Illustration by Jan Buchczik
This article appears in the June 2024 issue of The American Prospect magazine. Subscribe here.
Melissa Marquez is not your typical banker. She rails against the globalization of big finance and the concentration of the financial sector through mergers and acquisitions. She calls high interest rates “obscene.” Her financial institution has issued mortgages for 42 years but has never once foreclosed on anyone.
To be fair, Marquez doesn’t technically work for a bank; she’s the CEO of a credit union. And Genesee Co-Op Federal Credit Union in Rochester, New York, is different even from most credit unions.
“We really try to help create wealth for low-income people,” says Marquez, explaining that as a result, interest rates and fees need to be low. “Otherwise, you’re just extracting money, not helping build wealth.” Genesee Co-Op FCU is a community development financial institution, meaning serving low-income people is part of the organization’s mission.
When Marquez talks with new members, they’ve often come to the credit union after leaving the largest banks. “The pricing is just so exorbitant, whether that’s interest rates—well, if they can even borrow,” she says after a thoughtful pause, “or the fees being charged.”
IN AUGUST 2023, CONSUMERS IN THE U.S. broke a new record. Total credit card debt shot past $1 trillion. The latest statistics put that number $129 billion higher. At the same time, the credit card industry was breaking its own record, raising annual percentage rate (APR) margins on credit cards to their highest average ever.
As the price of credit increases alongside inflation’s higher prices, Americans spend more to borrow more. We know about the theory of “greedflation” exhibited by corporations since the COVID pandemic. Corporate profiteering was responsible for more than half of the increase in prices between 2020 and 2021, per the Economic Policy Institute. Even when inflation was slowing in 2023, 53 percent of price increases between April and September was driven by corporate profits, according to Groundwork Collaborative.
A recent study published by the Consumer Financial Protection Bureau (CFPB) suggests something similar happening in finance. The APR margin is the difference between the average APR and the prime lending rate, which is influenced by the federal funds rate, what the Fed tinkers with when it wants to lower inflation. About half of the increase in credit card interest rates over the past decade can be attributed to higher APR margins—bigger differences between the cost of lending and the average interest rate. That translates, the CFPB estimates, into an additional $250 in payments on the average credit card balance in 2023.
The average APR went from 16.3 percent in 2020, as the pandemic began, to 22.8 percent in 2023, a dramatic rise after several years of relative stability. That suggests that consumers are experiencing a “double greedflation,” with the cost of goods and services going up, and then the cost of credit to afford those goods and services going up opportunistically.
But over the history of the credit card, banks have been systematically scheming to raise interest rates, long before the pandemic unfurled.
Generating more borrowing—thus generating more interest—is the credit card business model.
A credit card industry dominated by a handful of big banks—perhaps fewer if the Discover–Capital One merger goes through—can rake in profits through widespread indebtedness. Monetary policymakers, like the Federal Reserve, seem to work in concert with the financial industry’s thirst for higher profits. And if customers look outside established credit channels, they will find new products like buy now, pay later that are hardly regulated at all.
While wages have finally seen real growth over the past year thanks to a tight labor market, decades of stagnation has ensured that wages are still insufficient for many workers to meet their needs. In lieu of those higher wages, we have credit. Want a better car? Charge it. Want to make rent this month? Charge it. Want to buy groceries? Charge it.
“We have made debt, and like the credit score that’s often required to borrow, nearly a requirement to participate in society today,” says Terri Friedline, associate professor of social work at the University of Michigan. Credit is embedded into society, and thus the economy. And the companies that provide credit, just like the companies providing goods and services, are using their indispensable nature to raise prices.
In 2022, just under half of consumers carried an unpaid balance on a credit card. As a result of the wide landscape of credit card use, the increase in credit pricing has a major impact on the economy at large. Households spend, the economy keeps whirring, and the credit purchases of both wants and basic needs turn into securitized assets, mainly benefiting financiers. After decades of this, the “real” economy and the credit economy are impossible to separate.
IT HASN’T ALWAYS BEEN LIKE THIS, but in some ways, it has. “People have always needed things before they had the cash to pay for it,” says Josh Lauer, associate professor of media studies at the University of New Hampshire and author of Creditworthy: A History of Consumer Surveillance and Financial Identity in America. Lauer explains that, rather than eschewing debt and prioritizing frugality, early Americans would rack up debts with local shopkeepers that they’d pay off after the harvest.
What’s changed after hundreds of years are the relationships between lenders and borrowers. Debts are not “personal between people who know each other anymore,” he says. Now, they’re “between people and faceless institutions.”
Those institutions brought about the rest of the changes.
Credit cards started out as an unregulated industry, but after a number of bank experiments—like mailing credit cards to consumers unsolicited—consumer advocates demanded that the new technology submit to state anti-usury laws, explains Sean Vanatta, a financial historian at the University of Glasgow in Scotland and the author of the new book Plastic Capitalism: Banks, Credit Cards, and the End of Financial Control. Under those anti-usury laws, credit cards were “operating in a world where the price of credit was fixed,” Vanatta says. This was not ideal for the big banks that intended for credit cards to be a new and profitable technology.
Lawyers at Citibank found a solution in the Great Plains. Citibank approached South Dakota—a state whose entire economy was reeling from the beginnings of the 1980s agricultural crisis—and inquired about moving bank operations to the state, if it would change its anti-usury law. South Dakota traded the higher interest rates for the promise of 400 jobs, and Citibank moved to the city of Sioux Falls in 1981.
A 1978 Supreme Court case called Marquette National Bank v. First of Omaha opened the floodgates for the scheme. First of Omaha, a Nebraska bank, was soliciting customers in Minnesota for credit cards that were based on Nebraska’s interest-rate law, not Minnesota’s more restrictive version. The Court ruled that the state where a bank is headquartered governs what credit card laws apply, not the state where consumers were based. With that ruling in place, it was a race to the bottom, with all credit card companies flocking to the states with the most generous laws, like South Dakota.
“After the 1980s, banks can charge whatever they want,” Vanatta says. Unsurprisingly, credit prices began to climb.
This kind of bank innovation—the kind that has lawyers hunched over regulations searching for weaknesses or inviting themselves to legislative sessions—hasn’t stopped since.
Government studies show that credit cards offered by bigger banks charge higher interest rates than smaller ones.
JUST ASK ELENA BOTELLA, A PRINCIPAL at Omidyar Network and the author of Delinquent: Inside America’s Debt Machine. Before she wrote her book and got a job at the eBay founder’s social change project, Botella worked at Capital One. She started at the bank fresh out of undergrad, and eventually rose to run the company’s subprime credit line increase program.
Your credit line, of course, limits how much you can charge to your credit card. Your issuer grants you a specific credit limit when you open your card, though the limit can be changed—and not just by the cardholder asking for an increase. Botella didn’t handle consumers requesting credit line increases, but proactive, automatic credit line increases imposed by Capital One.
Financial institutions often make the argument that extending credit to “subprime” customers with low or no credit scores—who are often low-income or are people of color—is actually about extending opportunity to these communities. For example, when the CFPB capped credit card late fees in March, a statement from the American Bankers Association argued the move would result in “reduced credit access for those who need it most.”
The idea that she was expanding access to credit is what kept Botella at Capital One, until she began asking herself: What if a bank is just extending credit in the hopes that it will be used?
“Capital One runs tens of thousands of experiments per year,” like any other bank, Botella says. The program had an “underlying experimental design” to determine who exactly would be granted credit line increases, and how much. From the experiments, Botella learned that the vast majority of credit line increases led to net new debt, meaning that cardholders wouldn’t otherwise take out debt on a different card or use the credit line increase to pay down different debt; they would spend more.
In other words, the cardholders were partly induced into debt by the mere availability of new credit. The new credit limit didn’t take a call to customer service or a trip to the bank—it was just there. Perhaps this is one reason why, as Botella says, “people will turn to a credit card to borrow where they would never take out an installment loan.”
And borrow they do, because even as wages stagnated over the past few decades, average consumer expenditures still continued to tick upward. This is sometimes attributed to the indefatigable power of the American consumer, but it’s just as much about the lure of easy access to credit.
Generating more borrowing—thus generating more interest—is the credit card business model, as interest is where companies make the bulk of their revenue. Approximately 80 percent of credit card profitability is based on the role of “credit” in credit cards—people actually carrying balances and being charged interest. In 2022, credit card companies charged Americans more than $105 billion in interest alone.
In a 2022 earnings call, Capital One CEO Rich Fairbank said the company was “leaning hard into origination growth and having the balances build over time”—that is, focusing on opening new accounts with a strategy to profit long-term, through things like credit line increases.
Botella says that Capital One starts cardholders with much lower credit limits than most banks. Only later, after they’ve gathered lots of data about you and how you spend your money, will they raise the credit limit. “Issuers can wait until they have extremely targeted information about you as the consumer specifically,” Botella, now a proud industry turncoat, says.
Of course, according to Capital One, a proactive credit line increase is “an indication you’ve used credit responsibly,” according to the company’s website. They say that a higher credit limit “may help you continue to use credit responsibly while meeting your spending needs.”
Customers can also request their own credit line increases online. If a customer wants to decline a Capital One–initiated increase, they … can’t do that online, but instead need to call customer service, talk to an automated voice, and then wait on hold for however long.
In 2023, Capital One made nearly $20 billion in interest from customer credit cards, a figure that represented more than half of the company’s total annual revenue.
DUE IN PART TO THE HIGH INTEREST and fees charged by credit cards, the Consumer Financial Protection Bureau under the Biden administration has set its sights on the industry. There are “serious questions about how competition is working, or not working, in the credit card market,” CFPB director Rohit Chopra told a gathering of the Consumer Bankers Association in March.
To support his point, Chopra regularly recites statistics such as the $130 billion that credit card companies charged U.S. cardholders in 2022, of which more than $25 billion was fees. While interest is the main moneymaker for credit card companies, fees—mainly late fees—drive a healthy 15 percent of credit card profitability. Or at least they did, until the CFPB moved on late fees.
In March, the CFPB capped credit card late fees to $8. The agency said that the reduction in late fees to a level commensurate with what it actually costs credit card companies to collect overdue bills will save Americans more than $10 billion annually. The regulation is currently under a flurry of legal objections from industry trade groups, and in May the Chamber of Commerce successfully secured a preliminary injunction, pending a resolution.
If it survives legal challenge, the late fee cap will disproportionately benefit people in low-income and majority-Black neighborhoods. Indeed, Black cardholders are significantly more likely to pay credit card fees than white cardholders, with 1 in 10 having paid a late fee in 2021. When controlling for income, the effect is smaller, but Black cardholders still were more likely to be assessed late fees than white cardholders.
Plus, cardholders with revolving balances pay the majority of credit card fees—not just late fees, but annual and other usage fees, too. This means that credit card companies make most of their money, whether in interest or fees, off of the same group.
When inflation falls, credit card interest rates don’t necessarily fall with it.
According to the CFPB, credit cards offered by big banks—Capital One, Citi, and the like—charge higher interest rates than the credit cards offered by smaller banks and credit unions. Still, people are much more likely to have credit cards from big companies.
Learning about these alternative options can be difficult. Often, comparison websites feature cards more prominently if the credit card company pays for placement. Other websites that promise to help people shop for credit cards have been accused of deception. In 2022, the Federal Trade Commission fined Credit Karma $3 million for promoting “preapproved” credit card offers that weren’t preapproved at all, and which sometimes led to customers’ credit scores getting lowered.
The CFPB is currently working on a public comparison-shopping website, allowing consumers to legitimately compare options with the confidence that they’re not being marketed to.
While Vanatta, the financial historian, thinks a cap on late fees is “unambiguously good,” he is not convinced an independent credit card marketplace will inspire much change, since it’s ultimately, as he says, “relying on consumer choice to ensure the market works better.”
Choice, or the illusion of it, is always lopsided when other parts of people’s lives are lopsided, too. “It’s the people who have the most time, who are the best informed, who can actually shop for prices” who will benefit, Vanatta says. “And it’s the people who have the least time, who are likely paying the highest rates, who are going to struggle to use those kinds of services.”
THERE’S ANOTHER INDEPENDENT AGENCY within the government that moves much more in step with credit card companies: the Federal Reserve.
Over the past couple of years, the Fed has been increasing the federal funds rate in order to combat inflation. The idea is that higher interest rates—a higher price of credit—will curb demand and prices will fall.
In doing so, the Fed “creates kind of a paradox for monetary policy,” says Gerald Epstein, professor of economics and founding co-director of the Political Economy Research Institute at the University of Massachusetts Amherst. “In trying to lower price increase, they themselves are raising prices,” he says, thus ultimately “hurting some groups at the expense of others.”
One group that is not hurting from the Fed’s actions is the financial industry. The Fed is essentially “mobiliz[ing] finance to help it with its policy,” Epstein says, which is allowing the industry to “act in concert as if they were a monopoly or an oligopoly.” Bank customers have nowhere to go, because financial institutions are all raising interest rates at once.
Plus, when inflation falls, interest rates don’t necessarily fall with it. “A lot of these interest rates that banks and credit card companies charge go up when inflation goes up, but they come down much more slowly,” Epstein says. That’s exactly what happened with credit card interest rates after the Great Recession. Even after instances of delinquency decreased and the prime rate fell during a period of low inflation, credit card companies still increased their interest rates.
They can, so they do.
And the same thing is happening today. In response to the CFPB late fee cap, Synchrony Financial, a large credit card issuer, has increased its interest rate, not because of increased risk of default or costs of doing business, but because it wants to offset the loss in revenue and maintain profit margins.
Critics argue that the ease of buy now, pay later apps facilitates runaway spending and unsustainable debt.
CREDIT CARDS ENTERED THE SPHERE when companies were looking to profit from a new, unregulated industry. As credit cards face even more regulation, corporations are again looking outside the regulatory perimeter.
Buy now, pay later (BNPL) companies have been quickly gaining ground as an alternative to credit cards, corresponding to a rapidly growing tally of consumer debt. Like credit cards, BNPL offers short-term loans that may be interest-free. Unlike credit cards, BNPL users aren’t subject to a traditional credit check, making the option easy, and to some consumers, much more attractive.
Companies like Klarna and Affirm have taken shopping by storm, with loans totaling more than $75 billion in 2023—a 3,650 percent increase from 2019’s $2 billion in BNPL spending.
Little of this is being tracked at the individual level. For instance, nearly all BNPL companies do not submit purchases to credit agencies. That may sound good to some consumers, but most BNPL transactions are exempt from the protections of the Truth in Lending Act, which allow consumers to dispute fraudulent charges and get disclosures on interest rates and fees.
Moreover, critics argue that the ease of using BNPL facilitates runaway spending and unsustainable debt, spilling over into other parts of financial life. One research paper indicates that people using BNPL are more likely to incur bank overdrafts and credit card late fees.
It’s clear that the BNPL industry is targeting customers who are more likely to “exhibit measures of financial distress,” according to a 2023 CFPB report. The agency found that most consumers don’t use BNPL because they lack access to other credit products. Rather, people who take advantage of BNPL were more likely to have revolving credit card debt and were more likely to frequent high-interest financial service providers like payday lenders.
Meanwhile, BNPL is spreading. Affirm is now even offering loans for elective medical procedures, which include cosmetic surgery as well as dental procedures.
Credit card companies have viewed BNPL both as competition and as a promising model. For instance, in 2020, Capital One barred its customers from using their credit cards to pay BNPL debt, citing BNPL payments as “risky.”
By 2021, Capital One was testing its own BNPL software. Many other big credit card providers have launched their own BNPL-like platforms: There’s Citi Flex Pay, My Chase Plan, Barclays Easy Pay, and American Express Plan It.
WHEN ANDRIA BARRETT WAS GROWING UP in a Jamaican family in Canada, her mother and grandmother saved money with other women in a group known in Jamaican patois as a pardna—partner. The lending circle worked like this: Each person gave the same amount each month, and one person received the monthly total until everyone received their share.
“It was an informal, community style of banking,” Barrett recalls. Women would “come together, pool their money, and lend credit to each other.” There was no interest charged. The success of the system was based on trust.
Barrett thought the informal lending circle was distinct to Jamaicans.
But pardnas, which academics call rotating savings and credit associations (ROSCAs), can be found all over the world. In Somalia, a ROSCA is called a haghad; in Trinidad, a susu.
In 2022, Barrett formed the Banker Ladies Council in Toronto, where—like across the United States—ROSCAs are particularly popular within immigrant communities who may not feel welcomed by the formal banking system. The council promotes ROSCAs as a legitimate financial choice throughout Canada.
“If you have issues at a regular banking institution, you can work cooperatively as a group,” Barrett says. “The informal mutual aid and banking of the past has a place today and in the future.”
Credit unions like Genesee Co-Op FCU in Rochester are another alternative to big banks, one that operates within the formal financial landscape. But many credit unions strayed from their original missions because of financial deregulation in the 1980s. Credit unions often make themselves look more like banks so that they can compete with banks.
Genesee Co-Op FCU formed in 1981 at the cusp of financial deregulation, but it doesn’t look much like a bank. It serves a diverse constituency in Rochester of mostly people with low incomes, including refugees and others with little to no credit history.
The firm doesn’t require a minimum credit score at all for consumer lending. (In fact, Marquez doesn’t consider credit scores an effective predictor of repayment.) Still, Genesee’s loan loss rate is normal for a credit union of its size, and even comparable to credit unions that only lend to borrowers with the best credit, Marquez says.
Marquez used to think of access to affordable credit as her competitive advantage. In the last decade, she’s realized “it’s not just about the access to credit,” but “how servicing happens as well.” In other words: What happens after a person gets their loan?
If members have trouble repaying, Marquez wants them to simply reach out. An actual warm human being will be on the other end of the phone line to help with getting an extension or creating a repayment plan.
“Not to say we haven’t had members struggle with repayment—we have,” Marquez says. But the credit union works with them.
“I think that’s what’s been lost [with] consolidation of the monster global institutions,” she says. “At such huge scales … how do they build good servicing that helps their borrowers?”
POSTSCRIPT: On May 22, the Consumer Financial Protection Bureau issued a rule stating that buy now, pay later products are actually credit cards, subject to the same rules giving borrowers the ability to dispute charges and demand refunds on returns.
