Sources: Card Industry Directory 2003 Edition (Thompson Publishers, June 2002) and James J. Daly, "A Little Help From Uncle Sam, Government Intervention Never Looked Better Than It Did in 2001," Credit Card Management, March 2002, pp. 3-7 *Based on 2001 industry averages of 1.7% interchange fee, 4.05% cost of funds, 4.7% combined cost of marketing and operating expenses (as a percentage of managed receivables, and 2001 First USA charge-off rate of 5.5% of managed receivables. Table 7 Highest Paid Card-Industry Executives: 2002 (Compensation includes Salary, Bonus, and Stock Options in millions) Sources: Standard & Poor's ExecuComp cited in Linda Punch, "Fading Pay," Credit Card Management, June 2003, p. 42. Appendix A CREDIT CARD NATION: Historical Anomalies of Post-Industrial America [1] More Profitable to Finance Consumption than to Produce/Sell Commodities such as Circuit City (electronics) and GE Finance Corporations. [2] The Most Desirable Clients of the Financial Services Industry Are Those Unable To Repay Their Loans. Conversely, Customers That Pay-Off Their Credit Card Charges Each Month Are Least Desirable and called 'DEADBEATS.' [3] The lowest Income and most financially Distressed "Revolver" Credit Card Users Subsidize the Most Affluent and Financially Advantaged "Convenience Users" (Moral Divide). [4] Banks Prefer to Reject Loans to Small Businesses, the Primary Source of New Jobs, With the Expectation that They Use High Interest Credit Cards; Today, Credit Cards are the Number One Source of Start-Up Capital for Entrepreneurs. [5] First Credit Card is More Likely to Be Received Before First Full-Time Job For Most College Students. Hence, Most College Students Perceive Credit Cards as an Entitlement Rather Than an Earned Privilege With Financial Responsibilities. [6] Since 1980, the Deregulation of the Banking Industry has Produced High Cost "Financial Products" that Defy Traditional Definitions of Loans ("Cash Advances,' 'Lease Cash') at Interest Rates of Over 700% APR. Credit Card Finance Charges of 19.9% APR are a Bargain in Comparison to these Usurious Interest Rates. [7] More Than One-Half of US Credit Card Debt is Re-Sold as "Securitarized" Bonds (NY, London, Tokyo). This Means Institutional Investors are Purchasing Credit Card Debts to Help Finance Your Future Retirement. [8] A 1997 Marketing Campaign by the US Department of Treasury encouraged the Purchase of “Savings Bonds” Over the Internet With Bank Credit Cards; Credit Card Interest Rates Averaged About 18% versus 4.5% for Bonds. [9] Banks Routinely Reject Credit Card Applications From Senior Citizens While Inundating Their Grandchildren With Offers--Before Their First Job--in College. [10] Over Educated and Under Compensated Recent College Graduates Often Refer to Their Credit Cards as a Form of Social Class Entitlement: "YUPPIE FOOD STAMPS." Appendix B Six Months of Financial Freedom: Can You Afford It? Ann saw the promotional offer in the weekend edition of the Orlando Sentinel newspaper and thought that it sounded almost too good to be true. A Home Depot credit card with a promise of 10% off the first purchase (up to $2000) and zero percent financing and NO PAYMENTS for six months. She called the Home Depot credit approval office-toll free-and received a $1,000 line of instant credit, courtesy of the new "partnership" with Citibank's private issue credit card subsidiary. Ann thought that with the backsliding of the economy, it was a great opportunity to finally replace the 20 year-old carpet in her home. Although Ann's local Home Depot store in suburban Orlando, Florida refused to honor the discount coupon, the final sale price of $1,619 with free padding for wall-to-wall carpeting in her two-bedroom house was too good to passup. After a call to the credit department, which was informed of Ann's pending purchase by a sales agent, her Home Depot credit card limit was raised to a $10,000. Hard to believe considering that her current monthly income of about $1200 was dwarfed by the over $21,000 in outstanding credit card balances on her six other credit cards. Ann was surprised and relieved that the exaggerated income that she listed on the application was not checked (she reported $2500 per month). To Ann, six months without payments seemed like an eternity and interest free, too. She couldn't wait to feel the plush new carpet under her bare feet. When the first bill arrived, she did not realize that the free financing clock started ticking on the date of the sale contract NOT the day of installation. So instead of six months of no payments it was really only five months. When the second bill arrived, Ann did not understand why there was a monthly finance charge of $20.88 and simply reminded herself that it was interest free. Afterall, the Home Depot salesman assured her that there were no finance charges on the purchase. And, everyone was complimenting her on how nice the new carpet looked. It was only after six months had passed that Ann understood the financial realities of the "promotional offer." The accrued interest charges of $125 was now added to the $1,619 sale price at an annual percentage finance rate (APR) of 15.48 percent. With a minimum monthly payment of $25, it was manageable but will require 15 years to pay it off assuming no additional charges. And, the conveniently low minimum payment obscured the total cost of the carpet at the end of the 15 year period--$4,489. Needless to say, no one mentioned that increasing the monthly payment by only $10 would cut the payoff period in half to only 7 1⁄2 years and thus reduce the final cost to "only" $2,811. Or, that lowering the APR by only 3 percentage points (12.48%) would reduce the payoff period to 101⁄2 years and the total cost to $3,124. Ann was interviewed for this article in March 2003 and requested that her last name not be identified. |