December 3, 2007
TO: Business and Personal Finance Editors and Writers
FROM: American Bankers Association
SUBJECT: Myths vs. Facts: Credit Cards
In the coming months, federal regulators and legislators will be examining credit card terms and practices. We hope you will find the following information useful in your reporting.
Myth: Americans are “up to their eyeballs” in credit card debt
Facts: About 75% of American families have one or more credit cards, but only about 46% of all families carry a balance while 54% pay their outstanding balance in full each month. And while competition has ensured greater access to credit cards, credit card balances as a percentage of total household debt have been declining since the mid-1990s, according to the Government Accountability Office (GAO).
- As a percentage of total household debt, credit card balances fell from 3.9% in 1995 to just 3.0% in 2004;
- Median credit card balance among families carrying a balance was $2,200 in 2004 (the most recent year this information is available), meaning that 50 percent of families with credit card debt owe more than $2,200, while 50 percent owe less than $2,200;
- The ratio of aggregate family debt payments to income has remained stable at roughly 14 percent across all income levels since 1995 and has even fallen for families in the lowest two income levels, meaning that American family debt levels relative to income have stayed well within reason for over a decade; this includes low-income families.
Myth: Fees and interest rates on credit cards are higher than ever before.
Facts: Improvements in the credit card industry have made credit more affordable and available for the average American. Thirty years ago, only about one-third of Americans could obtain a credit card, the fixed interest rate was around 20%, and most cards charged annual fees. Today, the vast majority of households have at least one credit card, most do not carry annual fees, and interest rates are substantially lower.
- The average credit card interest rate in 2005 was just over 12%, almost six percentage points lower than the average rates that prevailed before 1990;
- Though late-payment and over-the-limit fees – all of which can be avoided by consumers – have increased in recent years, nearly 75% of all credit cards do not carry annual fees and those that do typically offer rewards programs;
- According to the GAO, total revenue from combined annual and penalty fees was roughly the same in 2004 as it was in 1990; this means that, contrary to some assertions, fee generation has not been the focus of card industry revenues; fees have merely been reallocated away from the majority of consumers towards those who fail to pay their bill on time, exceed their credit limit, or otherwise fail to comply with the basic terms of their loan agreement.
Myth: Credit card companies force customers to pay outrageous fees.
Facts: Consumers are in complete control over how they use their credit cards. By choosing the right card for their needs, paying their bills on time, and avoiding purchases they cannot afford, consumers can completely avoid finance charges, late fees, over-the-limit fees, and other penalty fees. Furthermore, the credit card industry, consumer groups and others are working with government agencies to make credit card disclosures easier to understand to help consumers make better decisions.
Myth: It is unfair to “re-price” consumers based on how they perform with other credit account relationships.
Facts: Each new use of a credit card constitutes a new loan, the only collateral for which is the customer’s promise to repay. The ability of customers to repay their loans depends on what other obligations they may have taken on and how well they manage all of their debts.
- Customer risk profiles can change over time and these changes may adversely affect a customer’s ability to manage their debts; it is a settled fact that a customer’s performance with one or more debt obligations is predictive of whether they will pay their other bills, including credit cards;
- Card issuers generally only re-price customers to higher rates when they have exhibited a pattern of poor debt management, relegating them to a higher risk profile; customers that show a strong record of meeting their obligations receive lower rates and/or a higher credit limit;
- As noted by the Federal Reserve, attention to risk, including the risk of nonpayment, is a fundamental requirement of safe and sound lending.
Myth: Consumers are forced to accept unilateral interest rate changes by card issuers.
Facts: If customers are unhappy with their interest rate or the terms and conditions attached to their credit card, there are thousands of issuers that would be happy to accept their business. The cost of funding credit card loans can often vary and card issuers need to manage this variable by re-pricing sometimes; this is what allows issuers to provide flexible credit products and avoid taking on risks that are too high to maintain.
- The majority of card issuers allow customers to opt-out of interest rate increases and pay outstanding balances at their prior rate, provided the customer agrees to stop using the card and closes their account;
- The Federal Reserve’s proposed revisions to Regulation Z build on the opt-out concept and would make it applicable across the board for all card issuers;
- In the highly competitive credit card market, consumers have the option of finding another credit card and transferring their outstanding balance to a competing card issuer; the power of “choice” that consumers possess cannot be overstated.
Myth: Imposing price caps on credit card interest rates and fees will help consumers.
Facts: Capping interest rates and fees will actually hurt the vast majority of consumers, including those who it is believed would be most helped by price caps.
- A recent study by economist Jonathan Orszag demonstrates that price caps would result in unintended consequences such as increased annual fees, increased finance charges for consumers across the board, and a devaluation of rewards programs; price caps would also force credit card issuers to deny credit to people whose credit scores may be lower, but are still considered creditworthy, since issuers may not be able to accurately price for the risk involved.
- Interest rate caps in the United Kingdom and Australia led to significantly higher average interest rates and a rise in the number of cards charging an annual fee;
- The Federal Reserve has released studies showing the projected negative impact of price caps;
- According to the Federal Reserve, caps would have the greatest impact on those with limited access to credit, such as young adults and moderate income consumers.
Myth: Most bankruptcies are caused by high levels of credit card debt.
Facts: Most bankruptcies in the United States are actually triggered by life crises such as divorce, job loss, and uninsured illness. During times of crisis, consumers often use credit cards to help bridge the financial gap caused by these events, but credit card balances stemming from such events represent a relatively small portion of the individual’s overall debt burden.
- According to the Federal Reserve, though the percentage of families holding credit cards has steadily risen, the household debt service burden has only modestly increased and the vast majority of households pay their revolving debt on time;
- According to the GAO, unpaid interest and fees represent only a small portion of amounts owed by credit card cardholders that file for bankruptcy.
Myth: Most college students rack up huge credit card balances, often leading them to financial ruin.
Facts: Students use credit cards responsibly – even more so than the general population. Moreover, credit cards are an important resource to students, helping them buy necessary school supplies, giving them quick and convenient access to funds for emergencies, and allowing them to establish a good credit record that will be vital in later life.
- According to a recent report by the GAO, nearly 60% of students with credit cards report that they pay their balance in full each month, compared to just under 50% for the population in general;
- Of the roughly 40% of college students that carry a balance, the average balance is around $575.
Myth: The credit card industry is dominated by a few big banks. Without true competition, consumers are vulnerable.
Facts: While there are roughly ten large financial institutions that handle the majority of credit card accounts, these institutions are in fierce competition with one another as well as with 6,000 other card issuers, and consumers benefit from this competition in the form of lower rates, fewer fees and greater choices.
- There are more than 6,000 depository institutions that issue credit cards;
- According to the GAO, increased competition among issuers is what led to lower average interest rates between 1990 and 2005;
- The Information Policy Institute estimated that competition in the credit card industry saved consumers an estimated $30 billion between 1998 and 2002.
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The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $12.7 trillion in assets and employ over 2 million men and women
