The Secret History of Credit Cards (Part 1 of 2)

I remember watching a very informative show on PBS titled “Secret History of the Credit Card” last year. PBS replayed this show again recently and I used my so beloved TiVo to recorded. This report explained the history as follows:

The big “Monster,” credit card industry, got free from many restrictions staring a quarter of a century ago in Sioux Falls, South Dakota. Times were hard in South Dakota, there was a nation wide recession, and banks residing in this state were issuing very few loans of any kind. The price of money (interest rates) banks had to pay to get money and make loans were much higher than the rates they were allowed to offer their clients, a clear way to lose money and go broke. There were Usury Laws restricting the interest rates banks could charge their customers so South Dakota decided to remove their Usuary Laws (1979) to stimulate the economy in this state.

Citibank based in New York looked into South Dakota’s new Usury Laws and saw profits. They brought credit card operations to South Dakota and thousands of jobs; which helped the state tremendously but at the same time gave birth to the “monster” credit card companies are now.

An obscure Supreme Court decision called the “Marquette bank decision” basically allowed banks based in any state to export their business to any other state. A bank based in a poor or no Usury Law state like South Dakota could charge any interest rate to anyone across the country with very high cap limits. Soon other states followed like Delaware and were allowed to charge higher interest rates to riskier customers. This also allowed for these riskier customers to switch from small banks that were charging them 30% interest rates for their liability to credit card companies offering them 19% and an annual fee. Deregulation of interest rates enabled more people to get credit and made the credit card industry very profitable.

**On the next post which continues with this story you will see the PBS video report**