Universal or bank cards such as Visa or MasterCard were reserved for high- and upper-middle-income households. They were offered to reward the banks' best customers (after all, how many toasters could they use?) and served as loss leaders, as most cardholders paid off their monthly balances. Until the early 1980s, bank credit cards were a symbol of high social status, used mainly for convenience rather than because of need. This was the inspiration for the color-coded cards that emerged in the 1980s and 1990s: Fiscally responsible "convenience" users wanted to be distinguished from less credit-worthy consumers with a platinum card.
2. Mostly no. Credit card use expanded dramatically during the golden age of the industry -- beginning in the early 1980s -- because deregulation suddenly allowed high interest rates and penalty fees, and credit cards became a major engine of bank profits. In 1978, a Supreme Court decision effectively ended consumer interest-rate limits and the federal usury law. After the 1981-82 recession, industrial restructuring shifted demand for bank loans from manufacturing companies to individual households, and national banks aggressively pushed for more deregulatory policies, in line with the '78 decision. A 1996 Supreme Court ruling that ended state-regulated limits on credit card fees furthered that cause. Today, only nonprofit credit unions, as mandated by Congress, must abide by an interest rate ceiling of 15 percent.
As more and more people were preapproved for credit cards in the '80s and '90s, the "free" credit used by the most affluent households was subsidized by the high interest rates and penalty fees paid by the most financially distressed. A carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues. Nearly half of all credit card accounts do not generate finance and fee revenues.
3. False. Although credit card companies are experiencing record default rates, irresponsible consumer borrowing is not the main culprit behind soaring interest rates and fees. Banks have suffered far more from mortgage foreclosures and home-equity loan defaults. Major banks encouraged their credit card divisions to relax their standards at the end of the financial bubble; more customers went deeper into credit card debt. Those customers were encouraged to refinance their mortgages, generating high fees for the banks. Banks then sold securities backed by credit card debt to institutional investors around the world. When the bubble burst in September 2008, banks could not sell these low-quality securities. They were stuck with poorly performing credit card portfolios.
For cardholders, the central problem is that the credit card industry's business model is fundamentally flawed; bankers want consumers to foot the bill for its reengineering through higher interest rates and fees. As deregulation gave rise to conglomerate financial institutions, credit cards continued to serve as marketing loss leaders for attracting higher-income cardholders (who typically paid off their monthly charges) by bundling them with other financial products such as loans, brokerage fees and insurance. With the recession, these other bank revenues have declined sharply, raising pressure on credit card companies to boost profits.
