CORPORATE CRIME REPORTER

Harvard Law’s Elizabeth Warren Slaps Around NPR’s Terry Gross
21 Corporate Crime Reporter 14, March 28, 2007

For close to forty minutes on NPR’s Fresh Air show yesterday, Harvard Law Professor Elizabeth Warren ripped into the credit card industry for ripping off consumers.

At the end, host Terry Gross tried to put in a good word for the industry.

“I want to say something in praise of credit card companies,” Gross said. “I've had my number stolen by who knows who but I – you know, a couple of times I've had a lot of charges that I had nothing to do with. And the credit card company cleared it, they cleared it up. They did a commendable job with it, and I didn't have to pay anything extra.”

“You know, I think that's wonderful,” Warren said sarcastically. “I'm delighted for you, but that's federal law. It's not your credit card company that protected you. Once you show that it's not your charge, the credit card company legally can't charge you. Those were federal laws that were passed back in the 1970s that protected you. They were nice to you. They straightened it out. They took it off your bill – because if they hadn't, they would have been in violation of federal law.”

Gross tried again to be nice to the credit card industry.

“And they've called me a few times and said – these charges seem very out of character – and although they were actually mine, I kind of appreciated the call because they might not have been mine, and I don't mind spending a minute on the phone to clear that up but I thought – that’s a way to protect me.”

“You have to understand, it wasn't a way to protect you,” Warren said. “It was a way to protect themselves because if a stranger had been using your card, a thief had been using your card, the credit card company would have been responsible for those charges, not you. They were asking for your help to keep themselves from having to pay that extra money. They weren't kindly trying to help you out. I hate to destroy your illusions, but they were protecting themselves, not you.”

Throughout the interview, Warren was unrelenting in her critique.

She says that the credit card industry makes money three ways.

First, through a merchant discount fee. Every time you make a charge, the merchant gets hit with a fee. That adds up to about $21 billion a year.

Second through interest.

But the third way is that Warren calls “the profit sweet spot” – the exorbitant fees the companies charge when the customer can’t make payments on time.

“Some people are going to slip and stumble, some will lose their jobs, some will get sick, some will just be irresponsible,” Warren said. “But they'll move into a territory where they end up paying over-limit fees or late fees or default rates of interest – and that's where the profits just start racking up, and that's where the credit card companies make their real money.”

Warren said that indecipherable credit card contracts don’t have much meaning because there is a standard line in them that says “‘we have reserved the right to change the terms at any time for any reason’ – in other words, the bottom line is they'll charge you whatever they want to charge you.”

Warren said that the fee portion of credit card revenues have been the fastest growing revenue stream since 2000.

“The old model used to be that you lent out money and got back a little bit from the merchant fee, and then those who paid over time paid interest, and those were the two sources of money for the credit card contracts,” Warren said. “What's happened now, however, is the companies have figured out that by imposing fees, they're more likely to catch good payers – but to get an extra, you know, $49 from you here and $39 from you there and to do that for millions more customers, and yet it won't make you quite mad enough to cancel the card and quit.”

Sometimes these fees are imposed for no reason at all.

“There was a company recently that just evidently hit everyone with $75 fee, and then anyone who called and complained, they just canceled the fee,” Warren said. “So that way, they kept the customers who were the ones who were most alert and crankiest, and they got an extra $75 from all the customers who were either inattentive or timid in dealing with credit card companies.”

Gross interjected that such a thing happened to her.

“I had to contend with this once in the recent past – and I had to complain about it three months in a row before – each month they would agree to do it and each month it would be back again,” Gross told Warren.

“That's part of the problem,” Warren said. “My husband and I talk about this. When one of us hits a problem with our credit card company – we both know what the answer is – call, and they will straighten it out – but it will cost us time.”

“You'll be on the phone, you know, 15, 20 minutes every single time, and it won't get fixed in one call,” Warren said. “And the credit card companies count on this. You know, you really have to remember here – think of it this way. It's you against an entire army of MBAs whose job is to do nothing but figure out how to maximize profits for the credit card companies, how to pick your pocket. So if that means leaving you on hold for at least nine minutes because half the people will just give up and decide they don't need to complain – they'd rather pay the $39 than have to wait any longer on hold – that'll be OK. They'll do it. And then, you know, you put somebody polite on the phone so that when they finally come, ‘Oh, yeah, yeah. We'll fix it.' And they don't fix it the first month so you have to go through the whole process a second time. And, oh, they're very apologetic the second time and really, really sorry the third time. But think, if you multiply that times six million cardholders, that's a lot of people who just give up and pay $39.”

Warren said that the credit card system costs Americans $90 billion a year.

“Thirty-six percent of Americans with credit cards is worried they're not going to be able to make their credit card bills,” Warren said. “Sixty percent of Americans are carrying a balance on their credit cards. Forty percent of Americans missed at least one credit card payment in the last two years. Twenty-three percent is maxed out on at least one credit card. And here's the one that just scares me to death. One in every seven Americans today is dealing with a debt collector because they can't make their payments. This is a world turned upside down. This is not what America looked like in 1980. This is not what America looked like in 1997. But this is what's happened to America in just the last half dozen years.”

Home

Corporate Crime Reporter
1209 National Press Bldg.
Washington, D.C. 20045
202.737.1680