Our Credit Cards Have Become Cheaper, Or Have They?

Tuesday, March 18th, 2014

Our Credit Cards Have Become Cheaper, or Have They?

Tags: credit card fees, credit card regulations

Our Credit Cards Have Become Cheaper, or Have They?


Back in September of last year four economists published a paper, in which they claimed to have found that, by placing limits on credit card fees, the CARD Act of 2009 had reduced Americans’ overall borrowing costs by 2.8 percent of their average daily balances, which amounted to about $21 billion in annual savings. This morning I read that the paper has been revised and it now shows savings of 1.7 percent and $12.6 billion, respectively. That is quite a difference — it almost makes you wonder whether we shouldn’t expect further updates!


Still, as this is an important subject, I thought I should take a look at the researchers’ revised findings and see what I could make of them. Well, the vastly different headline figures aside, the authors’ conclusions have remained the same: the CARD Act has substantially reduced Americans’ cost of using credit cards without, crucially, leading to offsetting increases in interest rates or reductions in credit volumes.


But I wonder. For one, isn’t it quite possible that interest rates have remained low, because the Federal Funds Target Rate has been practically at zero since before the CARD Act took effect? For we know that the CARD Act has intensified a trend away from fixed interest rates on consumer credit cards and toward variable ones. As a result, the great majority of credit card offers now peddle products with variable interest rates, which are tied to the prime rate, which itself is loosely calculated using the following rule of thumb:


U.S. Prime Rate = (The Fed Funds Target Rate + 3).


So right now the prime rate is only at 3.25 percent or so (the Fed Funds rate is at 0 percent – 0.25 percent). However, once the Fed starts to raise its rate, as eventually it will do, the prime rate and the credit card variable interest rates will automatically be adjusted upwards. Therefore, holders of such cards can only expect their rates to increase in the future, as the Fed rate cannot possibly go any lower. That being the case, a reasonable question seems to be whether the real CARD Act costs haven’t merely been postponed.


Moreover, there is another major contributor to the issuers’ lower costs of borrowing: the lowest charge-off and delinquency rates in memory! And, even though it is less certain that these rates will rise than it is that the prime rate will increase (which is a virtual inevitability), this is still the overwhelming possibility. In any case, the point is that the issuers have been enjoying record-low borrowing costs for years, and this period has fully encompassed the CARD Act’s existence. But let’s take a look at the researchers’ revised findings.

Our Credit Cards Have Become Cheaper… Maybe


Here is the gist of the paper’s revised findings:

[W]e find that regulations to limit fees were highly effective. For borrowers with a FICO score below 660, over-limit fees dropped from an annualized 3.3 percent of average daily balances to virtually zero in February 2010, and late fees dropped 1.5 percentage points over the February 2010 and August 2010 implementation phases, leading to an overall decrease in total fees of 5.5 percentage points of average daily balances. Account holders with a FICO score above 660 had lower pre-CARD Act fees levels, and experienced qualitatively similar but smaller declines in fees, with a total drop over the implementation phases of 0.5 percentage points of average daily balances. Combined across the the low and high FICO score accounts, the CARD Act reduced overall fee costs by an annualized 1.7% of borrowing volume. Extrapolating this number to the total outstanding credit card volume of $744 billion in the first quarter of 2010 (FRBNY, 2013) yields annual cost savings for U.S. credit card users of $12.6 billion per year.


So, there you have it. But what about unintended consequences?

No Offsetting Fee Increases


That is what the researchers claim to have found:

We find little offsetting response in terms of pricing… [W]e show that there is not evidence of a sharp increase in interest charges during the CARD Act implementation period or a gradual increase over a longer time horizon. We also examine interest charges on new accounts, for which banks are less constrained in their ability to adjust contract terms, but find no evidence of an uptick or gradual increase in this sample. Our point estimate for the offset is approximately zero and we can rule out an offset of greater than 57% with 95% confidence. In addition, we find no evidence of an offsetting increase in other sources of credit card income (e.g., interchange fees) or a reduction in measures of costs (e.g., marketing expenses)…


[W]e find no effect of the CARD Act on the volume of credit as measured by credit limits, the number of new accounts opened, and average daily balances. These findings are consistent with the model which predicts no change in the volume of credit when the offset is zero. Taken together, we interpret the results as demonstrating that regulation of “hidden fees” can bring about a substantial reduction in borrowing costs without necessarily leading to an offsetting increase in interest charges or a reduction in access to credit. While the results do not speak to the persistence of these savings, even over a modest time horizon the estimated annual savings of $12.6 billion are quantitatively significant.


Let me just make a couple of points here. First, on the interchange front, of course the issuers could not raise them (actually, only Visa and MasterCard could do that, but never mind) to offset lost revenues elsewhere — the Durbin Amendment placed a new, and much lower, limit on debit interchange rates and raising the credit ones was politically simply out of the question. I don’t see how you could consider this to be any factor here.


Regarding the missing effects of the CARD Act on the available credit (the total credit limits), in the wake of Lehman’s collapse, these had plummeted as low as they could possibly go, because the issuers wouldn’t lend to anyone but consumers with excellent credit scores. So, yes, the CARD Act had no effect on their lending decisions, but what does that prove?

The Takeaway


Here is the paper’s revised conclusion:

Taken together, we interpret the results as demonstrating that regulation of “hidden fees” can bring about a substantial reduction in borrowing costs without necessarily leading to an offsetting increase in interest charges or a reduction in access to credit. While the results do not speak to the persistence of these savings, even over a modest time horizon the estimated annual savings of $12.6 billion are quantitatively significant.


Do you notice how the researchers have left a way out for themselves (“the results do not speak to the persistence of these savings”)? As well they should — having just reduced their “savings” estimate from $21 billion to $12.6 billion, they are bound to be careful. But then, what’s a few billion dollars among friends?


Image credit: Wikimedia Commons.

Monday, March 17th, 2014

Banks Pay Colleges $50.4M for Issuing Credit Cards to Students

Tags: CFPB, credit card regulations

Banks Pay Colleges $50.4M for Issuing Credit Cards to Students


One of the most controversial provisions of the CARD Act of 2009 prohibited financial institutions from issuing credit cards to anyone under the age of 21, unless the youngster could prove that she had the means to pay the debt back. Failing that, the applicant could only get a credit card if she could find an older person to co-sign her application. Furthermore, the CARD Act placed great restrictions on the marketing of credit cards on college campuses. And the latest report released by the Consumer Financial Protection Bureau (CFPB) shows that the law has succeeded: the issuers’ interest in maintaining college-affiliated credit card programs is quickly diminishing.


In its fourth annual report to Congress, the CFPB is telling us that in 2012 banks had entered into fewer agreements with, and paid less money to, colleges and affiliated organizations (such as fraternities, sororities, alumni associations, etc.) for the right to issue credit cards to their students and members than they did in 2011, which was also the case in each of the preceding years.


Of course, as the CFPB itself points out, the report does not include data about any credit card accounts opened by students “independent of a college credit card agreement”, but this is nonetheless the best resource we have available to help us examine the issuers’ interactions with college-age consumers. And anyway, if fewer youngsters are opening up credit cards through their colleges and organizations, I think it is very probable that the same is true for non-college-affiliated credit card accounts. And in fact data from the United States Government Accountability Office (GAO) confirms this assumption, as we will see in a moment. But let’s first take a look at the data.

College Students Get Fewer Credit Cards


In 2012, the CFPB has received 617 college credit card agreements (down from 798 in 2011) from 23 credit card issuers (up from 21 in the previous year). The report shows that the number of issuers who have entered into agreements with college organizations has held roughly stable between 2009 and 2012.


However, all other categories–the number of active agreements, the total number of newly-opened college card accounts, the total amount paid by issuers and the overall number of active college credit card accounts–has steadily declined over this period, as you can see in the chart below.


College Students Get Fewer Credit Cards


And here is the full data set:




Issuers Pay $50.4M for Access to College Students


The report’s headline number, as ever, is the $50.4 million paid by the 23 card issuers listed in the table below to various college organizations in 2012, a decrease of 19.4 percent–$12.1 million–from the $62.5 million total for 2011, which itself was lower by 15 percent–$11 million–than the $73 million paid out by financial institutions in 2010.


Once again, one particular issuer–Bank of America’s subsidiary FIA Card Services, N.A.–was responsible for the lion’s share–71 percent ($35.6 million) of the total amount paid to colleges and affiliated organizations (FIA’s last year’s share of the total was practically the same–72 percent). Here is the full list of issuers with active college credit card agreements in 2011:


Issuers Pay $50.4M for Access to College Students


As you can see in the chart above, the money paid over the years by the 23 issuers listed there has bought them just over 1.2 million credit card accounts–down by about 20 percent from the previous year’s total of 1.5 million. As you would expect, this category too is dominated by BofA’s FIA Card Services, and even more so than the money-paid category. In 2012, FIA had 80.4 percent of all active college credit card accounts, up by 49.7 percent from the issuer’s 53.7-percent share in 2011, according to the report.

Who Got Paid


The biggest share of the college card agreements in effect in 2012–about 43 percent–were struck between a card issuer and a college-affiliated alumni association (the share for 2011 was about the same–42 percent). An additional 28 percent (down from 33 percent in the previous year) of the agreements were signed between an issuer and a college. Another 19 percent were between a credit card issuer and some other type of organization affiliated with an institution of higher education. Here is the full list:


Who Got Paid


As you can see in the table above, alumni associations received by far the biggest share of the issuers’ payments in 2012–$30.8 million (61 percent)–down from $38 million (and again 61 percent) of in 2011.


But that wasn’t always the case. The make-up of the affinity agreements has changed a great deal since the 2010 year’s report, in which alumni associations constituted only 36 percent of all affinity agreements and institutions of higher education accounted for 37 percent. The growth in alumni associations’ share of the agreements at the expense of the share of institutions of higher education is a continuation of the trend illustrated in the figure below.


Who Got Paid


As was the case in 2011 and 2010, the biggest beneficiary of issuer money was the Penn State Alumni Association, which led the field by a substantial margin. Here is the top-5 list of the college institutions and organizations, which were the biggest recipients of issuer payments in 2012:



Agreement

Payments by issuer in 2012

Payments by issuer in 2011

Payments by issuer in 2010

Rank as of 12/31/2011/

12/31/2010

Institution or organization

Credit card issuer

Penn State Alumni Association

FIA Card Services, N.A.

$2,742,743

$2,742,743

$4,292,488

1 / 1

Alumni Association of the University of Michigan

FIA Card Services, N.A.

$1,800,000

$1,700,000

$1,600,000

2 / 3

University of Southern California

FIA Card Services, N.A.

$1,505,550

$1,502,250

$1,508,625

3 / 4

University of Tennessee

Chase Bank USA, N.A.

$1,428,571

$1,428,571

$1,428,571

4 / 5

California Alumni Association

FIA Card Services, N.A.

$1,353,450

$1,353,825

$1,353,225

5 / 7



The Takeaway


The marketing of credit cards on college campuses has declined quite drastically since the CARD Act took effect. There are fewer affinity programs and much less money is being paid to colleges and affiliated organizations for the right to market cards to their students and members. Consequently, the number of newly-opened accounts is declining.


Moreover, the United States Government Accountability Office tells us that the biggest affinity card issuers (representing 91 percent of cardholders) are now primarily targeting alumni and no longer market affinity cards directly to students. As a result, there has been a marked decline in card solicitations to students in recent years and in the newly-opened accounts in response to such solicitations. Only 6 percent of students are reported to have obtained a credit card as a result of a direct mail solicitation in 2013, down six-fold from the 36-percent share recorded in 2000.


So the CARD Act is working as planned here and has significantly limited student access to credit cards. Whether that is good or bad policy, however, is a wholly different matter. I, for one, firmly believe that college students should be able to open credit cards more easily. On this blog we’ve looked into reports, which have shown that youngsters are perfectly able to manage them and don’t need “protection”. But this argument has been settled, at least for now.


Image credit: Wikimedia Commons.

Tuesday, December 17th, 2013

How Risky Are Young Borrowers?

Tags: credit card regulations, Federal Reserve

How Risky Are Young Borrowers?


That is the question, which four researchers have attempted to answer in a recent paper for the Federal Reserve Bank of Richmond. The authors study the effects of the CARD Act of 2009, which, they remind us, made it much more difficult for young Americans to obtain credit cards. Among other things, the legislation banned credit card companies from marketing their products on college campuses and from issuing cards to people under the age of 21, unless the applicants either had a cosigner or could prove that they had the ability to repay their debt. So what do they find?


Well, the authors conclude, as others have done before them, and as I have argued on a number of occasions, that far from being clueless victims in dire need of protection, young Americans are actually doing a pretty good job at managing their finances. In fact, youngsters are less likely to be delinquent on their credit cards than middle-aged Americans. In fact, as the researchers note, citing other studies, the younger one is when she gets a credit card, the less likely she is that she will be late making her payments. Naturally, then, the authors observe that an “early entry into the credit card market is not necessarily risky or short-sighted behavior and that a prescriptive approach to financial behavior might be inefficient because it limits consumer choice”. Now, I understand that this is a Federal Reserve paper, but surely there is a better way to put it. How about my take from more than a year ago: “college students are not dummies and they do need credit cards”? It’s a short paper, so I thought I’d give you the whole thing. Here it is.

How Risky Are Young Borrowers?


By Peter Debbaut, Andra C. Ghent, Marianna Kudlyak, and Jessie Romero


Young borrowers are conventionally considered the most prone to making financial mistakes. This has spurred efforts to limit their access to credit, particularly via credit cards. Recent research suggests, however, that young borrowers are actually among the least likely to experience a serious credit card default. One reason why people obtain credit cards early in life may be to build a strong credit history.


Access to credit is an important way for individuals to smooth their consumption throughout their lives. This may be especially true for young people because they are more likely to be making large investments in their human capital and because they have not yet built up significant wealth. Credit cards may be a valuable source of credit and consumption smoothing to young people given their relatively limited exposure to other means of credit.


In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), which regulates when lenders can change the interest rate on a card, the fees they can charge, and the language of credit card disclosure forms. In addition, Title 3 of the Act limits the marketing of credit cards to people under the age of 21 and makes it illegal to issue a credit card to anyone under 21 unless the individual has a cosigner or can demonstrate “an independent means of repaying any obligation arising from the proposed extension of credit.” The impetus for this provision of the CARD Act was a concern that young people are more likely to accumulate excessive debt and to default on that debt, perhaps because they are not financially literate or because they are more prone to impulse purchases.1


Legislation designed to protect consumers from the consequences of financial decisions may be well-intentioned, but it presumes consumers are likely to make financial mistakes. From an economist’s perspective, however, it’s very difficult for an outside observer to determine whether a consumer has made a mistake. Choices depend on the preferences and constraints of the person making the decision, not on the beliefs of the observer. For a consumer who plans to sell a home in a few years, for example, an adjustable-rate mortgage that begins at a lower interest rate might be a better option than a fixed-rate mortgage. Likewise, obtaining a credit card might be a prudent choice for a young person who does not have access to other types of credit.


There is little empirical research on young people and credit card default. The CARD Act, however, offers researchers a quasi-natural experiment for examining the impact of credit card availability on young people. In a recent working paper, three of the authors of this brief (Debbaut, Ghent, and Kudlyak) use the Act to study whether or not young people are worse credit risks than older borrowers.2 The authors also examine the effects of early entry into the credit market on the likelihood of default. These effects are not straightforward.


On the one hand, a person who gets a credit card early in life has more time to accumulate debt and might therefore be more likely to be delinquent on that debt. On the other hand, someone who gets a credit card at a young age has more time to learn how to manage debt, perhaps lowering the risk of future delinquency or default.

The CARD Act and Credit Availability


The CARD Act was signed into law in May 2009, but credit card companies were not required to comply with all the provisions of the Act until February 2010. Borrowers and lenders thus were aware of pending changes for at least half a year before they went into effect. This knowledge could have influenced borrowers and lenders in several different ways. For example, consumers under age 21 might have obtained a credit card earlier than they otherwise would have, or they might have obtained an additional card. Credit card issuers might have tried to increase the supply of credit to young people in an effort to offset the effects of the Act. Conversely, issuers might have started changing their systems and procedures prior to February 2010 to make sure they would be ready to comply with the new law, thus reducing the supply of credit to young people.


Debbaut, Ghent, and Kudlyak compare the credit card status of individuals who were 18 or 19 years old in 2009, and thus would have been 19 or 20 years old when the law came into effect, with individuals who were 20 or 21 in 2009, and thus would have been 21 or 22 in 2010 and unaffected by Title 3. The authors find that anticipation of the CARD Act appears to have decreased, not increased, the availability of credit to young people. People who were 18 or 19 in 2009 were several percentage points less likely than those who were 20 or 21 to have a credit card, and if they did have a credit card, they were more likely to have a cosigner for that card.


Based on this evidence that the CARD Act affected credit availability before it was officially in place, the authors include 2009 in their analysis of the total effect of the Act. In this analysis, they compare credit available to young people via credit cards in 2008 to the credit available in 2010. They find that the Act did have a significant effect on credit card availability. People who were 20 years old in the fourth quarter of 2010 were 8 percentage points less likely to have a credit card than people who were 20 in the fourth quarter of 2008, and if they did have a card, they were 3 percentage points more likely to have a cosigned card.

Default and Age


Debbaut, Ghent, and Kudlyak look at the relationship between borrower age and credit card default. They find that in general, the risk of credit card default is highest for middle-aged borrowers and lower for young and elderly borrowers. Borrowers between the ages of 35 and 44 are 10 percentage points more likely to have a serious delinquency than a borrower between the ages of 18 and 20 and 13 percentage points more likely than borrowers over the age of 65. The reason might be that young borrowers have not yet had time to accumulate significant debt or that young borrowers have fewer spending commitments and can more easily curtail their consumption. But youth in and of itself is not necessarily a risk factor for serious delinquency.


Young borrowers are, however, slightly more likely to experience minor delinquencies, perhaps because they have less financial experience than older borrowers.3 As they get more practice using credit cards, they likely will discover ways to avoid minor delinquencies, such as automating payments or consolidating cards. Financial experience, however, does not seem to reduce serious delinquency, since the likelihood of serious delinquency is highest for middle-aged borrowers.

Who Gets Credit Cards Early?


Young people might not be at greater risk of serious default while they are young, but does early entry into the credit card market make them more prone to financial problems later in life? Analyzing whether or not young borrowers are bad borrowers is complicated by the fact that people who choose to get credit cards early might be better or worse credit risks than average debtors because of factors that are not necessarily related to age.


Because the CARD Act had a material effect on young people’s usage of credit cards, it is possible to use the Act to identify differences between people who choose to get a credit card before they turn 21 and people who choose to wait.


Debbaut, Ghent, and Kudlyak compare 22-year-olds in the fourth quarter of 2009 to 22-year-olds in the fourth quarter of 2012. In both groups, the individuals waited until age 21 to get their first credit card. Those in the former group waited until 21 to get a credit card by choice because they would have been unaffected by the CARD Act. But it is reasonable to assume that at least some of the people in the latter group, who were 21 in 2012, did not get a credit card until age 21 because they were prohibited from doing so by the CARD Act. Comparing the delinquency rates of these two groups can shed light on how people who self-select into early credit card usage (or who would self-select if they were able to) differ from those who wait.


The authors find that people who likely would have gotten a credit card prior to age 21 were less likely to experience a serious credit card delinquency than those who chose to wait until age 21. These results suggest that individuals who self-select into early credit card usage might be better credit risks than those who choose to wait.

Early Entry, Mortgages, and Defaults


Another reason to limit young people’s credit card usage is to protect them from potentially damaging their credit and harming their ability to get credit in the future, for example to buy a home or to take out a small business loan. Debbaut, Ghent, and Kudlyak explore whether or not there is a link between early access to credit cards and the likelihood of having a mortgage at age 22 or 23. Young people who wish to own a home are especially likely to need a mortgage since they have not had a long time to accumulate wealth.


The authors find that people who enter the credit card market early are more likely to have a mortgage at age 22 or 23 than people who do not get credit cards early. This suggests that any potential damage to an individual’s credit history might be outweighed by having a longer credit history.


Another interpretation of this finding is that people who want to get a mortgage early in life intentionally enter the credit card market early in order to build a credit history. To examine this possibility, the authors again use the CARD Act to compare individuals who chose to delay getting a credit card to those who were forced to delay getting a card. They find that the former are less likely to have a mortgage early in life than the latter, which suggests that one motivation for obtaining a credit card before age 21 is to build a credit history in order to purchase a home early in life.


The final question the authors explore is whether early entry into the credit card market has an effect on credit card default later in life. They find that earlier entrants are actually less likely to have a serious delinquency or default later in life, which casts doubt on the idea that getting a credit card when young results in more financial problems in the future.

Conclusion


The CARD Act offers researchers a way to study the effects of credit card availability on a variety of outcomes for young people. Contrary to the conventional wisdom, Debbaut, Ghent, and Kudlyak find that young borrowers are not necessarily bad borrowers. In fact, they are less likely to experience a serious delinquency than middle-aged credit card users. The authors also find that people who choose to get credit cards early in life are less likely to have a serious delinquency or default than those who wait to get credit cards. One reason, among many, why young people might want to begin using credit cards is to establish a credit history in order to purchase a home early in life. These results suggest that early entry into the credit card market is not necessarily risky or short-sighted behavior and that a prescriptive approach to financial behavior might be inefficient because it limits consumer choice.


Andra C. Ghent is an assistant professor of real estate at Arizona State University. Peter Debbaut is a research associate, Marianna Kudlyak is an economist, and Jessie Romero is an economics writer in the Research Department at the Federal Reserve Bank of Richmond.


Endnotes


1 For example, see Walbaum, Michelle, “College Students Need to Handle Debt, Credit Cards Wisely,” USA Today, August 14, 2009.


2 Debbaut, Peter, Andra C. Ghent, and Marianna Kudlyak, “Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009,” Federal Reserve Bank of Richmond Working Paper No. 13-09R, Revised November 2013.


3 A serious delinquency is defined as being more than 90 days past due, having a credit card account in collections, having a chargeoff, or declaring bankruptcy. A minor delinquency is defined as being 60 days or 30 days past due.


Views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.


Image credit: Wikimedia Commons.

Monday, October 14th, 2013

How the CARD Act Saves Us $3.5 Billion a Year in ‘Other Fees’

Tags: CFPB, credit card fees, credit card regulations

How the CARD Act Saves Us $3.5 Billion a Year in 'Other Fees'


Last week I reviewed the CFPB’s report on the effect the CARD Act of 2009 has had on the cost of credit cards in the U.S. In all, between 2008, the year before the Act began coming into effect, and 2012, credit cards became cheaper by almost two percentage points, the CFPB has found. Much of the decline was the result of two developments: the virtual elimination of the over-the-limit fees, which resulted in annual savings of $2.5 billion, and the reduction of the overall amount of late fees paid by cardholders, which added an additional $1.5 billion in savings. The total amount of annual fees collected by card issuers increased, but only by $475 million a year, so the aggregate amount of consumer savings from these three major fee categories came to about $3.5 billion, give or take.


But, it turned out, there was another group of lower-profile credit card fees, whose total was pushed down by the CARD Act by as much as the total of the three major fees. These “other fees” include charges for debt suspension (these make up about 45 percent of all “other fees”, by dollar amount), balance transfers (25 percent), cash advances (20 percent), returned payments and other transactions. The amount of “other fees” paid by American consumers declined from $2.0 billion per quarter in 2008 to $1.1 billion per quarter in 2012, for a total of about $3.5 billion. Let’s break that total down.

Suspension Fee Total down by 41%


Consumers enrolled in debt suspension and debt cancellation services are typically charged a monthly fee, which varies with the size of the balance at the end of the month. The quarterly incidence rate of debt suspension fees has declined from 18.7 percent in 2008 Q2 to 14.1 percent in 2012 Q4. The reduction was similarly large among consumers with core and deep subprime credit scores — from about 18 percent in 2008 Q4 to about 12 percent in 2012 Q4, whereas the super-prime group saw a much smaller decrease — to 4.6 percent in 2012 Q4 from 5.2 percent in 2008 Q4. The incidence rate fell the most — by 250 basis points — between 2011 Q4 and 2012 Q4.


Suspension Fee Total down by 41%


In dollar terms, the quarterly volume of debt suspension fees has declined from $773.8 million in 2008 Q4 to $458.3 million in 2012 Q4, a drop of 41 percent. The decline is the result of the reduction in the total number of accounts, the fall of the incidence rate in accounts paying debt suspension fees, particularly among cardholders with subprime credit scores, and the average balance per enrolled account. The biggest decline in the volume of debt suspension fees was measured in 2009, which the researchers believe may be the result of a reduction in the number of accounts due to the recession.


Suspension Fee Total down by 41%

Balance Transfer Fees down by 26%


Balance transfers give cardholders the opportunity to pay a lower interest rate on their outstanding card balances for a limited period of time — typically between 6 and 18 months. However, consumers are generally charged a fee when they transfer balances from one issuer to another, which is calculated as a percentage of the transferred amount and usually comes with a floor and / or a ceiling.


The quarterly incidence rate of balance transfer fees declined from 0.9 percent in 2008 to Q4 to 0.8 percent in 2012 Q4, although it had reached a trough of 0.5 percent in 2010 Q1.


Balance Transfer Fees down by 26%


The total volume of transferred outstanding balances fell from $33.6 billion in 2008 Q4 to $14.1 billion in 2009 Q4, and has remained roughly at that level through 2012, we learn.


Balance Transfer Fees down by 26%


The researchers suggest that the steep decline of the balance transfer total “may indicate a reduced appetite for debt transfers due to the recession”. However, it seems clear to me that the sharply increased balance transfer rate, by deterring consumers, should also have something to do with it. As you see in the chart below, the balance transfer rate rose from 1.3 percent of transferred amount in 2008 Q4 to a peak of 2.7 percent in 2010 Q3, before falling to 2.0 percent in 2012.


Balance Transfer Fees down by 26%

Cash Advance Cost up by 20%


Issuers typically charge a fee when consumers use their credit cards to obtain cash at an ATM or from a bank teller. The cash advance fee is calculated as a percentage of the transaction amount, often with a floor.


The quarterly incidence rate of cash advance fees declined slightly from 3.6 percent in 2008 Q4 to 3.1 percent in 2012 Q4.


Cash Advance Cost up by 20%


The total amount of cash advance fees also fell — a result of the modest decline of the incidence rate, a decrease in the number of accounts, an overall declining portfolio (the volume of cash advances fell from $9 billion in 2008 Q4 to about $4 billion in 2012 Q4, we learn), as well as a reduction of 30 percent in the per-incident cash advance size.


Cash Advance Cost up by 20%


The total amount of cash advance fees fell less rapidly than the overall volume of cash advances, as the issuers raised the cash advance rates. As shown in the chart below, the cost of the average cash advance rose from 3.9 percent of the advanced amount in 2008 Q4 to 4.9 percent in 2012 Q4.


Cash Advance Cost up by 20%

The Takeaway


So, on the whole, the CARD Act has effected a significant reduction in our overall cost of using credit cards. The CFPB’s report doesn’t calculate the total amount we’ve saved, but a recent NBER paper, which I reviewed last week, estimates that the legislation has reduced Americans’ overall borrowing costs by 2.8 percent of our aggregate daily balances, saving us $21 billion a year in the process. That’s a lot of money.


Image credit: Flickr / Consumer Financial Protection Bureau.

Thursday, October 10th, 2013

The CARD Act Has Made Credit Cards Cheaper

Tags: CFPB, credit card fees, credit card regulations

The CARD Act Has Made Credit Cards Cheaper


Earlier this week I reviewed a new NBER paper, which had found that the limits on credit card fees imposed by the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 have reduced Americans’ overall borrowing costs by 2.8 percent of their average daily balances, saving us $21 billion a year in the process. In fact, the same conclusion was reached by the American Bankers Association (ABA) in a newly-released report, which I reviewed last week.


Well, not to be undone, the Consumer Financial Protection Bureau (CFPB) has just released its own report on the matter, concluding that the CARD Act has indeed had a hugely beneficial effect to American consumers. The CFPB has found that the total cost of credit cards has declined by almost two percentage points between 2008, the last full year before the Act’s gradual implementation began, and 2012. The Bureau’s report is much longer than the other two and there is a lot to go over, but I will only focus on its examination of the movements of the various categories of credit card fees.

CARD Act Eliminates Over-the-Limit Fees


The CFPB notes that the CARD Act has been directly responsible for the virtual elimination of over-the-limit (overlimit) fees as a source of cost to consumers and revenue to issuers. During the period between the mid-1990s and 2005, the fees charged for over-the-limit transactions had more than doubled, increasing from under $15 to over $30, we are reminded. The CFPB has calculated that, by 2008, the average over-the-limit charge was $34.80.


Then the CARD Act required that over-the-limit fees are “reasonable and proportional” to the violation. Lest anyone wondered what that meant in practice, the Act spelled it out for the issuers: caps were placed on the over-the-limit charges: $25 for a first violation and $35 for each subsequent violation within the next six months. Most credit card issuers responded by simply discontinuing over-the-limit fees altogether. The upshot was a sharp reduction in the over-the-limit incidence rate, as shown in the chart below.


CARD Act Eliminates Over-the-Limit Fees


Had the over-the-limit incidence rate remained at 2007 levels and had its average amount remained at its 2008 level, consumers would have paid $2.5 billion more in over-the-limit fees in 2012 than they actually paid, the CFPB has calculated.

Late Fees Go Down


The Act has also caused the dollar amount of late fees to go down. Similarly to over-the-limit fees, the level of late fees rose sharply between the mid-1990s and 2005 — from under $15 to over $30. The CFPB has calculated that the average late fee in 2008 was $33.08.


Then the CARD Act restricted the circumstance under which late fees could be charged. For example, a payment could no longer be considered as late if the payment due date fell on a day on which the issuer did not receive or accept payments by mail (e.g. weekend or holiday) and the payment was instead received on the next business day after the due date. Furthermore, the Act required that the payment due date be on the same day each month, that the billing statements be mailed at least 21 days before that due date and that the statements include a warning of the amount of the late fee and any penalty rate that will be assessed if a payment is late. Finally, the “reasonable and proportional” rule also applied: $25 for a first violation and $35 for each subsequent violation within the next six months. As a result, as seen in the chart below, the average late fee fell from $33.08 in 2008 Q2 to $23.13 in 2010 Q4. By the fourth quarter of 2012, the average late fee had increased by $3.71, reaching $26.84, but it’s still well below pre-Act levels.


Late Fees Go Down


The Bureau calculates that the $6 decrease in the average late fee has saved American consumers a total of $1.5 billion. Furthermore, the incidence of late fees has fallen from a high of 26.1 percent in Q3 2008 to a low of 20.0 percent in 2010 Q2, although it had increased to 22.2 percent in 2012 Q4, where it has remained since then.


Late Fees Go Down

Annual Fees Go Up


The CFPB has also looked into the annual fees and has found that these have increased slightly — from an average of $32.48 in 2008 to $34.19 in 2012 — which has cost American consumers an additional $475 million in annual fees in the latter year.


Annual Fees Go Up

Other Fees Down by $3.5 Billion Annually


However, the increase in annual fees has been more than offset by a decrease in the “other fees” category, which includes charges for debt suspension (these make up about 45 percent of all “other fees”), balance transfers (25 percent), cash advances (20 percent), returned payments and other transactions. The other fees have declined from $2.0 billion per quarter in 2008 to $1.1 billion per quarter in 2012, for an annual decrease of more than $3.5 billion. I think I may take a closer look into this category in a future post.


Other Fees Down by $3.5 Billion Annually


The incidence rate of other fees has also declined quite substantially: from 24.3 percent in 2008 Q2 to 18.1 percent in 2012 Q4.


Other Fees Down by $3.5 Billion Annually

The Takeaway


Unsurprisingly, given all the data, the CFPB’s assessment of the CARD Act’s effectiveness is quite positive:

The end result is a market in which shopping for a credit card and comparing costs is far more straightforward than it was prior to enactment of the Act. Many credit card agreements have become shorter and easier to understand, though it is not clear how much of these changes can be attributed directly to the CARD Act since it did not explicitly mandate changes to the length and form of credit card agreements. Limitations on “back-end” fees, along with restrictions on an issuer’s ability to raise interest rates, have simplified a consumer’s cost calculations. Credit card costs are now more closely related to the clearly disclosed annual fees and interest rates. This greater transparency means a consumer deciding whether to charge a purchase can now make that decision with far more confidence that costs will be a function of the current interest rate rather than some yet-to-be determined interest rate that could be reassessed at any time and for any reason by the issuer.


Image credit: Flickr / GuySie.