Nick Wolney
Appearances
Today, Explained
Our trillion-dollar credit card bill
It limited excessive marketing to young adults. There was a lot of marketing towards college students who might be more susceptible to getting a credit card before they have a fully robust financial education, financial literacy. So it did make a little bit of a dent, but unfortunately, we're dealing with quite a large boulder here. And so there's more work to be done, certainly.
Today, Explained
Our trillion-dollar credit card bill
Regulations have loosened on credit card interest rates, and there are a few reasons why. So some history here. There was a Supreme Court opinion that came out in 1978, Marquette National Bank versus First of Omaha Corp. And this opinion allowed national banks to be governed by the usury laws of the state that they are headquartered.
Today, Explained
Our trillion-dollar credit card bill
And so famously in the late 70s, Citibank was just absolutely drowning. Inflation was extremely high circa 1980. It was actually so high that banks like Citibank were losing money on every single dollar that was on a credit card because they were capped on how much interest they could charge their consumers.
Today, Explained
Our trillion-dollar credit card bill
So Citibank famously courted the governor of South Dakota and said, hey, we'd love to move our headquarters to South Dakota. Will your legislature invite us to come to South Dakota? And they agreed. So they abolished the usury laws in South Dakota. Citibank moved there. Several other banks moved there. Delaware followed. Nevada followed.
Today, Explained
Our trillion-dollar credit card bill
And so as a result, no matter what state you live in, if you have a credit card from that bank and that bank is headquartered in Delaware or South Dakota, that bank can charge whatever it wants to on the credit card. And as a result, you have this very deregulated landscape that allows national banks to jack up those credit card rates.
Today, Explained
Our trillion-dollar credit card bill
Of course. What else is it for, right? All the way back in the 1950s, those very first credit cards that came out, there was a card called Diner's Club, which was one of the first forms of a credit card.
Today, Explained
Our trillion-dollar credit card bill
And it was very much branded as this social club card, right? You could go out, you'd be in the Diners Club and things like that. And it was branded very much as an identity. That was also akin to just a lot of the marketing and branding in general in the 1950s.
Today, Explained
Our trillion-dollar credit card bill
You know you made it when your cards go from sounding like this to sounding like this. Or you see this as a trend on TikTok now. Gen Zers showing off their Amexes as a flex.
Today, Explained
Our trillion-dollar credit card bill
Right? That's what I thought. Like, don't flash your platinum Amex to me. And so that's kind of interesting for them as well. It's like the social clout of having the platinum Amex is worth the $695 annual fee. to that. But if you look at the total credit card debt in America, it's just gone up and up and up and up and up. We had two corrections.
Today, Explained
Our trillion-dollar credit card bill
We had a correction in the housing crisis, and then we also had a correction during COVID where people were like, oh crap, I better pay this down in case I lose my job. And so we did see corrections there, but otherwise we have seen that number steadily go up. Another reason we're trying to sound the alarm now is that people are really struggling right now
Today, Explained
Our trillion-dollar credit card bill
Historically in Q1 of each year, we see a little bit of a payoff. People come off the holidays. They're like, oh God, what have I done? And they're actually responsible. There's some of that new year's resolution energy as well. People tend to pay down some of the balance. So we usually see a dimple in that line graph.
Today, Explained
Our trillion-dollar credit card bill
And for the last two years, so Q1 of 2023 and this Q1 as well, people didn't really do that. So even most recently, we went from $1.13 trillion to $1.12 trillion. And this is the quarter where people are supposed to be really making a dent and paying down their balances.
Today, Explained
Our trillion-dollar credit card bill
So it's concerning to some economists that people are not following that usual behavior, that people are actually needing their credit card in order to make ends meet.
Today, Explained
Our trillion-dollar credit card bill
And there's also some concern that in terms of consumer spending, which accounts for a large part of overall GDP, that that is perhaps being propped up somewhat by people using their credit cards and spending money that they don't necessarily have.
Today, Explained
Our trillion-dollar credit card bill
Yeah, I mean, it's happened multiple times. It tends to die in legislation or when it gets to a certain House committee or a Senate committee. We have a couple of different ones that have been introduced over the years. The most recent one is the Capping Credit Card Interest Rates Act.
Today, Explained
Our trillion-dollar credit card bill
But then when those ended and inflation reared its ugly head and came back around, it really caught people off guard and they're digging themselves deeper and deeper into debt in order to make ends meet.
Today, Explained
Our trillion-dollar credit card bill
That was introduced by Senator Hawley of Missouri, which was not on my bingo card that he would be the one to introduce that.
Today, Explained
Our trillion-dollar credit card bill
I'm Nick Wolney, and I'm a managing editor at CNET and a finance journalist.
Today, Explained
Our trillion-dollar credit card bill
The last time it was introduced, it was introduced by Bernie Sanders. And AOC, sometimes politicians will introduce these laws even though they know they're going to die in a vote because it's a good political gambit for them, right? So Senator Hawley, when he's out on the campaign trail, people say, like, you're not fighting for the little guy. He'd be like, yeah, I did.
Today, Explained
Our trillion-dollar credit card bill
You know, I introduced this bill. You know, even though, you know, there's a tremendous amount of lobbying money from banks, understandably, that is flowing through DC at any given moment. So while we do see some of these different pieces of legislation emerge, you know, you go online to look at the status of the bill and it's been introduced.
Today, Explained
Our trillion-dollar credit card bill
You know, the stage that it's in is, okay, it's been introduced and it's with the committee and, you know, it's unlikely that it's going to see the light of day again.
Today, Explained
Our trillion-dollar credit card bill
There is. There is a policy fix. Whether or not we can bring it to fruition, I think, is the challenge. So the most immediate policy fix would be to cap interest rates and to just allow us to stop the bleeding in terms of consumers falling deeper and deeper into into debt, taking a really good look at what are the limits that we are extending to consumers.
Today, Explained
Our trillion-dollar credit card bill
We've got another, I'll just say it, we've got another villain in the picture, and that villain's name is Buy Now, Pay Later.
Today, Explained
Our trillion-dollar credit card bill
Yeah. And so what's tricky about Buy Now, Pay Later is that those companies have been skirting reporting requirements. And so for many people, we can't even see how much that they have out on Buy Now, Pay Later. At Bloomberg did a Harris poll last month where they found that a third of respondents said they have over $1,000 out on buy now, pay later. And this is four payments over six weeks.
Today, Explained
Our trillion-dollar credit card bill
It's purposely four payments so that they can skirt under the Truth in Lending Act, which once you get to five payments or more on any form of debt or any kind of loan – then you have a bunch of additional regulatory requirements that you have to adhere to. So that's why you almost always see it be for payments, usually over a six-week period.
Today, Explained
Our trillion-dollar credit card bill
And so it's sort of a cousin to the credit card, right? So now people already have all their credit card debt, and you can use your credit card for buy now, pay later as well.
Today, Explained
Our trillion-dollar credit card bill
If you have credit card debt, then it's just going back to the bones of personal finance, right? I like to say that when we come down to it, personal finance, it's just eight words. Make more money, lower expenses, invest the difference. And so if you're trying to pay down that debt and you want to put some extra money toward that debt,
Today, Explained
Our trillion-dollar credit card bill
In Q1 of 2024, the Federal Reserve reported that the average credit card rate is 21.59%. This is a record high. We've been above 20% for a year. And for retail cards, Target, or you go to wherever it is, and I'm just trying to buy dish soap, and they're like, you know, do you want this card? Do you want the red card? You know, all those retail cards, those tend to have an average closer to 30%.
Today, Explained
Our trillion-dollar credit card bill
then taking a good look at your budget, seeing where you could lower expenses, perhaps bringing some extra money into the picture, that's going to be the most impactful way to make a dent on those balances. Stop using the credit card. Maybe if you're someone who uses the digital wallet a lot, maybe it's time to take those cards out of your wallet just so that you're not...
Today, Explained
Our trillion-dollar credit card bill
tempted in the moment to shop or to spend, things like that. It could also be time to do some of those maybe more unsavory financial activities. You call your cell phone company to see if you can get your bill lowered. You call the credit card company to see if you can get the APR lowered. There's plenty of free scripts and stuff like that online.
Today, Explained
Our trillion-dollar credit card bill
I know it doesn't sound like much, but 50 or 100 bucks a month of savings, it really adds up. It's over $1,000 a year when you add it up. And for many people, that can help make the biggest difference. We need some policy change that is about the cost of living as well, not just about the credit card as the instrument.
Today, Explained
Our trillion-dollar credit card bill
Because I think, you know, despite their best intentions, consumers are going to keep using that tool to make ends meet for as long as it's available to them and for as long as prices are at where they're at right now.
Today, Explained
Our trillion-dollar credit card bill
And so in the moment, if someone is cash strapped or particularly there tends to be something like sign-on bonus or perhaps a credit, an opportunity to save some extra money in the moment, a lot of people will fall prey to that and not realize that they have this 30% interest charge that is accruing on this. And they just have this lagging credit card debt that persists as a result.
Today, Explained
Our trillion-dollar credit card bill
I don't think so. When I interviewed a financial planner at Northwestern Mutual last year, she pointed out that her clients would regularly say, oh, I'm good. I'm making the minimum payment. I'm good. I'm paying my credit card. And she's like, no, that's the minimum payment. And these are the people who are probably more fiscally savvy if they've hired a financial advisor.
Today, Explained
Our trillion-dollar credit card bill
If you've hired a financial advisor at Northwestern Mutual, you're probably at least thinking about your money and about your expenses and things like that. And those people are saying, oh, I'm good. I'm making the minimum payment. I'm good. It's quite hard to visualize how much something actually costs when you're just making these very, very small payments.
Today, Explained
Our trillion-dollar credit card bill
And it's difficult for us, I think, to realize the total amount of interest and how much extra interest we would pay.
Today, Explained
Our trillion-dollar credit card bill
You know, credit cards didn't used to be as profitable as they are right now. And it also used to be that the minimum monthly payment was 5% of your balance. In the 1980s, some very smart mathematicians realized that if they made two tweaks to credit card culture, there'd be a lot more profit to be made.
Today, Explained
Our trillion-dollar credit card bill
And those two tweaks were to lower the minimum monthly payment from 5% to 2%, and then to increase people's credit limit. And so it makes the consumer feel good in the moment because rather than being almost maxed out on your credit card, if you have a much higher limit, you're not as maxed out. You've got a lot of wiggle room.
Today, Explained
Our trillion-dollar credit card bill
And then if your minimum monthly payment is less, then it's like, oh, this is not so bad. It's only 2% of my balance rather than 5% of my balance. What that all meant is that people were more likely to have higher balances.
Today, Explained
Our trillion-dollar credit card bill
Someone I spoke to last year as well talked about it. His name is Josue Henriquez, lives in San Francisco. And he talked about how when he emigrated to the US, he wanted to build his credit to eventually buy a house one day. And so he took out a credit card when he was 18 and he got a $500 limit, which does not exist anymore.
Today, Explained
Our trillion-dollar credit card bill
But over time, as his limit increased, as he got more credit card offers, fast forward 10 years, He's $25,000 in debt. He has to work with a debt consolidation company to pay it all down. Completely wrecks his credit score because of what's needed in order to work with those creditors and things like that. And then during COVID, he lost his job.
Today, Explained
Our trillion-dollar credit card bill
And so even though he had paid it all down, you know, after... seven or eight months, he was back to $20,000 in credit card debt just to make ends meet. And I think that him sharing that story with me just felt like something that is a paradigm for what a lot of people are experiencing with credit cards. You know, they're just trying to make ends meet. They're just trying to survive.
Today, Explained
Our trillion-dollar credit card bill
They're slowly trying to pay it down and pay a little bit extra every month or every other month. But because people have so little in savings, you know, you're one car problem away from being knocked all the way back to the beginning, so to speak.
Today, Explained
Our trillion-dollar credit card bill
One group that's having a hard time when it comes to credit card debt is Gen Z. A report from the Federal Reserve Bank of New York found that one in every seven Gen Z credit card borrowers are completely maxed out on their balances. One factor to this is that Gen Z credit card holders have much lower limits to begin with.
Today, Explained
Our trillion-dollar credit card bill
So the median credit limit for Gen Z was $4,500, whereas it's over $16,000 for all the other generations. But it illustrates how younger borrowers get trapped in this cycle right from the start, especially when they either aren't earning enough or they're using a card as their emergency fund since they don't have that safety net established yet.
Today, Explained
Our trillion-dollar credit card bill
There was also a recent study from TransUnion, which found that 84% of 22 to 24-year-olds had a credit card in 2023. When that same age bracket was measured with millennials back in 2013, only 61% of them had a credit card. So it's not really a kids being kids argument.
Today, Explained
Our trillion-dollar credit card bill
Whether they want to or they need to, Gen Z consumers are opening up and using their credit cards sooner than previous generations.
Today, Explained
Our trillion-dollar credit card bill
Utilization is a pretty chunky part of credit score. It accounts for 30% of the overall FICO score. So in the moment, as long as people are paying their credit cards and they're not maxing themselves out in terms of their balances, it won't necessarily impact their credit score. Delinquency does impact the credit score, right?
Today, Explained
Our trillion-dollar credit card bill
If you start missing payments, then you're going to get dinged for that. It's also a great point that credit score culture in general, it's kind of twisted. And for most people, when they're young, the easiest way to build up your credit history and to get a line of credit of some kind is the credit card. That's the fastest way to open up a line of credit in most cases.
Today, Explained
Our trillion-dollar credit card bill
And so we kind of have this culture that, I mean, not even just culture, it's just in terms of how people buy a house, how people buy a car, your credit score, it's very much your financial rating, you know, it's your track record. And so it's kind of difficult for us to divorce ourselves from credit card culture because of that.
Today, Explained
Our trillion-dollar credit card bill
Well, and last year I spoke to a financial educator who teaches classes in high schools, teaches financial literacy classes in high schools. And something she pointed out, she said this happens in every single class. Kids will – well, they won't raise their hand in the class. They'll come up to her afterwards, you know. And they'll say, you know, my parents gave me this credit card.
Today, Explained
Our trillion-dollar credit card bill
And it's just – It feels like it's just like free money, you know, and it's like, oh, you know, so the parent, it feels like they're doing a good job in terms of opening up a credit card and helping their child with their credit history. But for many of those kids, they don't understand why they have the credit card and they don't understand how to use it.
Today, Explained
Our trillion-dollar credit card bill
And, you know, I would assert that young people are perhaps more impulsive, you know, at times as they start to come into adulthood and things like that. And so just having that financial literacy piece in place, you know, is really, really important.
Today, Explained
Our trillion-dollar credit card bill
there was and it did ease some of the burden uh but you know when you're 100 feet down the rabbit hole and you get a law that gets passed and you know you come 10 feet back up you're still quite far down the rabbit hole the card act credit card accountability responsibility and disclosure that was in 2009 statements will be required to tell credit card holders how long it will take to pay off a balance