1 00:00:06,631 --> 00:00:11,052 [narrator] In 1958, Fresno, California was growing fast. 2 00:00:11,594 --> 00:00:13,680 It had a pretty downtown, 3 00:00:13,763 --> 00:00:15,223 a brand-new mall, 4 00:00:15,306 --> 00:00:17,350 and sprawling suburbs. 5 00:00:17,434 --> 00:00:21,479 It was, in short, a pretty ordinary American city, 6 00:00:22,397 --> 00:00:23,982 and the perfect site 7 00:00:24,065 --> 00:00:26,943 for one of the boldest experiments in capitalism. 8 00:00:28,153 --> 00:00:29,446 In September of that year, 9 00:00:29,529 --> 00:00:33,825 60,000 residents received a little rectangle of plastic in the mail, 10 00:00:33,908 --> 00:00:39,581 embossed with their names and addresses, a mysterious number, a "good thru" date, 11 00:00:40,248 --> 00:00:42,584 and the name BankAmericard. 12 00:00:42,667 --> 00:00:47,130 {\an8}Imagine opening your mail one day, and you've never had a credit card before. 13 00:00:47,213 --> 00:00:52,552 [narrator] And you're told that this piece of plastic is loaded with $500, 14 00:00:52,635 --> 00:00:55,180 over $4,500 in today's money. 15 00:00:55,263 --> 00:00:57,265 You could spend it however you liked, 16 00:00:57,348 --> 00:01:01,728 and so credit cards liberated consumers to spend freely in a way 17 00:01:01,811 --> 00:01:03,063 that they never had before. 18 00:01:03,646 --> 00:01:06,024 [narrator] They were sold as the perfect package, 19 00:01:06,107 --> 00:01:09,027 luxury and convenience, all rolled into one. 20 00:01:09,527 --> 00:01:12,989 Pretty soon, millions of people had a BankAmericard, 21 00:01:13,073 --> 00:01:15,366 and they loved them. 22 00:01:15,450 --> 00:01:19,412 They used their cards to buy all the trappings of middle-class life. 23 00:01:19,954 --> 00:01:23,792 But many of them didn't pay Bank of America back. 24 00:01:23,875 --> 00:01:28,129 In the first few years, the bank lost around $15 million, 25 00:01:28,755 --> 00:01:31,257 and it was determined not to let that happen again. 26 00:01:32,092 --> 00:01:34,844 Today, the industry is worth trillions, 27 00:01:34,928 --> 00:01:37,138 and there are thousands of different credit cards 28 00:01:37,222 --> 00:01:38,807 in wallets all over the world. 29 00:01:38,890 --> 00:01:42,435 -You take Master Charge, don't you? -Master Charge? Of course. 30 00:01:42,519 --> 00:01:44,646 [narrator] For decades, credit cards have been marketed 31 00:01:44,729 --> 00:01:46,773 {\an8}as a ticket to a more exciting life. 32 00:01:46,856 --> 00:01:48,608 [announcer] {\an8}It's everywhere you want to be, 33 00:01:48,691 --> 00:01:50,568 {\an8}including front row center! 34 00:01:51,653 --> 00:01:52,904 [narrator] But for many people, 35 00:01:52,987 --> 00:01:56,658 the dream they promised has become more of a nightmare. 36 00:01:56,741 --> 00:01:59,953 Around four in ten Americans have credit card debt, 37 00:02:00,036 --> 00:02:02,956 and one in ten expect that debt to outlive them. 38 00:02:03,498 --> 00:02:07,168 So, have credit cards really liberated us, 39 00:02:07,252 --> 00:02:09,546 and how can you avoid getting screwed? 40 00:02:10,839 --> 00:02:14,425 [man] Where can the self-respecting family of today turn for aid? 41 00:02:15,385 --> 00:02:17,303 [news anchor] Shopkeepers and customers alike 42 00:02:17,387 --> 00:02:19,222 are concerned about spiraling credit. 43 00:02:19,305 --> 00:02:21,057 [man 2] It feels like every month, 44 00:02:21,141 --> 00:02:23,893 you take one step forward but two steps back. 45 00:02:24,811 --> 00:02:26,229 [man 3] It's difficult to calculate 46 00:02:26,312 --> 00:02:28,481 the interest you're charged on a monthly basis, 47 00:02:28,565 --> 00:02:31,359 and of course there's an annual interest rate, a monthly rate, 48 00:02:31,442 --> 00:02:33,153 and even a daily rate. 49 00:02:33,236 --> 00:02:35,113 [woman] What are we going to do, John? 50 00:02:35,697 --> 00:02:39,409 We must have money to meet those overdue grocery and doctor bills. 51 00:02:39,492 --> 00:02:42,495 I don't know, dear, but we'll find some way. 52 00:02:42,579 --> 00:02:44,789 [voice echoing] Some way… some way… 53 00:02:48,084 --> 00:02:50,670 [narrator] Credit is a simple but radical idea. 54 00:02:50,753 --> 00:02:52,213 {\an8}[video game bleeping] 55 00:02:52,297 --> 00:02:56,134 {\an8}There's someone with extra money lying around who's willing to lend it, 56 00:02:56,217 --> 00:02:58,720 {\an8}and someone else who needs extra money right now 57 00:02:58,803 --> 00:03:00,847 {\an8}and would be able to pay it back later. 58 00:03:00,930 --> 00:03:04,684 {\an8}Matching them up has always been one of the biggest engines of the economy. 59 00:03:04,767 --> 00:03:08,021 [narrator 2] Those who have savings {\an8}often invest or lend them, 60 00:03:08,104 --> 00:03:10,398 hoping for a share of profit. 61 00:03:10,481 --> 00:03:13,401 [narrator] But that means solving a central dilemma… 62 00:03:14,027 --> 00:03:14,903 risk. 63 00:03:15,528 --> 00:03:16,988 "Credit" just means "a loan," 64 00:03:17,071 --> 00:03:20,491 but it comes from the Latin credere, "to trust." 65 00:03:21,034 --> 00:03:23,912 Before credit cards, if you needed to buy something big, 66 00:03:23,995 --> 00:03:26,789 you'd probably go to your banker and ask for a loan. 67 00:03:26,873 --> 00:03:29,209 And they'd judge you on the three C's: 68 00:03:29,292 --> 00:03:31,377 your capacity to pay back the loan… 69 00:03:31,461 --> 00:03:33,755 [narrator 3] {\an8}Mr. Morton owns a hardware store in town, 70 00:03:33,838 --> 00:03:36,299 and he is well known as a capable businessman. 71 00:03:36,382 --> 00:03:38,593 [narrator] …whether you had enough savings to pay it back, 72 00:03:38,676 --> 00:03:40,637 or something that could be taken if you didn't… 73 00:03:40,720 --> 00:03:44,015 What collateral can you offer for this loan, Mr. Brown? 74 00:03:44,098 --> 00:03:45,558 [narrator] …and your character. 75 00:03:45,642 --> 00:03:48,770 [narrator 3] Since Mr. Morton is known to the bank as a reliable man, 76 00:03:48,853 --> 00:03:50,605 the banker can feel reasonably certain 77 00:03:50,688 --> 00:03:53,775 that Mr. Morton will be able to repay the loan when it comes due. 78 00:03:53,858 --> 00:03:56,945 [narrator] It wasn't a very scientific way to judge risk, 79 00:03:57,028 --> 00:03:59,489 so mostly, the people who got credit were… 80 00:03:59,572 --> 00:04:01,950 Quote, "men of responsibility." 81 00:04:02,533 --> 00:04:04,953 [narrator] Meaning white and middle-class. 82 00:04:05,036 --> 00:04:07,956 But then computers came along. 83 00:04:08,039 --> 00:04:13,169 Suddenly there were vast troves of data available to these banks, 84 00:04:13,253 --> 00:04:15,880 to try and figure out to whom they should lend. 85 00:04:15,964 --> 00:04:18,800 [narrator] Banks stopped judging people {\an8}based on hearsay 86 00:04:18,883 --> 00:04:21,427 {\an8}and started using credit scores, 87 00:04:21,511 --> 00:04:23,471 complicated statistical models 88 00:04:23,554 --> 00:04:27,183 designed to predict how risky it would be to lend you money. 89 00:04:27,267 --> 00:04:28,977 {\an8}Some would argue it's not super fair, 90 00:04:29,060 --> 00:04:32,188 {\an8}some would argue that it's not a true projection, 91 00:04:32,272 --> 00:04:35,483 {\an8}but it's what we've got as a way for banks to, frankly, 92 00:04:35,566 --> 00:04:40,363 be able to judge you in a way that they can judge everybody else. 93 00:04:40,446 --> 00:04:44,993 [narrator] The most used score in the US ranges from 300 to 850. 94 00:04:45,076 --> 00:04:47,912 {\an8}Above 700 means you have good credit. 95 00:04:47,996 --> 00:04:49,539 {\an8}You're trustworthy. 96 00:04:49,622 --> 00:04:53,584 {\an8}But if your score is below 650, you're considered higher risk. 97 00:04:53,668 --> 00:04:59,507 So a good score puts you in the running for some of the best types of credit. 98 00:04:59,590 --> 00:05:03,094 It also shows up when you're applying to live somewhere as a renter. 99 00:05:03,177 --> 00:05:05,555 A landlord will want to check your credit history 100 00:05:05,638 --> 00:05:07,432 to make sure you're good for the money. 101 00:05:07,515 --> 00:05:10,143 These numbers are not just numerals. 102 00:05:10,226 --> 00:05:12,687 It characterizes who we are as people. 103 00:05:12,770 --> 00:05:15,023 [narrator] And the easiest way to get a credit history? 104 00:05:15,106 --> 00:05:16,399 Have a credit card. 105 00:05:17,150 --> 00:05:20,278 All this data has helped more borrowers get credit, 106 00:05:20,361 --> 00:05:23,948 {\an8}and it's helped creditors make a lot more money off of them. 107 00:05:24,032 --> 00:05:26,034 {\an8}My name is Elena Botella. 108 00:05:26,117 --> 00:05:28,244 {\an8}I worked at Capital One for five years. 109 00:05:28,328 --> 00:05:32,623 Credit card companies conduct literally tens of thousands of experiments per year 110 00:05:32,707 --> 00:05:36,544 to figure out, "How do I make the most money from each person?" 111 00:05:37,253 --> 00:05:39,922 [narrator] Which means that each of us is playing a game 112 00:05:40,006 --> 00:05:42,592 with slightly different rules. 113 00:05:42,675 --> 00:05:46,179 So there's really two main groups of customers. 114 00:05:46,262 --> 00:05:49,849 So you have your transactors, and you have your revolvers. 115 00:05:49,932 --> 00:05:54,062 [narrator] A transactor is someone who pays their bill in full every month, 116 00:05:54,145 --> 00:05:56,898 and a revolver is someone who doesn't. 117 00:05:56,981 --> 00:06:01,194 If you look at American adults, about 40% are revolvers. 118 00:06:01,277 --> 00:06:03,446 {\an8}40% are transactors, 119 00:06:03,529 --> 00:06:06,491 and the other 20% just don't have a credit card at all. 120 00:06:07,158 --> 00:06:09,994 {\an8}Ideally, you want to be a transactor. 121 00:06:10,078 --> 00:06:12,538 When it comes to managing your credit, boring is best. 122 00:06:12,622 --> 00:06:14,082 Pay your bills on time, 123 00:06:14,165 --> 00:06:17,418 and try not to carry a balance. 124 00:06:17,502 --> 00:06:20,922 [Elena Botella] Those people often get a great deal on their credit cards, 125 00:06:21,005 --> 00:06:23,674 so they're getting rewards, maybe some other perks, 126 00:06:23,758 --> 00:06:25,593 a little bit of fraud protection. 127 00:06:25,676 --> 00:06:27,762 [narrator] All while boosting their credit score. 128 00:06:27,845 --> 00:06:30,223 Those people tend to be happy with their cards. 129 00:06:30,306 --> 00:06:32,975 [narrator] But the credit card company isn't your teammate. 130 00:06:33,059 --> 00:06:35,395 -[ominous bleeping] -You're playing against them, 131 00:06:35,478 --> 00:06:38,981 which is why they're reported to have another name for transactors. 132 00:06:39,065 --> 00:06:42,568 If you pay your debts, you're a deadbeat from the banker's point of view. 133 00:06:42,652 --> 00:06:43,486 Called deadbeats. 134 00:06:43,569 --> 00:06:45,154 {\an8}That's a deadbeat customer. 135 00:06:45,238 --> 00:06:46,989 We're not making any money on them. 136 00:06:47,448 --> 00:06:49,826 [narrator] Well, that's not entirely true. 137 00:06:49,909 --> 00:06:51,494 When you swipe your credit card, 138 00:06:51,577 --> 00:06:54,205 there is a processing fee charged to the merchant, 139 00:06:54,288 --> 00:06:55,706 and that fee can vary, 140 00:06:55,790 --> 00:06:59,252 normally from anywhere around a little bit less than two percent, 141 00:06:59,335 --> 00:07:01,170 sometimes up to four percent. 142 00:07:01,254 --> 00:07:02,880 [narrator] {\an8}If you're a transactor, 143 00:07:02,964 --> 00:07:05,633 {\an8}the credit card company isn't making money off of you, 144 00:07:05,716 --> 00:07:08,261 -they're making money off your swipes. {\an8}-[positive bleeping] 145 00:07:08,344 --> 00:07:12,473 Just look at the Amex Black Card, a favorite of the rich and famous. 146 00:07:12,557 --> 00:07:14,016 ♪ If it ain't money Then wrong number ♪ 147 00:07:14,100 --> 00:07:15,810 ♪ Black Card is my business card ♪ 148 00:07:15,893 --> 00:07:18,104 {\an8}♪ Pick a bag Black Card on the way, go ♪ 149 00:07:18,187 --> 00:07:20,773 ♪ Give you that Black Card No limit ♪ 150 00:07:21,691 --> 00:07:27,238 [narrator] In 2014, a Chinese billionaire bought this teacup for $36 million, 151 00:07:27,780 --> 00:07:29,699 and put it on his Black Card. 152 00:07:30,324 --> 00:07:32,743 With an average merchant fee of three percent, 153 00:07:32,827 --> 00:07:37,915 Amex may have pocketed over a million dollars from just that one sale. 154 00:07:37,999 --> 00:07:40,126 There is a lot of competition in that space. 155 00:07:40,209 --> 00:07:42,753 The banks really fight over those wealthy customers. 156 00:07:42,837 --> 00:07:45,756 [narrator] Some have dubbed it "the Rewards War," 157 00:07:45,840 --> 00:07:48,384 and arguably the winner is this: 158 00:07:48,468 --> 00:07:50,887 the Chase Sapphire Reserve card. 159 00:07:52,138 --> 00:07:56,684 When it debuted in 2016, it had a sign-up bonus worth $1,500. 160 00:07:57,226 --> 00:07:58,769 It was so popular, 161 00:07:58,853 --> 00:08:01,731 Chase ran out of the metal they used to make it. 162 00:08:02,315 --> 00:08:03,816 And within a few months… 163 00:08:03,900 --> 00:08:07,778 {\an8}JPMorgan Chase's new Sapphire Reserve credit card will reduce the bank's profit. 164 00:08:07,862 --> 00:08:10,239 {\an8}Chase is losing $200-$300 million on this card. 165 00:08:10,323 --> 00:08:15,661 {\an8}The losses are due to the lavish awards offered to entice users to take the cards. 166 00:08:15,745 --> 00:08:17,079 [narrator] {\an8}But Chase didn't care. 167 00:08:17,163 --> 00:08:19,582 {\an8}The card was so successful, it cost us $200 million, 168 00:08:19,665 --> 00:08:21,751 {\an8}but we expect to have a good return on it. 169 00:08:21,834 --> 00:08:23,044 {\an8}-[anchor] More fake news. -Yeah. 170 00:08:23,127 --> 00:08:25,338 {\an8}-[laughing] -I wish it was a $400 million loss. 171 00:08:25,421 --> 00:08:28,424 [narrator] Because that sign-up bonus {\an8}was a one-time hit, 172 00:08:28,925 --> 00:08:31,135 but those customers' swipes year after year 173 00:08:31,219 --> 00:08:34,639 will send Chase more money than the bank pays out in perks. 174 00:08:34,722 --> 00:08:39,352 But there's one type of card user the industry actually loses money on: 175 00:08:39,435 --> 00:08:40,561 the hacker. 176 00:08:41,187 --> 00:08:45,358 {\an8}I personally wouldn't identify myself as a credit card hacker. 177 00:08:45,441 --> 00:08:47,568 I would definitely say that I take advantage 178 00:08:47,652 --> 00:08:50,071 of all the opportunities that are out there. 179 00:08:50,154 --> 00:08:52,615 All right, guys, ready for Texas! 180 00:08:54,325 --> 00:08:57,161 I stayed at the Bellagio completely for free 181 00:08:57,245 --> 00:08:58,996 just because I was using credit cards. 182 00:08:59,080 --> 00:09:00,623 I've been able to take flights 183 00:09:00,706 --> 00:09:03,167 and stay at hotels that I never thought I would before. 184 00:09:03,251 --> 00:09:07,046 The Bahamas, I was in Austin, I was in New York, I was in LA. 185 00:09:07,129 --> 00:09:09,924 [narrator] Brian is a credit card super user, 186 00:09:10,007 --> 00:09:12,510 someone who uses the company's tricks against them 187 00:09:12,593 --> 00:09:16,472 to maximize rewards, skirt fees, and never pay interest. 188 00:09:17,139 --> 00:09:20,810 Actively, I would say I have about 13 credit cards at this moment, 189 00:09:20,893 --> 00:09:25,815 but under my whole umbrella, I think I have about 20 to 30-plus cards. 190 00:09:25,898 --> 00:09:28,401 [narrator] Which he keeps in specialized binders… 191 00:09:28,484 --> 00:09:31,070 This one here is my main one, this one's my backup one. 192 00:09:31,153 --> 00:09:33,990 This one is a custom gold card. It's actually 24-karat. 193 00:09:34,073 --> 00:09:36,742 [narrator] …and organizes in a thorough spreadsheet. 194 00:09:36,826 --> 00:09:39,203 So I have 14 cards logged onto my spreadsheet, 195 00:09:39,287 --> 00:09:41,956 but about six of them require just a bit more attention. 196 00:09:42,498 --> 00:09:46,502 I have 1.5, maybe even two million points. 197 00:09:46,586 --> 00:09:49,338 When it comes to my credit cards, I use many different ones, 198 00:09:49,422 --> 00:09:54,635 depending on what type of season it is or what category spend I'm trying to get. 199 00:09:54,719 --> 00:09:58,431 It definitely does take a good amount of work to stay on top of these things. 200 00:09:58,514 --> 00:09:59,557 [scanner beeping] 201 00:09:59,640 --> 00:10:03,019 [narrator] All those perks are partly paid for by merchant fees. 202 00:10:03,978 --> 00:10:06,272 It's why sometimes you'll see signs like this. 203 00:10:06,355 --> 00:10:09,358 American Express fees are notoriously high, 204 00:10:09,442 --> 00:10:11,736 and it's why a lot of places are cash-only. 205 00:10:11,819 --> 00:10:14,155 They don't want to pay the fees at all. 206 00:10:14,238 --> 00:10:18,200 And credit cards don't just cost merchants, they cost consumers, 207 00:10:18,784 --> 00:10:22,163 because stores raise their prices to cover those fees. 208 00:10:22,246 --> 00:10:23,998 {\an8}If you have one of those fancy cards, 209 00:10:24,081 --> 00:10:25,875 you earn that back with perks, 210 00:10:25,958 --> 00:10:27,710 {\an8}but if you have a more basic card, 211 00:10:27,793 --> 00:10:30,254 {\an8}or pay with a debit card or cash, 212 00:10:30,338 --> 00:10:32,089 {\an8}you're just paying more, 213 00:10:32,173 --> 00:10:35,259 {\an8}and subsidizing the fancy card users along the way. 214 00:10:36,093 --> 00:10:40,973 One study found that cash users are basically giving each card-using household 215 00:10:41,057 --> 00:10:43,267 over $1,000 every year. 216 00:10:45,144 --> 00:10:49,482 What you see is that it really creates this big transfer of wealth 217 00:10:49,565 --> 00:10:52,652 from lower-income families to higher-income families. 218 00:10:52,735 --> 00:10:56,072 [narrator] And lower-income families are more likely to be revolvers, 219 00:10:56,155 --> 00:10:59,158 the biggest money maker for credit card companies, 220 00:10:59,241 --> 00:11:02,286 because of a little thing called interest. 221 00:11:02,370 --> 00:11:06,749 [Elena] Say you spent $1,000 on a fridge, so it's, like, a very round number. 222 00:11:06,832 --> 00:11:08,626 [narrator] When your credit card bill is due, 223 00:11:08,709 --> 00:11:11,837 the fridge will cost you exactly that amount. 224 00:11:11,921 --> 00:11:15,049 That $1,000 was essentially a free advance, 225 00:11:15,132 --> 00:11:17,093 a loan with no interest. 226 00:11:17,176 --> 00:11:19,887 But say you can't afford to pay off that fridge. 227 00:11:19,970 --> 00:11:24,100 The very next day, that $1,000 you didn't pay starts accruing interest. 228 00:11:24,600 --> 00:11:27,311 How much? Well, that depends on your APR, 229 00:11:27,395 --> 00:11:29,021 your annual percentage rate. 230 00:11:29,772 --> 00:11:32,650 {\an8}If you have a really good credit score, it could be 12%, 231 00:11:32,733 --> 00:11:35,444 {\an8}but they go as high as 23%. 232 00:11:35,528 --> 00:11:38,030 The average is around 16%, 233 00:11:38,114 --> 00:11:41,951 and that amount is going to compound daily. 234 00:11:42,034 --> 00:11:47,373 So every day, your balance is going to get a little bit higher, a little bit higher. 235 00:11:47,456 --> 00:11:48,916 Then you'll get your statement. 236 00:11:48,999 --> 00:11:52,378 [narrator] This month, you'll owe an additional $13, 237 00:11:52,461 --> 00:11:55,756 but you don't just pay interest on the $1,000 principal, 238 00:11:55,840 --> 00:11:58,634 you pay interest on the interest. 239 00:11:58,718 --> 00:12:02,430 So every month, your debt will grow a little faster. 240 00:12:02,513 --> 00:12:05,391 A month later, you'll owe this much. 241 00:12:05,474 --> 00:12:07,852 A year later, you'll owe this much. 242 00:12:08,436 --> 00:12:12,940 And if you keep carrying that original $1,000 over, eventually… 243 00:12:13,023 --> 00:12:17,361 You've paid more in interest than the actual amount you originally borrowed. 244 00:12:18,028 --> 00:12:19,363 [narrator] There's a reason 245 00:12:19,447 --> 00:12:22,575 the Old Testament and the Koran both ban usury, 246 00:12:22,658 --> 00:12:25,411 the old-timey word for high interest. 247 00:12:25,494 --> 00:12:29,206 Dante even reserved a special portion of Hell for usurers. 248 00:12:29,290 --> 00:12:30,791 They're in the seventh circle, 249 00:12:30,875 --> 00:12:31,959 with the murderers. 250 00:12:32,042 --> 00:12:35,045 -[distant screaming] -Interest can be a devilish thing. 251 00:12:35,671 --> 00:12:39,175 And American card users have been paying a lot more of it. 252 00:12:39,258 --> 00:12:42,636 In 2019, 121 billion, 253 00:12:42,720 --> 00:12:45,598 right into the pockets of credit card companies. 254 00:12:46,807 --> 00:12:51,228 Credit card companies don't want people who pay back all their money every month, 255 00:12:51,312 --> 00:12:54,648 and they don't want people to never pay back their money, 256 00:12:54,732 --> 00:12:58,194 but between those two extremes is the sweet spot, 257 00:12:58,277 --> 00:13:02,823 is the place where banks make a lot of money on those loans. 258 00:13:02,907 --> 00:13:05,743 [narrator] And they've got quite {\an8}a few tricks to make sure that happens. 259 00:13:06,410 --> 00:13:09,705 {\an8}First, they need you to pick their card. 260 00:13:09,789 --> 00:13:14,251 Dropping ready-to-use cards on unsuspecting consumers is now illegal, 261 00:13:14,335 --> 00:13:18,589 but companies send out billions of credit card offers every year instead, 262 00:13:18,672 --> 00:13:22,384 with enticing deals catered to the kind of customer they think you are. 263 00:13:23,469 --> 00:13:26,889 {\an8}Transactors will get offers for those great perk cards. 264 00:13:26,972 --> 00:13:29,475 {\an8}But if they think you're more likely to be a revolver, 265 00:13:29,558 --> 00:13:31,769 {\an8}they'll send you something like this: 266 00:13:31,852 --> 00:13:35,147 a sweet introductory offer, no interest for the first year. 267 00:13:35,231 --> 00:13:38,901 Now, what happens from the consumer psychological standpoint of this, is that 268 00:13:38,984 --> 00:13:42,404 {\an8}when I see these rewards offered to me, 269 00:13:42,488 --> 00:13:46,033 {\an8}I start now thinking about free benefits. 270 00:13:46,116 --> 00:13:48,577 [overlapping] Bahamas, I was in Austin… Completely for free. 271 00:13:48,661 --> 00:13:50,162 Even two million points. 272 00:13:50,246 --> 00:13:52,289 I start thinking about the things I could get, 273 00:13:52,373 --> 00:13:57,044 and I stop thinking about the things I have to pay to get those benefits. 274 00:13:57,127 --> 00:14:01,006 [narrator] Like the amount of money you have to spend to get those rewards, 275 00:14:01,590 --> 00:14:04,218 or the high interest rate that'll kick in later. 276 00:14:04,718 --> 00:14:06,387 {\an8}And the credit line they give you? 277 00:14:06,470 --> 00:14:09,014 {\an8}That isn't because they think you're good for that money. 278 00:14:09,098 --> 00:14:11,809 When consumers see some information in front of them, 279 00:14:11,892 --> 00:14:13,936 they assume there's a reason it was put there, 280 00:14:14,019 --> 00:14:16,856 and the assumption might be that whoever is making this decision 281 00:14:16,939 --> 00:14:22,152 thinks that I'm credit-worthy enough that I can have a limit that's this high. 282 00:14:22,236 --> 00:14:24,989 The business model that credit card companies use 283 00:14:25,072 --> 00:14:27,366 with the customers with lower credit scores 284 00:14:27,449 --> 00:14:29,201 is sometimes called "low and grow." 285 00:14:29,285 --> 00:14:31,328 [narrator] Starting you on a low credit line 286 00:14:31,412 --> 00:14:33,372 and then slowly increasing it, 287 00:14:33,455 --> 00:14:36,041 because studies show, most people will use that room 288 00:14:36,584 --> 00:14:38,794 almost perfectly in tandem. 289 00:14:38,878 --> 00:14:42,840 On average, if you double the credit line, you double the debt. 290 00:14:42,923 --> 00:14:46,176 So sometimes consumers are myopic, and what I mean by that is that 291 00:14:46,260 --> 00:14:47,761 they have almost tunnel vision. 292 00:14:47,845 --> 00:14:50,347 They're focused on today, on the here and now. 293 00:14:50,431 --> 00:14:53,642 [narrator] And it's especially easy to overspend with a credit card. 294 00:14:53,726 --> 00:14:56,353 {\an8}So there's research on what's called "the pain of paying." 295 00:14:56,437 --> 00:14:58,063 {\an8}What it suggests is that 296 00:14:58,147 --> 00:14:59,815 different forms of payment 297 00:14:59,899 --> 00:15:03,819 can be more or less psychologically painful to make. 298 00:15:03,903 --> 00:15:08,198 [narrator] One study found that areas of the brain associated with pain and fear 299 00:15:08,282 --> 00:15:11,660 are more likely to light up when you watch someone pay with cash 300 00:15:11,744 --> 00:15:14,204 than when you watch them pay with a credit card. 301 00:15:14,288 --> 00:15:17,207 And once you've racked up a month's worth of charges, 302 00:15:17,291 --> 00:15:18,834 you get your first bill. 303 00:15:18,918 --> 00:15:21,629 It will probably look something like this. 304 00:15:21,712 --> 00:15:23,923 In the top right corner will be your due date, 305 00:15:24,006 --> 00:15:26,133 balance, and a minimum payment. 306 00:15:26,216 --> 00:15:31,472 It's usually 3% of your total debt, or $25, whichever is higher. 307 00:15:31,555 --> 00:15:34,642 That's there for a good reason, so you know how much you have to pay 308 00:15:34,725 --> 00:15:37,019 so you don't default on your credit card. 309 00:15:37,102 --> 00:15:39,146 But it may have the impact 310 00:15:39,229 --> 00:15:42,775 of anchoring consumers to pay less than they would have otherwise, 311 00:15:42,858 --> 00:15:45,027 because they get too hooked on that one amount 312 00:15:45,110 --> 00:15:46,737 they see on the statement itself. 313 00:15:46,820 --> 00:15:49,907 [narrator] It's known as anchoring bias, 314 00:15:49,990 --> 00:15:51,492 a tendency our brains have 315 00:15:51,575 --> 00:15:54,870 to favor the first piece of information we're offered. 316 00:15:54,954 --> 00:15:58,207 When a ship wants to dock, it drops an anchor in the water, 317 00:15:58,290 --> 00:15:59,625 and that holds the ship down. 318 00:15:59,708 --> 00:16:01,627 Of course the ship can move back and forth, 319 00:16:01,710 --> 00:16:03,879 but it doesn't stray that far from the anchor. 320 00:16:03,963 --> 00:16:06,674 [narrator] Which is roughly the same thing that happens in our brains 321 00:16:06,757 --> 00:16:08,717 when we see a minimum payment. 322 00:16:08,801 --> 00:16:11,679 [Hal Hershfield] We sort of stay close by to that number. 323 00:16:11,762 --> 00:16:14,640 [narrator] If you just paid the minimum on that fridge from before, 324 00:16:14,723 --> 00:16:16,517 you would eventually pay it off, 325 00:16:16,600 --> 00:16:19,937 but it would take almost five years, 326 00:16:20,020 --> 00:16:22,523 and cost you an extra $400. 327 00:16:22,606 --> 00:16:27,403 They call it "the treadmill to nowhere." You're on that minimum-balance ride, 328 00:16:27,486 --> 00:16:32,241 which only takes off a minuscule amount of your balance every pay period. 329 00:16:32,825 --> 00:16:35,703 [narrator] US law now requires bills to have one of these, 330 00:16:35,786 --> 00:16:40,457 a little box that tells you how much money you might save by paying more each month. 331 00:16:40,541 --> 00:16:43,293 [Hal] Now, note what's interesting about this is that 332 00:16:43,377 --> 00:16:46,755 nobody is actually being encouraged right there on that statement 333 00:16:46,839 --> 00:16:49,049 to pay the maximum of what they can, and in fact, 334 00:16:49,133 --> 00:16:53,053 research that I and others have done has found that people still end up 335 00:16:53,137 --> 00:16:55,973 anchoring on whatever that extra information is. 336 00:16:56,056 --> 00:16:58,142 They may end up paying more than the minimum, 337 00:16:58,225 --> 00:17:00,519 but they still might pay less than they would pay 338 00:17:00,602 --> 00:17:02,938 if none of that information was there to begin with. 339 00:17:03,022 --> 00:17:05,149 [narrator] And there are lots of other little obstacles 340 00:17:05,232 --> 00:17:07,568 credit card companies throw in our way, 341 00:17:07,651 --> 00:17:11,030 like long, complicated contracts full of fine print, 342 00:17:11,113 --> 00:17:13,532 where they hide all sorts of penalty fees: 343 00:17:13,615 --> 00:17:15,034 for paying a bill late, 344 00:17:15,117 --> 00:17:17,286 transferring your balance to a different card, 345 00:17:17,369 --> 00:17:19,830 or using your card at an ATM. 346 00:17:20,372 --> 00:17:23,417 It's no accident so many of us are struggling with debt. 347 00:17:24,043 --> 00:17:27,671 And for a lot of people, it's not even about the game being rigged. 348 00:17:28,255 --> 00:17:30,049 It's the whole arcade. 349 00:17:31,175 --> 00:17:34,887 Working at the credit card industry, I had a really good perspective of 350 00:17:34,970 --> 00:17:36,472 how it worked from the inside, 351 00:17:36,555 --> 00:17:41,643 but I didn't feel like I understood really why consumers chose to borrow money, 352 00:17:41,727 --> 00:17:45,355 and ultimately I was really craving to understand, 353 00:17:45,439 --> 00:17:47,983 were credit cards making people's lives better or not? 354 00:17:48,067 --> 00:17:49,318 [narrator] In pop culture, 355 00:17:49,401 --> 00:17:51,445 -they're associated with luxury… -[woman] Rosa! 356 00:17:51,528 --> 00:17:53,280 -…freedom… -He gave me his credit card. 357 00:17:53,363 --> 00:17:55,449 -…and frivolous spending. -Becks! 358 00:17:56,116 --> 00:17:58,577 Two hundred dollars on Marc Jacobs underwear? 359 00:17:58,660 --> 00:18:01,622 Oh, underwear is a basic human right. 360 00:18:01,705 --> 00:18:04,458 [narrator] But the reality is often the opposite. 361 00:18:04,541 --> 00:18:06,919 I think most of the people I talked to, 362 00:18:07,002 --> 00:18:10,130 they didn't feel they'd used their credit card for extravagant things. 363 00:18:10,214 --> 00:18:16,804 People were using it for things that were, kind of, like, simple, everyday expenses. 364 00:18:16,887 --> 00:18:20,808 [narrator] That may be why credit card debt carries a special stigma. 365 00:18:20,891 --> 00:18:24,394 {\an8}One study found that people accurately reported their mortgages, 366 00:18:24,478 --> 00:18:29,358 {\an8}but claimed their credit card debt was 40% less than it actually was. 367 00:18:29,441 --> 00:18:34,196 Most people pay back their debts most of the time until they have a crisis. 368 00:18:34,279 --> 00:18:37,324 And so suddenly you're out of a job or you get sick, 369 00:18:37,407 --> 00:18:40,119 and you turn to your credit card to make up that difference. 370 00:18:40,202 --> 00:18:43,247 It's no secret that few of us have savings accounts, 371 00:18:43,330 --> 00:18:46,375 we couldn't come up with a few hundred dollars in a pinch if we had to. 372 00:18:46,458 --> 00:18:48,460 [narrator] It's $400. 373 00:18:48,544 --> 00:18:54,258 Thirty percent of Americans can't cover a $400 emergency expense. 374 00:18:54,341 --> 00:18:58,804 And so our next best thing is credit. 375 00:18:58,887 --> 00:19:01,723 A lot of us use credit cards as savings accounts, 376 00:19:01,807 --> 00:19:05,144 as the "break open in an emergency." 377 00:19:05,227 --> 00:19:09,565 And that's a very expensive way to pay for your problems. 378 00:19:09,648 --> 00:19:13,318 And this is the real difference between the American system 379 00:19:13,402 --> 00:19:16,280 and that of any other industrialized country, 380 00:19:16,363 --> 00:19:20,200 that when people are in crisis, we ask them to fend for themselves, 381 00:19:20,284 --> 00:19:22,786 and to do it on their plastic. 382 00:19:22,870 --> 00:19:25,205 [narrator] During the 2009 financial crisis, 383 00:19:25,956 --> 00:19:30,252 the US passed a law that banned many of the industry's worst practices. 384 00:19:30,335 --> 00:19:32,588 {\an8}We also put a stop to retroactive rate hikes 385 00:19:32,671 --> 00:19:35,215 {\an8}that appear on a bill suddenly with no rhyme or reason. 386 00:19:35,716 --> 00:19:39,970 [narrator] That act did drastically reduce the amount of certain fees we had to pay: 387 00:19:40,053 --> 00:19:44,683 by one estimate, saving Americans $12.6 billion per year. 388 00:19:45,517 --> 00:19:51,356 But I think what you've seen every year since that law has passed is, 389 00:19:51,440 --> 00:19:54,193 the CARD Act really moved credit card companies 390 00:19:54,276 --> 00:19:57,070 from a model that was actually more fee-driven 391 00:19:57,154 --> 00:20:00,324 to a model that was more interest-driven. 392 00:20:04,578 --> 00:20:10,000 [Farnoosh Torabi] Absolutely, there is a fantastical message around credit cards… 393 00:20:10,083 --> 00:20:11,418 That'll be a charge. 394 00:20:11,501 --> 00:20:15,172 …that it's going to be this tool to get you to a better place in life, 395 00:20:15,255 --> 00:20:19,134 to build your dreams, to get you to a better future. 396 00:20:19,218 --> 00:20:21,762 It's not wrong, but…. 397 00:20:21,845 --> 00:20:25,390 it does require following some important rules. 398 00:20:25,474 --> 00:20:27,976 [narrator] Don't let the card pick you. 399 00:20:28,060 --> 00:20:30,354 Find the one that's best for your needs, 400 00:20:30,437 --> 00:20:32,356 with the lowest interest rate you can get. 401 00:20:32,439 --> 00:20:33,982 Start with the simple things. 402 00:20:34,066 --> 00:20:36,151 Know when your credit card statements are due. 403 00:20:36,235 --> 00:20:37,736 Know what your credit score is. 404 00:20:37,819 --> 00:20:40,322 Focus on those small things, and you'll find yourself 405 00:20:40,405 --> 00:20:44,368 actually able to reap a lot more benefits than you ever would have imagined. 406 00:20:44,451 --> 00:20:47,454 [narrator] Then, use your card like it's cash. 407 00:20:47,537 --> 00:20:51,166 You may have heard that revolving can sometimes boost your credit score. 408 00:20:51,750 --> 00:20:55,087 This is one of the biggest myths, I don't know who has started this myth. 409 00:20:55,170 --> 00:20:56,838 Let's just set the record straight. 410 00:20:56,922 --> 00:21:01,385 It is always best to pay off your balance in full every month, period. 411 00:21:01,468 --> 00:21:03,762 I use my cards pretty much like a debit card. 412 00:21:03,845 --> 00:21:05,639 I will never carry a balance on it, 413 00:21:05,722 --> 00:21:08,141 even if it has a 0% APR promotion. 414 00:21:08,225 --> 00:21:10,352 [narrator] But if you find yourself in debt, 415 00:21:10,435 --> 00:21:13,355 there are things you can do to help climb your way out. 416 00:21:13,438 --> 00:21:16,316 Start by taking it one level at a time. 417 00:21:16,400 --> 00:21:19,987 We have a hard time dealing with and thinking about bigger numbers. 418 00:21:20,070 --> 00:21:24,032 We have an easier time thinking about smaller chunks of something. 419 00:21:24,116 --> 00:21:26,076 If you've got $10,000 worth of debt, 420 00:21:26,159 --> 00:21:28,453 and you wanna be out of debt in the next two years, 421 00:21:28,537 --> 00:21:30,747 that's $5,000 a year. 422 00:21:30,831 --> 00:21:32,666 What is that on a monthly basis? 423 00:21:32,749 --> 00:21:35,002 What is that on a weekly and daily basis? 424 00:21:35,085 --> 00:21:37,629 [narrator] Then automate your payments. 425 00:21:37,713 --> 00:21:41,925 Use and leverage tools that make life easy and make life certain. 426 00:21:42,009 --> 00:21:43,885 If we can automate it and say, 427 00:21:43,969 --> 00:21:47,055 "Okay, every month, this much comes out of my checking account, 428 00:21:47,139 --> 00:21:49,224 then all I have to do is make one decision." 429 00:21:49,308 --> 00:21:52,227 [narrator] A credit card is a powerful tool. 430 00:21:53,312 --> 00:21:56,106 And in the moments of life when you're down on your luck, 431 00:21:56,189 --> 00:21:57,649 it can keep you afloat. 432 00:21:58,317 --> 00:22:01,153 -But it's also easy to slip up… -[ominous bleeping] 433 00:22:01,236 --> 00:22:03,572 …and that's not a personal failure. 434 00:22:04,239 --> 00:22:06,450 It's how the whole game was designed. 435 00:22:08,160 --> 00:22:11,330 [theme music plays]