[narrator] In 1958, Fresno, California was growing fast.
It had a pretty downtown,
a brand-new mall,
and sprawling suburbs.
It was, in short, a pretty ordinary American city,
and the perfect site
for one of the boldest experiments in capitalism.
In September of that year,
60,000 residents received a little rectangle of plastic in the mail,
embossed with their names and addresses, a mysterious number, a "good thru" date,
and the name BankAmericard.
Imagine opening your mail one day, and you've never had a credit card before.
[narrator] And you're told that this piece of plastic is loaded with $500,
over $4,500 in today's money.
You could spend it however you liked,
and so credit cards liberated consumers to spend freely in a way
that they never had before.
[narrator] They were sold as the perfect package,
luxury and convenience, all rolled into one.
Pretty soon, millions of people had a BankAmericard,
and they loved them.
They used their cards to buy all the trappings of middle-class life.
But many of them didn't pay Bank of America back.
In the first few years, the bank lost around $15 million,
and it was determined not to let that happen again.
Today, the industry is worth trillions,
and there are thousands of different credit cards
in wallets all over the world.
-You take Master Charge, don't you? -Master Charge? Of course.
[narrator] For decades, credit cards have been marketed
as a ticket to a more exciting life.
[announcer] It's everywhere you want to be,
including front row center!
[narrator] But for many people,
the dream they promised has become more of a nightmare.
Around four in ten Americans have credit card debt,
and one in ten expect that debt to outlive them.
So, have credit cards really liberated us,
and how can you avoid getting screwed?
[man] Where can the self-respecting family of today turn for aid?
[news anchor] Shopkeepers and customers alike
are concerned about spiraling credit.
[man 2] It feels like every month,
you take one step forward but two steps back.
[man 3] It's difficult to calculate
the interest you're charged on a monthly basis,
and of course there's an annual interest rate, a monthly rate,
and even a daily rate.
[woman] What are we going to do, John?
We must have money to meet those overdue grocery and doctor bills.
I don't know, dear, but we'll find some way.
[voice echoing] Some way… some way…
[narrator] Credit is a simple but radical idea.
[video game bleeping]
There's someone with extra money lying around who's willing to lend it,
and someone else who needs extra money right now
and would be able to pay it back later.
Matching them up has always been one of the biggest engines of the economy.
[narrator 2] Those who have savings often invest or lend them,
hoping for a share of profit.
[narrator] But that means solving a central dilemma…
risk.
"Credit" just means "a loan,"
but it comes from the Latin credere, "to trust."
Before credit cards, if you needed to buy something big,
you'd probably go to your banker and ask for a loan.
And they'd judge you on the three C's:
your capacity to pay back the loan…
[narrator 3] Mr. Morton owns a hardware store in town,
and he is well known as a capable businessman.
[narrator] …whether you had enough savings to pay it back,
or something that could be taken if you didn't…
What collateral can you offer for this loan, Mr. Brown?
[narrator] …and your character.
[narrator 3] Since Mr. Morton is known to the bank as a reliable man,
the banker can feel reasonably certain
that Mr. Morton will be able to repay the loan when it comes due.
[narrator] It wasn't a very scientific way to judge risk,
so mostly, the people who got credit were…
Quote, "men of responsibility."
[narrator] Meaning white and middle-class.
But then computers came along.
Suddenly there were vast troves of data available to these banks,
to try and figure out to whom they should lend.
[narrator] Banks stopped judging people based on hearsay
and started using credit scores,
complicated statistical models
designed to predict how risky it would be to lend you money.
Some would argue it's not super fair,
some would argue that it's not a true projection,
but it's what we've got as a way for banks to, frankly,
be able to judge you in a way that they can judge everybody else.
[narrator] The most used score in the US ranges from 300 to 850.
Above 700 means you have good credit.
You're trustworthy.
But if your score is below 650, you're considered higher risk.
So a good score puts you in the running for some of the best types of credit.
It also shows up when you're applying to live somewhere as a renter.
A landlord will want to check your credit history
to make sure you're good for the money.
These numbers are not just numerals.
It characterizes who we are as people.
[narrator] And the easiest way to get a credit history?
Have a credit card.
All this data has helped more borrowers get credit,
and it's helped creditors make a lot more money off of them.
My name is Elena Botella.
I worked at Capital One for five years.
Credit card companies conduct literally tens of thousands of experiments per year
to figure out, "How do I make the most money from each person?"
[narrator] Which means that each of us is playing a game
with slightly different rules.
So there's really two main groups of customers.
So you have your transactors, and you have your revolvers.
[narrator] A transactor is someone who pays their bill in full every month,
and a revolver is someone who doesn't.
If you look at American adults, about 40% are revolvers.
40% are transactors,
and the other 20% just don't have a credit card at all.
Ideally, you want to be a transactor.
When it comes to managing your credit, boring is best.
Pay your bills on time,
and try not to carry a balance.
[Elena Botella] Those people often get a great deal on their credit cards,
so they're getting rewards, maybe some other perks,
a little bit of fraud protection.
[narrator] All while boosting their credit score.
Those people tend to be happy with their cards.
[narrator] But the credit card company isn't your teammate.
-[ominous bleeping] -You're playing against them,
which is why they're reported to have another name for transactors.
If you pay your debts, you're a deadbeat from the banker's point of view.
Called deadbeats.
That's a deadbeat customer.
We're not making any money on them.
[narrator] Well, that's not entirely true.
When you swipe your credit card,
there is a processing fee charged to the merchant,
and that fee can vary,
normally from anywhere around a little bit less than two percent,
sometimes up to four percent.
[narrator] If you're a transactor,
the credit card company isn't making money off of you,
-they're making money off your swipes. -[positive bleeping]
Just look at the Amex Black Card, a favorite of the rich and famous.
♪ If it ain't money Then wrong number ♪
♪ Black Card is my business card ♪
♪ Pick a bag Black Card on the way, go ♪
♪ Give you that Black Card No limit ♪
[narrator] In 2014, a Chinese billionaire bought this teacup for $36 million,
and put it on his Black Card.
With an average merchant fee of three percent,
Amex may have pocketed over a million dollars from just that one sale.
There is a lot of competition in that space.
The banks really fight over those wealthy customers.
[narrator] Some have dubbed it "the Rewards War,"
and arguably the winner is this:
the Chase Sapphire Reserve card.
When it debuted in 2016, it had a sign-up bonus worth $1,500.
It was so popular,
Chase ran out of the metal they used to make it.
And within a few months…
JPMorgan Chase's new Sapphire Reserve credit card will reduce the bank's profit.
Chase is losing $200-$300 million on this card.
The losses are due to the lavish awards offered to entice users to take the cards.
[narrator] But Chase didn't care.
The card was so successful, it cost us $200 million,
but we expect to have a good return on it.
-[anchor] More fake news. -Yeah.
-[laughing] -I wish it was a $400 million loss.
[narrator] Because that sign-up bonus was a one-time hit,
but those customers' swipes year after year
will send Chase more money than the bank pays out in perks.
But there's one type of card user the industry actually loses money on:
the hacker.
I personally wouldn't identify myself as a credit card hacker.
I would definitely say that I take advantage
of all the opportunities that are out there.
All right, guys, ready for Texas!
I stayed at the Bellagio completely for free
just because I was using credit cards.
I've been able to take flights
and stay at hotels that I never thought I would before.
The Bahamas, I was in Austin, I was in New York, I was in LA.
[narrator] Brian is a credit card super user,
someone who uses the company's tricks against them
to maximize rewards, skirt fees, and never pay interest.
Actively, I would say I have about 13 credit cards at this moment,
but under my whole umbrella, I think I have about 20 to 30-plus cards.
[narrator] Which he keeps in specialized binders…
This one here is my main one, this one's my backup one.
This one is a custom gold card. It's actually 24-karat.
[narrator] …and organizes in a thorough spreadsheet.
So I have 14 cards logged onto my spreadsheet,
but about six of them require just a bit more attention.
I have 1.5, maybe even two million points.
When it comes to my credit cards, I use many different ones,
depending on what type of season it is or what category spend I'm trying to get.
It definitely does take a good amount of work to stay on top of these things.
[scanner beeping]
[narrator] All those perks are partly paid for by merchant fees.
It's why sometimes you'll see signs like this.
American Express fees are notoriously high,
and it's why a lot of places are cash-only.
They don't want to pay the fees at all.
And credit cards don't just cost merchants, they cost consumers,
because stores raise their prices to cover those fees.
If you have one of those fancy cards,
you earn that back with perks,
but if you have a more basic card,
or pay with a debit card or cash,
you're just paying more,
and subsidizing the fancy card users along the way.
One study found that cash users are basically giving each card-using household
over $1,000 every year.
What you see is that it really creates this big transfer of wealth
from lower-income families to higher-income families.
[narrator] And lower-income families are more likely to be revolvers,
the biggest money maker for credit card companies,
because of a little thing called interest.
[Elena] Say you spent $1,000 on a fridge, so it's, like, a very round number.
[narrator] When your credit card bill is due,
the fridge will cost you exactly that amount.
That $1,000 was essentially a free advance,
a loan with no interest.
But say you can't afford to pay off that fridge.
The very next day, that $1,000 you didn't pay starts accruing interest.
How much? Well, that depends on your APR,
your annual percentage rate.
If you have a really good credit score, it could be 12%,
but they go as high as 23%.
The average is around 16%,
and that amount is going to compound daily.
So every day, your balance is going to get a little bit higher, a little bit higher.
Then you'll get your statement.
[narrator] This month, you'll owe an additional $13,
but you don't just pay interest on the $1,000 principal,
you pay interest on the interest.
So every month, your debt will grow a little faster.
A month later, you'll owe this much.
A year later, you'll owe this much.
And if you keep carrying that original $1,000 over, eventually…
You've paid more in interest than the actual amount you originally borrowed.
[narrator] There's a reason
the Old Testament and the Koran both ban usury,
the old-timey word for high interest.
Dante even reserved a special portion of Hell for usurers.
They're in the seventh circle,
with the murderers.
-[distant screaming] -Interest can be a devilish thing.
And American card users have been paying a lot more of it.
In 2019, 121 billion,
right into the pockets of credit card companies.
Credit card companies don't want people who pay back all their money every month,
and they don't want people to never pay back their money,
but between those two extremes is the sweet spot,
is the place where banks make a lot of money on those loans.
[narrator] And they've got quite a few tricks to make sure that happens.
First, they need you to pick their card.
Dropping ready-to-use cards on unsuspecting consumers is now illegal,
but companies send out billions of credit card offers every year instead,
with enticing deals catered to the kind of customer they think you are.
Transactors will get offers for those great perk cards.
But if they think you're more likely to be a revolver,
they'll send you something like this:
a sweet introductory offer, no interest for the first year.
Now, what happens from the consumer psychological standpoint of this, is that
when I see these rewards offered to me,
I start now thinking about free benefits.
[overlapping] Bahamas, I was in Austin… Completely for free.
Even two million points.
I start thinking about the things I could get,
and I stop thinking about the things I have to pay to get those benefits.
[narrator] Like the amount of money you have to spend to get those rewards,
or the high interest rate that'll kick in later.
And the credit line they give you?
That isn't because they think you're good for that money.
When consumers see some information in front of them,
they assume there's a reason it was put there,
and the assumption might be that whoever is making this decision
thinks that I'm credit-worthy enough that I can have a limit that's this high.
The business model that credit card companies use
with the customers with lower credit scores
is sometimes called "low and grow."
[narrator] Starting you on a low credit line
and then slowly increasing it,
because studies show, most people will use that room
almost perfectly in tandem.
On average, if you double the credit line, you double the debt.
So sometimes consumers are myopic, and what I mean by that is that
they have almost tunnel vision.
They're focused on today, on the here and now.
[narrator] And it's especially easy to overspend with a credit card.
So there's research on what's called "the pain of paying."
What it suggests is that
different forms of payment
can be more or less psychologically painful to make.
[narrator] One study found that areas of the brain associated with pain and fear
are more likely to light up when you watch someone pay with cash
than when you watch them pay with a credit card.
And once you've racked up a month's worth of charges,
you get your first bill.
It will probably look something like this.
In the top right corner will be your due date,
balance, and a minimum payment.
It's usually 3% of your total debt, or $25, whichever is higher.
That's there for a good reason, so you know how much you have to pay
so you don't default on your credit card.
But it may have the impact
of anchoring consumers to pay less than they would have otherwise,
because they get too hooked on that one amount
they see on the statement itself.
[narrator] It's known as anchoring bias,
a tendency our brains have
to favor the first piece of information we're offered.
When a ship wants to dock, it drops an anchor in the water,
and that holds the ship down.
Of course the ship can move back and forth,
but it doesn't stray that far from the anchor.
[narrator] Which is roughly the same thing that happens in our brains
when we see a minimum payment.
[Hal Hershfield] We sort of stay close by to that number.
[narrator] If you just paid the minimum on that fridge from before,
you would eventually pay it off,
but it would take almost five years,
and cost you an extra $400.
They call it "the treadmill to nowhere." You're on that minimum-balance ride,
which only takes off a minuscule amount of your balance every pay period.
[narrator] US law now requires bills to have one of these,
a little box that tells you how much money you might save by paying more each month.
[Hal] Now, note what's interesting about this is that
nobody is actually being encouraged right there on that statement
to pay the maximum of what they can, and in fact,
research that I and others have done has found that people still end up
anchoring on whatever that extra information is.
They may end up paying more than the minimum,
but they still might pay less than they would pay
if none of that information was there to begin with.
[narrator] And there are lots of other little obstacles
credit card companies throw in our way,
like long, complicated contracts full of fine print,
where they hide all sorts of penalty fees:
for paying a bill late,
transferring your balance to a different card,
or using your card at an ATM.
It's no accident so many of us are struggling with debt.
And for a lot of people, it's not even about the game being rigged.
It's the whole arcade.
Working at the credit card industry, I had a really good perspective of
how it worked from the inside,
but I didn't feel like I understood really why consumers chose to borrow money,
and ultimately I was really craving to understand,
were credit cards making people's lives better or not?
[narrator] In pop culture,
-they're associated with luxury… -[woman] Rosa!
-…freedom… -He gave me his credit card.
-…and frivolous spending. -Becks!
Two hundred dollars on Marc Jacobs underwear?
Oh, underwear is a basic human right.
[narrator] But the reality is often the opposite.
I think most of the people I talked to,
they didn't feel they'd used their credit card for extravagant things.
People were using it for things that were, kind of, like, simple, everyday expenses.
[narrator] That may be why credit card debt carries a special stigma.
One study found that people accurately reported their mortgages,
but claimed their credit card debt was 40% less than it actually was.
Most people pay back their debts most of the time until they have a crisis.
And so suddenly you're out of a job or you get sick,
and you turn to your credit card to make up that difference.
It's no secret that few of us have savings accounts,
we couldn't come up with a few hundred dollars in a pinch if we had to.
[narrator] It's $400.
Thirty percent of Americans can't cover a $400 emergency expense.
And so our next best thing is credit.
A lot of us use credit cards as savings accounts,
as the "break open in an emergency."
And that's a very expensive way to pay for your problems.
And this is the real difference between the American system
and that of any other industrialized country,
that when people are in crisis, we ask them to fend for themselves,
and to do it on their plastic.
[narrator] During the 2009 financial crisis,
the US passed a law that banned many of the industry's worst practices.
We also put a stop to retroactive rate hikes
that appear on a bill suddenly with no rhyme or reason.
[narrator] That act did drastically reduce the amount of certain fees we had to pay:
by one estimate, saving Americans $12.6 billion per year.
But I think what you've seen every year since that law has passed is,
the CARD Act really moved credit card companies
from a model that was actually more fee-driven
to a model that was more interest-driven.
[Farnoosh Torabi] Absolutely, there is a fantastical message around credit cards…
That'll be a charge.
…that it's going to be this tool to get you to a better place in life,
to build your dreams, to get you to a better future.
It's not wrong, but….
it does require following some important rules.
[narrator] Don't let the card pick you.
Find the one that's best for your needs,
with the lowest interest rate you can get.
Start with the simple things.
Know when your credit card statements are due.
Know what your credit score is.
Focus on those small things, and you'll find yourself
actually able to reap a lot more benefits than you ever would have imagined.
[narrator] Then, use your card like it's cash.
You may have heard that revolving can sometimes boost your credit score.
This is one of the biggest myths, I don't know who has started this myth.
Let's just set the record straight.
It is always best to pay off your balance in full every month, period.
I use my cards pretty much like a debit card.
I will never carry a balance on it,
even if it has a 0% APR promotion.
[narrator] But if you find yourself in debt,
there are things you can do to help climb your way out.
Start by taking it one level at a time.
We have a hard time dealing with and thinking about bigger numbers.
We have an easier time thinking about smaller chunks of something.
If you've got $10,000 worth of debt,
and you wanna be out of debt in the next two years,
that's $5,000 a year.
What is that on a monthly basis?
What is that on a weekly and daily basis?
[narrator] Then automate your payments.
Use and leverage tools that make life easy and make life certain.
If we can automate it and say,
"Okay, every month, this much comes out of my checking account,
then all I have to do is make one decision."
[narrator] A credit card is a powerful tool.
And in the moments of life when you're down on your luck,
it can keep you afloat.
-But it's also easy to slip up… -[ominous bleeping]
…and that's not a personal failure.
It's how the whole game was designed.
[theme music plays]