The Other Side of Debt

What happens after you swipe your credit card? Inside the wonky world of fixed-income investments.

A lot of us are using credit cards more frequently lately, as debt has become necessary to keep our finances afloat.

When you swipe your card, do you ever wonder who is on the other side, lending you the money? It’s not just the bank that issues your card. There’s a whole set of investors and lenders who don’t just loan you money but also profit off of doing so.

Here’s how it works.

Let’s say you have a CitiBank credit card. You charge more than you can afford to repay because the pandemic has reduced your pay significantly. So you let the balance accrue interest and monthly fees. The interest and monthly fees go to Citi, but the bank is not the final beneficiary of that money.

In addition to providing you with personal banking services, Citi is an investment bank. One of the things it offers investors is the opportunity to lend money. In exchange, those investors receive interest on the loans and are eventually repaid the money they lent. This is called a fixed-income investment.

To create a fixed-income investment out of credit card debt, Citi pools your debt with that of thousands of other customers and packages them for investors.

In this example, think of Citi as a middleman. The bank lends money to you via your credit card, but it doesn’t have infinite resources to do so. Instead, institutional investors lend Citi money in exchange for interest.

So what’s an institutional investor? Pension plans, health systems, endowments, foundations, family offices, and sovereign wealth funds, among others. They have billions of dollars to invest, and investment banks like Citi provide attractive opportunities for investment.

Back to your credit card: we’ve traced the interest and fees to Citibank, but what institutions are giving them money?

To find out, I looked at the fixed income investments Citi advertises on its website. From there, I found an asset class called “Citibank Credit Card Securitization.”

I found publicly available information that shows that the Florida Local Government Investment Trust has loaned Citigroup roughly $30 million for its credit card-focused lending program. This sounds huge, but it’s a fraction of the investment trust’s $11.6 billion in assets under management.

In exchange for the interest payments Florida receives from its loan, it pays Citi investment fees.

In other words, this institution lent an investment bank money, which the bank then lent you. You were charged interest and fees, which were passed through the investment bank on to the institution. The institution paid the investment bank fees in exchange for a steady stream of returns.

If you are looking to duplicate this effort and find out where your own credit card debt is going, look on your credit card company's website for something like “credit card securitization” or “credit card asset-backed securities.” It will likely be on a page devoted to fixed-income investments. From there, Google the name of the asset plus the phrase “meeting minutes." Here’s why: public pension funds publish meeting minutes that show their investments online regularly.

These disclosures are valuable, as they can reveal who exactly is benefitting when we take on debt. Many police departments, for example, have pension funds that invest in these types of securities.

While it’s understandable that many of us need to take on debt right now to survive, I think it’s important to know who benefits when that happens. That said, there aren’t a ton of alternatives to credit cards beyond paying off the debt. There are, though, the next steps we can take that are mainly related to systemic, rather than personal change.

Check out the Debt Collective and Strike Debt, and read the Debt Resistors' Operations Manual. The New Economy Coalition, although not solely focused on credit card debt, is another good resource.