall Street Journal, the typical credit card contract was about a page and a half long. It told you about the interest rate, about being late and that was pretty much it. Today, the typical credit card contract according to the Wall Street Journal is about 31 pages long. So, tricks and traps? It's that other 29 and a half pages.

DB: I have a 30-page credit card contract and I've never quite gotten through it.

EW: I teach contract law at Harvard Law School and I can't understand my credit card contract. I just can't. It's not designed to be read. Read the Government Accountability Office (GAO) study on this. The GAO looked at credit cards and they said: "Nobody can understand this stuff." Are you kidding me? And understand when you've got terms that say: "In effect, we'll charge anything we want any time we want for any reason or no reason at all," what's the point of reading it?

DB: Many people think they'll be okay if they pay their credit card bill on time and meet the monthly minimum payment. They didn't realize that the credit card companies could shift the rules, but they're wrong weren't they?

EW: They're really wrong. You would think that if you upheld your end of the contract that the contract was still binding. But in the case of credit cards, you would be wrong, because the credit card companies bury back in that language the right to change the terms of your credit card including the interest rate at any time for any reason and for no reason at all. So if you're kind of chugging along at the 7.99 percent interest rate you carefully shopped around for and you meet all the terms, your credit card company can decide it's time for 29.9 percent, and that's it. It's 29.9 percent. Pay up or it's over for you.

DB: But the credit card companies would probably say that they increased interest rates because the customer's so-called risk profile changed?

EW: That is what the credit card companies will say because I think it's probably pretty unpopular to say: "We did it because we could. We did it because we put it in the contract and we have the power and what are you going to do about it?" The notion that these credit card companies are pricing for risk is a public relations sham ... What the credit card companies are doing is maximizing their profits. The way they figured out to maximize their profits—thanks to the laws we have right now—is to draw in as many people as they can.

Every credit card for a credit card company is like a lottery ticket. They're just waiting to see who's going to maybe stumble a little. Maybe get into trouble on a car loan. Maybe nothing at all except they just look vulnerable. They're just in the right zip code. They're just the right profile for people who won't be able to run any place else. And those are the ones you slam. Those are the ones you hit with the 29 percent interest rate, the 35 percent interest rate, the new fees. And then, because of course if you can't pay it, then you get hit with a fee for not paying or for paying late, for going over limit. And the game is afoot. With any luck at all from the credit card company's perspective, these people will become little annuities that will just keep generating profits for the credit card companies for months, for years, maybe forever.

DW: So you're saying credit card companies want their customers to be on the edge and in fact struggling?

"Every credit card for a credit card company is like a lottery ticket."
EW: That's exactly the sweet spot for the credit card companies. It's the person who can just barely make it, who's lost a job, who's having trouble finding another job, diligently tries to pay, and struggles to pay. Boy, that's the one you want. And that's the one you want hit with 29 percent interest ... Those are staggering profitable accounts. I mean, that's the big bucks. That's where it happens.

DB: So what's the solution? Is it time for a change in credit card laws?

EW: It's past time for a change. We permit credit products to pass every day in commerce in America that if they were toasters, we would shut those folks down. You know, you can't give somebody a toaster that's going to explode ... We have a Consumer Product Safety Commission in the U.S. so every physical thing you touch, everything you wear, everything you smell is covered by some kind of basic safety regulation. But, you can buy credit cards that will take a family that's making it month by month—they're using it the way the card is supposed to be used. Just like plugging that toaster in and dropping the bread in it. Just like it's supposed to be used. And that card can explode on them and turn their financial lives upside down. We need the same, basic safety standards for credit products that we have for physical products. We cannot encourage companies to develop business plans that are modeled on selling people exploding credit cards. It just doesn't make any sense.

DB: I just read a Reuters's story that suggested that in the next year and a half or so, $2 trillion worth of credit card lines could be pulled back. Is that good for the American people? Or is this a problem for the American people?

"This could be the knockout blow to the middle class."
EW: This is such a mixed area. What would be good for the American people is that they reduce their credit outstanding. But, that they reduce it because they have adequate income relative to their expenses. That they can pay off those credit card bills, and move to a cash accounting. What would be good is if they didn't have to run doctor bills on their credit cards, pay for periods of unemployment. So, would I like to see credit shrink? You bet. That's an additional expense and an additional risk that American families simply cannot bear. But, the scary part is that it's the decision of the credit card companies—who's going to lose it and the timing for which they're going to lose it.

DB: And it would be one thing if what's on all our credit card bills is extravagant meals out or fancy vacations. But, I'll tell you what, that is not what I have been hearing when I talk to people who are having trouble with their credit cards.

EW: For much of America, the credit card is now the health insurance policy, the unemployment insurance, the way to deal with a child who's off in college and you haven't got enough to cover the expenses. Shoot, it's the transmission in the car and the dental bill that was unexpected. The credit card is the way that families have been dealing with every emergency, every bump in the road, with every reality that no matter how hard they work, those flat incomes that we've had for 30 years now combined with rising core expenses, mortgage, health insurance, childcare, transportation—credit cards have been the way that families have tried to bridge that gap. It's dangerous. It's expensive. But, they haven't had any alternative.

DB: And in an environment where that's changing very, very quickly, this could be catastrophic to many American families?

EW: This could be the next one that really delivers the tough blow to the middle class. The one from which I don't know if they recover. This could be the knockout blow to the middleclass.

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