Maxed out on plastic

Marketplace Staff Mar 23, 2007

TESS VIGELAND:
We talked earlier on the show about those fixed-rate credit cards that really aren’t fixed. Well, that’s just one of many, many complains consumers have about the credit industry. Another one, all those pre-approved card solicitations. The Fed estimates 6 billion of them landed in our mailboxes in 2005. On the flip side, most of us can’t imagine living without a card or two, or five. We are a nation of credit junkies. And a new documentary film called Maxed Out shows just how dangerous that addiction has become. The film’s director, James Scurlock, is here. Let me ask you first, why this topic? Did you have some credit card experience that discarded you forever?

JAMES SCURLOCK: Not really. I, you know, everyone is affected by credit now. It’s the universal problem.

VIGELAND:
Mm-hmm.

SCURLOCK:
And every year, there’s more money viewers and money books, and debt diets, and so on. And every year, we get more and more in debt. You know, our savings right now is negative one percent, at the lowest since the height of the Great Depression. And at the same time, we’re supposed to be in a great economy. So there’s real contradiction there. And I was interested in taking a look.

VIGELAND:
You have clips from–I guess, the–probably the ’50s and ’60s of…

SCURLOCK:
Right.

VIGELAND:
…ads and other kind of educational shows where they’re coaching people on how to be responsible with their credit. Not something that you’d necessarily see on television these days.

SCURLOCK:
No. There’s this canny Mr. Money who’s teaching two high school students how to be responsible.

MISTER MONEY:
And, of course, some people prefer to wait to buy the things they want until they saved enough money to pay a cash for them. However, there are many people who prefer to buy things on credit.

JODIE:
But Mr. Money, doesn’t that cost more to buy things on credit?

MISTER MONEY:
Oh, yes, it does, Jodie.

SCURLOCK:
But you know, the industry has really transformed since then. It’s in the last generation or so. It’s gone from an industry that really encourage people to save money to an industry that encourages people to spend.

VIGELAND:
The credit industry actually used to encourage people to save?

SCURLOCK:
Yes, believe it or not. That, that used to be a responsible customer, was someone who pay their bills on time and saved money, you know, and saved equity in their house. And now, of course, a great customer is someone who cashes out the equity in their house and spends and spends and spends, and doesn’t pay their credit card bill off every month. It’s totally different.

VIGELAND:
One part of the film that really struck me was when you’re talking to Harvard Professor Elizabeth Warren, the author of The Two-Income Trap. And she talks about how banks refuse to tighten up who they lend to, despite the fact that if they did, they could cut down by 50 percent on the number of bankruptcies that are declared. So then, of course, they can’t get their money back from these people. And yet, the banks don’t wanna do that because, well, let’s her finish that.

ELIZABETH WARREN:
If you cut out the people, who are least likely to be able to repay, if you cut out the most marginal borrowers, the ones who are deepest in trouble, then you’re cutting out the heart of our profits because that’s where we make most of our money.

VIGELAND:
Is that really where credit card companies make most of their profits, is off people who shouldn’t have them in the first place?

SCURLOCK:
Absolutely. You know, they call people who pay their bill off every month deadbeat because they’re not paying interest in fees. This has become a fee-based business. I think fees are up a thousand percent in the last 10 years. Something like $18 billion worth of credit card fees were paid last year. So it’s gone from making money on an interest rate spread, to making money, charging people fees. And the people who are most willing to pay the fees are usually the most desperate.

VIGELAND:
Talk to me for a second about some of the debt collectors that you spoke with or, at least, profiled, men who seemed almost joyful at the fact that they were going after people who owed money and couldn’t pay.

DEBT COLLECTOR:
I like to make the analogy that, you know, you’re like, you’re like this pirate on this pirate ship, right? And you got that person here. You’re walking him out on the plank. And you walk him as, as far as you can on that plank without pushing them off. And then you bring him back to get what you want.

SCURLOCK:
This is the Wild West of the financial world, debt buying and debt collecting.

DEBT COLLECTOR:
The more debt, obviously, the more opportunity there is for delinquency, and the more opportunity then for, for collection. We assume that that will drive buyers and sellers to that outlet. We’re just bringing people together, almost like a dating service.

SCURLOCK:
You know, when you’re buying debt for pennies on the dollar, if you just collect a fraction of it, you’re making a fortune. So there are all these young guys getting into the business.

VIGELAND:
Do you think–believe that there is any such thing as good credit?

SCURLOCK:
I do. You know, credit is sort of the lubricant that greases the wheels of the economy, and it always has been. The trouble is that people are getting into situations in signing contracts that they don’t understand. And the price of that credit is doubling, sometimes tripling. And a lot of times, people just don’t understand how quickly these payments can skyrocket.

VIGELAND:
Do you use credit cards?

SCURLOCK:
I do. I have an American Express and a MasterCard in my pocket.

VIGELAND:
What does that say?

SCURLOCK:
Well, you know, it says that most of us don’t think we can get by without them.

VIGELAND:
It’s almost impossible, say–like, rent a car without one.

SCURLOCK:
It is. And, you know, it’s funny because when you walked into a store now and paid cash, you’re immediately suspect. You know, if you pulled out $100-bill, they have to search and find apen. And they wave it up in the air. And, you know, they think you’re a drug dealer or something. So we’ve gone from this, you know, cash society to a society where cash is almost a taboo.

VIGELAND:
Do you think we’ll ever get to the point where we are tilting in the other direction, where we do go back to the notion that you shouldn’t be spending all the money you have and, and the money you don’t–where there is such an idea as maybe you shouldn’t have any credit?

SCURLOCK:
Right. Yeah. Absolutely. This is a cyclical sort of thing. You can go back to the 1920s when interest-only mortgages were the most popular mortgage. Dow came crashing down, of course, and we had this generation that was terrified of debt. You can go back to the beginning of this country, Washington was a speculator. Jefferson lived in debt all of his life. These things do tend to go in cycles. And I think at some point, people get maxed out. And they realize that the only real hedge against destitution is savings, you know? An open credit card balance is not an emergency fund. And we’ve gotten so far away from that mentality. At some point, I can’t imagine we won’t swing back in the other direction.

VIGELAND:
All right. So we’ll check with you again in, what, 50 years?

SCURLOCK:
Yeah. I don’t think it’s gonna take that long. I think, looking at this whole subprime mortgage mess, it, in maybe one or two.

VIGELAND:
All right. James Scurlock is the director of the movie Maxed Out, and also the author of the book Maxed Out, Hard Times, Easy Credit and the Era of Predatory Lenders. Thanks for coming in.

SCURLOCK:
Thank you.

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