Menu Strike Debt! A Project of Strike Debt

The Debt Resisters’ Operations Manual

Chapter Two

Credit Card and Automobile Debt: On the Road to Nowhere

Workers in the United States continue to be among the most productive in the world, yet median wages have barely increased over the past four decades. We’ve been working longer and harder, trying to keep up with the rising costs of living—housing, health care, education—yet we haven’t actually managed to keep up without plastic. In the early 1980s, U.S. household debt as a share of income was around 60%. By the time of the 2008 financial crisis, that share had grown to exceed 100%, and today it’s hovering around 112%. So despite the fact that productivity has gone up, we have relied more and more on credit as a means of subsistence. This, in turn, intricately weaves people into the complex debt system at the heart of modern capitalism. This process essentially ensures that we will be dependent on Wall Street to provide us with a “lifeline” of credit. These “lifelines” of credit don’t really solve our problems, though. Instead, they only make things worse in the long run.

The credit card industry is notorious for its lack of transparency, which makes credit cards some of the most hazardous and confusing financial tools out there. At their core, they embody the deceptive and bottom line–driven processes that are the engine of mafia capitalism. Many credit cards feature a fluctuating interest rate and a multiplicity of complicated and hidden fees.

Like credit card debt, car debt—money borrowed to purchase an automobile—is a form of consumer debt that enmeshes individuals, perhaps unwittingly, in the debt system. For many who live outside the public transportation infrastructure of a major city, owning a car is a necessity, not a luxury. (How else will they get to their job so they can earn money to pay off their auto loan?) But maintaining a car—buying gas, paying for repairs, paying for parking tickets—is an expensive undertaking. Sometimes, these payments are made with a credit card, thus compounding the consumer’s debt and further entangling them into our predatory financial system.

Today in the United States, credit cards and automobiles are inescapable parts of daily life for many people. Throughout this chapter, we analyze the different ways the credit card and auto loan industries profit off people through duplicitous means. In doing so, we explain the history of the credit card industry, in particular what economic and political conditions allowed for the rise and proliferation of credit, and how credit has affected different communities. For both forms of consumer debt, we introduce strategies for practical alternatives, while hoping to open up avenues that allow for other, more creative individual and collective resistance strategies. We also explore the different ways you—the worker and consumer—can fight back to regain some of your economic independence.

Although fewer people hold credit cards than before the 2008 financial crisis, most still do. Some 50 million households have credit card debt, with about 75% of individuals having at least one credit card. With nearly 383 million open credit card accounts and 700 million credit cards in circulation, it’s fair to say that having a wallet full of plastic has now become one of the defining features of life in the United States—our plastic safety net. In all, credit card debt in the United States stands at about $670 billion. This means the average U.S. household owes nearly $15,000 in credit card debt, which is actually down from 2010. However, the number of indebted households has increased by 3.5%. Basically, more people are in debt now than a few years ago, even if they have less of it.

History in reverse

When credit cards were first introduced in the 1960s, the credit card industry would make its money on interest rates, but this never amounted to much. Universal credit cards such as Visa and MasterCard were offered then as loyalty rewards only to banks’ “best” customers who paid off their monthly balances—that is, affluent White men. The appeal of the cards was convenience and prestige, not a need for credit. Banks lost money on the product, but the idea was to build loyalty in order to do even bigger business down the road. The banks got something in return as well: the wealthiest, most powerful men served as walking advertisements for the cards every time they used one. In contrast, today, cardholders who never carry balances on their cards are known inside the industry as “deadbeats,” or “money-losers.”

A series of legal changes—effectively eliminating usury laws by allowing all lenders to register in South Dakota, where no such laws existed—along with the growth of computer networks that could trace credit ratings, led to an explosion of credit card use in the 1980s. Interest rate deregulation helped transform credit cards from banks’ loss leaders into profit engines. As more people acquired credit cards throughout the ’80s and ’90s, the wealthiest households’ credit cards were subsidized by the least wealthiest households. This is sometimes called “risk pooling,” although typically pooling involves those with more subsidizing those with less; here it’s the reverse. Through the use of so-called “risk-based pricing,” credit card companies actually charge financially distressed households more to use their cards. Card companies claim that interest rate charges are based on “risk,” but there is abundant evidence that the risk ratings are largely determined by where you live, a practice known as “redlining.” Redlining was historically used to deny residents and businesses access to credit in predominantly Black neighborhoods—without using explicitly racial/ethnic criteria. However, now high-risk ratings are used to charge more for credit—a practice often referred to as “reverse redlining”—and this condition sets up a self-fulfilling prophecy. Being designated financially “risky” actually further exposes one to unfair and abusive financial practices. According to Robert D. Manning, founder of the Responsible Debt Relief Institute and author of Credit Card Nation, “[a] carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues. Nearly half of all credit card accounts do not generate finance and fee revenues.”

As mentioned above, U.S. household debt as a share of income has risen from 60% to over 100% in the past thirty years. So, despite all our exertions as workers over this period, the majority of us have only gone deeper into debt. The prime reason is clear: we’re in debt because we’re not paid enough in the first place. In the United States, there’s minimal or non-existent social protection available to support us as we struggle to provide for our own basic needs and those of our dependents. Consolidated corporate greed, with its never-ending appetite for profit above all, continues to trump our basic rights. In a financial system characterized by a lack of transparency, credit cards are a complicated and risky product upon which too many of us depend. Additionally, credit cards feature a number of complicated, disguised fees; according to Professor Adam Levitin of Georgetown University Law Center, these “gotcha” fees cost families in the United States over $12 billion a year.

Although total national credit card debt is small in comparison with mortgage debt, effective APRs (annual percentage rates) on credit cards are at least five times as high as mortgage loans. The moment consumers get into trouble, card companies pounce, imposing penalties, even retroactively. These practices are unfair and abusive. In an attempt to address them, in 2009 Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which aimed to “establish fair and transparent practices relating to the extension of credit.”

Today, there are more than five thousand credit cards issuers; a majority of these (and the debt they manage) is owned by the big banks. The top three—Citigroup, Bank of America, and JPMorgan Chase—control more than 60% of outstanding credit card debt. From 1993 to 2007, the amount charged to U.S. credit card carriers went from $475 billion to more than $1.9 trillion. Late fees have risen an average of 160% and over-limit fees have risen an average of 115% over a similar period (1990–2005).

After the crash of 2008, families scrambled to get out of debt. Some were helped by the useful, if limited, regulatory reforms prescribed by the CARD Act. Credit card debt is down by 15% overall as regulations take effect and cardholders wise up to the industry’s old tricks. The problem is that, meanwhile, card companies have been devising new tricks, household expenses have risen, and incomes have either remained stagnant or have fallen. The total amount of credit card debt remains staggeringly high, and card issuers are still free to charge whatever rates of interest they like. (Only nonprofit credit unions are required by Congress to abide by an interest-rate ceiling of 15%.)

In the nine months between the passage and implementation of the CARD Act, credit card issuers did their best to hike interest rates, reduce lines of credit, increase fees, and water down rewards programs. For the millions with poor credit scores and borrowing costs that are through the roof, it may already be too late. Now, as credit scores are widely used as a screening tool for job applicants, workers face even greater challenges in finding employment, much less entering the increasingly mythological U.S. middle class.

The tricks of the trade

From risk-rating to pricing to credit limit determination, credit industry policies are extremely opaque and seem designed to keep cardholders in the dark. Analysts at Credit Karma, however, were able to study a sample of over two hundred thousand credit cards; the relationship between credit scores, income, and credit limits indicated that higher credit scores get you higher credit limits, regardless of income. Low credit scores, no matter your income, keep credit limits low.

A history of compliance with minimum payments is more important to issuers than current ability to repay. Credit card companies don’t mind late payments if you maintain a balance, as long as you pay your monthly minimum. Remember us “deadbeats”? Since almost all of the issuers’ profits come from late fees and interest rate penalties, they depend on our slip-ups. This is why monthly statements are intentionally designed to be confusing. If they change the design of your statement—say, by moving a box to the left, or making the print a little smaller—in such a way as to cause even one cardholder out of a thousand to misunderstand and miss a payment, that’s millions of dollars in additional profit for the credit card company. In the past, companies would trip up consumers by making the due date fall on a Sunday or a holiday, creating more “deadbeats” from which to profit.

The CARD Act outlawed several of the most predominant predatory lending practices. For instance, in the past, companies needed to provide only fifteen days notice before raising rates or making other changes to your contract, leaving little time to negotiate. Now, companies are required to notify customers forty-five days in advance. However, this notification will most likely be sent by mail, so be sure to read everything your credit card company sends. Since the 1990s, credit card pricing has been a game of “three-card monte,” according to Levitin. “Pricing has been shifted away from the upfront, attention-grabbing price points, like annual fees and base interest rates, and shifted to back-end fees that consumers are likely to ignore or underestimate.” If we are unable to gauge the true cost of financial products, how can we be expected to use them responsibly?

For a credit card company, the perfect customer is one who charges up a large amount of debt impulsively, sits on it for a year or two so as to build up maximum high-rate interest charges, finally feels guilty, and pays it all back without asking any questions. That’s why companies used to besiege high school and college students with free card offers: they calculated that students were likely to spend impulsively, attempt to avoid the problem, and eventually call their parents to foot the bill. The CARD Act restricts extensions of credit to those under twenty-one unless they have a cosigner or a proven means of income. Credit card companies are no longer allowed to hand out free gifts at or near colleges or college-sponsored events.

The overwhelming bulk of credit card debt isn’t driven by impulse spending at all, but by the predicaments of people trying to make ends meet. Even when jobless or unemployed, we remain consumers; our basic needs still include education, groceries, housing, doctor’s visits, medicine, and transportation. One survey found that 86% of people who lose their jobs report having to live, to some degree, off of their credit cards until they find new jobs. According to another survey, medical bills are a leading contributor to credit card debt, affecting nearly half of low- to middle-income households; the average amount of medical debt on credit cards is $1,678 per household.

What can we do?

Obviously, no one wants to sit on a huge pile of “revolving” credit card debt accruing interest at usurious rates every month. Unfortunately, credit cards are the double-edged sword of the credit score world. If we have cards with high balances, our scores go down. If we have no credit card, our scores go down. Having low credit scores can keep us from getting the things we need, like an affordable mortgage, apartment, or job. If we don’t buy on credit, then banks will see us as “risky,” and will not loan. On the other hand, if we have a credit card but spend too much, then we will also be denied a loan.

If you can’t avoid having the cards, you can sidestep the traps by understanding the fine print. Card Hub offers free tools to help us understand and navigate credit reports and scores, compare cards, and even provides customized credit card recommendations. Credit Karma is another great option.

Think about how important credit scores are, and how strongly some people are committed to preserving them. Consider the risks. This involves looking into the future, which always makes things more complicated and multiplies the “unknowns.” Start by finding out where you currently stand. Get your free credit report (see Chapter One) and make sure it’s accurate.

Whether you’re drowning in credit card debt or simply have too many cards, the most appropriate tactics for fighting back against the credit card trap will depend on your individual needs and circumstances. Below we suggest a few options, including legal action, bankruptcy, or simply refusing to pay.

Going to court

You may have seen those lawyers who appear on late-night TV promising that they can get us out of debt. Surprisingly, some of them actually can! This is how the honest ones do it.

What most people don’t realize is that, legally, there’s nothing special about owing money. A debt is just a promise and, contractually, no promise is more or less sacrosanct than any other. If one signs with a credit card company, both the signer and the company are agreeing to abide by a contract that is equally binding. The fine print applies to both sides, so if American Express has failed to fulfill any of its contractual obligations—for instance, its obligation to alert us promptly of a change of policy—that’s just as much a violation of contract as our failure to pay the agreed-upon sum. Knowing how this industry works, any skilled lawyer with a copy of the contract and access to all relevant correspondence is likely to discover half a dozen ways the company has violated its contractual obligations. In the eyes of the law, both parties are guilty, so we may have the power to renegotiate the terms of the relationship. This usually means that the judge can knock off half or even three-quarters of the total sum owed.

The credit card industry is riddled with fraud on a scale that is only now beginning to be revealed. “The same problems that plagued the foreclosure process—and prompted a multibillion-dollar settlement with big banks—are now emerging in the debt collection practices of credit card companies,” the New York Times reported in 2012. “As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous robo-signed [i.e., automatically computer generated] documents, incomplete records, and generic testimony from witnesses, according to judges who oversee the cases.” Lenders are “churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers.” One judge told the paper that he suspected a full 90% of lawsuits brought by credit card companies were “flawed and can’t prove the person owes the debt.”

In some cases, banks have sold credit card receivables known to be inaccurate or already paid. In a series of transactions in 2009 and 2010, Bank of America sold credit card receivables to an outfit called CACH, LLC, based in Denver, Colorado. Each month CACH bought debts with a face value of as much as $65 million for 1.8 cents on the dollar. The cut-rate pricing suggests the accounts’ questionable quality, but what is remarkable is that the bank would even try to sell them and that it could make money from them. Over the last two years, Bank of America has charged off $20 billion in delinquent card debt. An undisclosed portion of the delinquent debt gets passed along to collectors. Once sold, rights to such accounts are often resold within the industry multiple times over several years. Other banks have also admitted that their debt sale contracts may be riddled with inaccuracies.

The lesson is, always keep copies of everything. Always keep open the option of legal action (small claims or otherwise), and make sure the credit card companies know that you’re doing so.

What happens if you just don’t pay?

After ninety days of non-payment, your account goes into default and the credit card company has the option of sending it off to a debt collection agency. They don’t really like this option, because they will be taking a huge loss. Debt collection agencies make their money by buying up your debt at pennies on the dollar, often through brokers, and then trying to collect the whole thing, plus fees for the cost of collection. The original lender takes a loss. No doubt they can get some of it back through tax accounting and no doubt they figure a certain percentage of that loss into their business model, but ultimately they would rather this didn’t happen.

Obviously this is a bad thing for us as well; it means we will be hounded by a collection agency and our credit scores will take a major hit. If we want to borrow in the future, it might not be possible. If we are able to borrow, we will be charged much higher interest rates. If that isn’t a concern, then go ahead, default: it’s free money! But for most of us, it is a problem, so we must turn to other measures.

Negotiating with the credit card company

Since credit card companies don’t want us to default, we can often negotiate. They may offer a substantial reduction on what we owe them if they think defaulting is our only other option. Remember: even if we offer them ten cents on the dollar, that’s more than they would be getting if they sold it to a collection agency. On the other hand, they may not want to set a precedent—they know that if everyone just held out and negotiated a 90% reduction, their business would be ruined. So they are being pulled in two different directions. This is important to bear in mind when negotiating. If you’re seriously thinking about negotiating, see carreonandassociates.com for the exact sequence of procedures for how to do it.

Default versus bankruptcy

When you fail to make payments on your credit card, it falls into default. When this happens, your credit card company usually “closes” the card, meaning that no further charges will be allowed on the account. But that doesn’t mean that the balance goes away—far from it. Interest and late fees will continue to accrue until you pay the balance. If you don’t, the credit card company will most likely hire a collection agency to hound you for the money.

Declaring bankruptcy is an alternative to going into default. When you declare bankruptcy, credit card debts may be wiped out or lessened. However, it is a complex process that can backfire in many cases. In addition, bankruptcy will affect your credit rating for the next seven to ten years. If you are thinking of declaring bankruptcy, refer to Chapter Ten of this manual. The statute of limitations on defaults—the amount of time creditors or collectors have after you default to try to get it back legally—differs from state to state, from as little as three years to as many as ten. But after it’s over, you’re entirely off the hook and it’s easy to wipe the default off your record. Which option to choose will vary according to your individual circumstances. Try to get all information about the different possibilities in your state of residence before you decide.

What about those people who use one credit card to pay interest on another?

There definitely are people who have figured out the ropes―the way that one’s credit score interacts with multiple credit card accounts, and so forth―so well that they can live off their credit cards for years before defaulting. It can be done. The major proviso is that making a living this way is not all that much easier than making a living in a more conventional way, and it has the disadvantage of being extremely risky and time-consuming. If you, along with figuring out all the possible legal ramifications, deem this acceptable, then go ahead. Consider that for some, going “off the financial grid” is an easier way to live (see Chapter Eleven).

Resisting the credit card industry

Unlike student debt, a movement against credit card debt has yet to form. Launching such a movement is one of the aims of this manual and of Strike Debt. In the meantime, here are some examples of individual resistance actions that some people have taken. They tend toward the playful and absurd. As always, beware of the risks before you engage in such behavior.

Dimitry Agarkov, a forty-two-year-old from Russia, managed to mischievously turn the tables on the credit card industry, and has inspired others to do the same. Agarkov, discontented with unsolicited credit card offers from his country’s leading online bank, Tinkoff Credit Systems, scanned, amended, and returned the contracts. In their rush to capitalize on the contracts, the bank signed off on them without reading them. Two years later, due to overdue payments on a balance of $575 in rubles, Agarkov’s card was terminated. Agarkov later decided to sue Tinkoff Credit Systems for violation of contract, and was awarded $727,000 in rubles.

Until we can organize and mount genuine collective resistance against credit card debt, registering your displeasure through symbolic gestures might help let off some steam. One such gesture is to gather with friends to stuff credit card companies’ own prepaid envelopes that they’ve sent to you along with their offers. Stuff each envelope with wooden shims or roofing shingles to increase the postage costs and send them back to the company at their own expense. This is an example of an action that transforms debtors from passive victims to active rejecters of financialization tools. Also, as the proceeds of this action go to the U.S. Postal Service, we can help slow down this country’s fast track toward mail-delivery privatization.

Debt incurred as a result of car ownership, upkeep, and repair represents the single most onerous form of consumer debt, according to a recent Consumer Federation of America complaint survey. And at roughly $783 billion, auto loan debt is the third largest source of consumer debt after mortgages and student loans. Those who suffer most from automobile debt are those who depend on cars most—working people. It’s not unusual for a person to take out a loan to buy a car in order to commute to work, only to discover that monthly loan payments, replacement parts, garage payments, and gas quickly eat into one’s take-home pay:

Even with a generous allowance for housing, Navy Electronics Technician Riley Butler cannot feed his family of three without assistance from a local non-profit in his home city of San Diego, California. Butler’s monthly take-home pay is $1,800, and because he receives a housing stipend, car costs are his biggest expense at $450 each month, followed by groceries at $300.

Cars are the most common non-financial asset held by families in the country, and as an asset they are a natural candidate for creating secured debt. This means that unlike credit card agreements, which have no collateral, if you don’t repay the auto loan, the car—as the underlying asset securing the loan—can be repossessed and sold by the creditor to cover its losses. Given how dependent many of us are on cars, repossession can be devastating. Costs associated with cars can also add to credit card debt, so if you are not well-to-do, sliding further into debt is nearly impossible to avoid.

Monthly payments for cars tend to last for more than four years. As reported by Experian, the average new car payment is $452 per month, and used car loans cost about $351 per month. In 2011, the average total annual cost of a four-door car was almost $9,000 ($750 per month), according to the American Automobile Association.

Cars—new or used—don’t make sense as investments because they lose their value quickly after being purchased. If you buy a new car, this dramatic net loss occurs literally as you drive away from the seller’s lot. Even if you lease, by the time you finish paying it off, you have most likely paid more for your car than its original cost—you are “upside down” on your loan. Often, just after your last car payment, it’s time again to decide to look for a reliable car. Bottom line: if you need to finance a car through debt—a necessity for many—it can easily lead to a net loss in your wealth. But it doesn’t have to be that way.

Framing alternatives: Transportation infrastructure as commons

One of the root causes of the scourge of car debt is the absence of affordable and reliable public transit. This lack of reliable transportation options tends to fall upon poor households and households of color the hardest. The troubles that come with insufficient access to safe and clean transportation for work or schooling in struggling communities are further compounded by advanced age, disability, illness, and whether one has dependents to transport. Although many see the purchase of an automobile as a ticket to prosperity and happiness, creating more car owners is not a solution to our collective transportation woes. Rather, the solution is to create infrastructure and practices around transportation that make transportation a collective good, rather than a private asset that must be financed by debt. Doing so will not only hopefully reduce the effects of car debt but also of climate changestaggering public health costs, the destruction of our precious wild areas for fossil fuel extraction and burning, resource wars in the Middle East, and our rapid military expansion all over the world to feed our dependence on oil. And of course, car accidents are responsible for well over thirty thousand deaths a year in the United States.

One thing we can do is to demand at the local, state, regional, and national levels transportation infrastructure and policies that are not centered on private automobiles, such as walking, biking, moped and scooter use, and transit such as trains (from local light rail to high-speed regional and transcontinental services), buses, and trolleys. One such example at the local level is families organizing non-car transportation arrangements for their children to get to school through the nationally funded program Safe Routes to Schools.

While agitating for policy changes that bring multiple and safe transport options to our communities, we also must find ways now to envision—then to act upon—our needs to deliver ourselves from car debt. One example is the Build a Better Block project, a model that interested members of your community can follow to create walkable, safe blocks in your neighborhood. There are countless creative ways to bring attention to problems with our current transportation culture, including interventions in public spaces (see my.parkingday.org and visiblecity.ca).

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