Approximately half of credit card holders in the United States regularly carry unpaid credit card debt. These so-called revolvers exhibit different payment behavior from those who repay their credit card balances every month. Previous research has found that individuals with revolving balances are more likely to adopt debit cards, but so far there have been no empirical studies exploring the relationship between credit card revolving and payment use patterns, such as substitution away from credit cards to other payment methods.
14 Using data collected in the 2005 Survey of Consumer Payment Preferences, we explore the relationship between revolving credit card balances and payment use. We find that credit card revolvers are significantly more likely to use debit and less likely to use credit, as compared with convenience users who repay their balances each month. ( credit card)
We find no significant differences in the use of check or cash between the two groups. The two groups also differ in their perceptions of payments—revolvers are significantly less likely to view debit as superior with respect to ease of use and acceptability, but more likely to see debit as better with respect to control over money and budgeting. The findings suggest that revolvers not only adopt, but also use, debit more frequently than convenience users do, in order to control their spending. ( credit card)
MARKET SIZE AND FOUNDATIONAL METRICS OF CONSUMER USE The credit card market is one of the United States’ largest consumer financial markets. It continues to grow by most measures. The total amount of outstanding consumer credit card debt is now at pre-recession levels, while the total amount of credit line available and the total number of accounts are below pre-recession peaks. The total amount spent on credit cards, by contrast, has moved past previous highs and, according to industry projections, shows no sign of slowing down.
The increasing gap between credit card spending and credit card indebtedness becomes even clearer if we compare changes in these indicators to changes in the nation’s gross domestic product (“GDP”). Total credit card indebtedness and total available card credit have been stable relative to GDP for a number of years now, but at levels lower than we observe prerecession. Purchase volume, however, continues to grow significantly faster than overall economic activity. Consumers with higher credit scores continue to account for the majority of credit card debt and spending. However, in the last few years, the share of consumers with lower scores holding credit cards has been growing at a rate that exceeds that for consumers with higher scores.
Cardholders with lower scores have also increased the average number of credit cards they hold. These cardholders have seen steeper increases in both aggregate and average outstandings over the last few years than cardholders with higher scores, although all credit tiers have seen some growth in these indicators over the last few years. Aggregate credit card indebtedness for consumers with lower scores, however, remains below 2008 peaks. We also look at evidence around rewards penetration and usage, as well as revolving rates and payment rates.
Rates of credit card delinquency and charge-off have declined sharply since their peak during the recession, and remain lower than they were in the years prior to the recession. However, we note slight increases recently in both indicators. COST OF CREDIT The cost of card credit to consumers remains stable—with one significant exception noted below. It also generally remains lower compared to the period prior to the implementation of CARD Act rules.
The CARD Act’s effect on the structure of card costs also persists, with interest 10 CONSUMER FINANCIAL PROTECTION BUREAU — CONSUMER CREDIT CARD MARKET REPORT charges representing the bulk of all-in costs to consumers across most products and credit score tiers. For consumers with the highest credit scores, annual fees are strongly associated with the presence of a rewards program on the card. Such costs may be better understood less as the price of deferring payment for purchases and more as the price of accessing lucrative benefits and perks relating to spending activity. The one key exception to cost stability is the increase in interest rates on variable rate accounts. Although the CARD Act generally prohibits rate increases on existing balances, it allows issuers to increase rates on many cards when an index rate, such as the WSJ prime rate, increases. For several years after the CARD Act’s implementation, such index rates remained relatively stable, potentially setting a consumer expectation of stable interest rates in perpetuity. Since we highlighted this issue in our prior report, several increases in background interest rates have occurred, and issuers have generally increased interest rates on their customers’ accounts accordingly.
AVAILABILITY OF CREDIT The availability of credit in the card marketplace is more difficult to measure directly than its cost. Even so, we find substantial evidence that credit availability is significant and increasing. Both the number of accounts originated and the volume of credit originated have grown steadily in recent years, as has the share of consumers opening new accounts. Most origination metrics we observe are near pre-recession levels. This is true across credit score tiers for both general purpose and private label cards. Approval rates have climbed for all credit score tiers since postrecession lows, even as application volumes have stabilized. Credit availability is constrained, however, by ability-to-pay rules mandated by the CARD Act. Meanwhile, there has been significant recent change in how consumers procure general purpose credit cards. Direct mail volume has stagnated.
Large shares of applications for general purpose cards are now sourced through digital channels. More consumers are finding their way to application pages via digital advertisements or third-party credit card comparison sites. More consumers are also applying for credit on their mobile devices. Even among private label and retail co-brand cards, fewer accounts are applied for in-person. The use of at least some digital channels is disproportionately heavy for consumers with lower credit scores. We also attempt to verify empirically whether issuers are now putting increased weight on line management as a risk control tool.
Our findings are not dispositive, but they are consistent with 11 CONSUMER FINANCIAL PROTECTION BUREAU — CONSUMER CREDIT CARD MARKET REPORT increased issuer emphasis on line management policies and practices. This may represent issuer adaptability in the face of the CARD Act’s limitations on repricing and on certain fees. ISSUER PRACTICES Digital account servicing platforms, such as websites where consumers can view and manage account activity, continue to grow in penetration and scope. For all card types, a majority of consumers are enrolled in online servicing portals. One-third of general purpose accounts are enrolled in mobile servicing applications. Increased enrollment has been accompanied by increased consumer reliance on these portals for core account servicing activities.
We observe upticks in the share of accounts opting out of receiving paper billing statements and the share of accounts making both automatic and non-automatic payments against their accounts using digital channels. Non-automatic payments are much more frequent than automatic payments. More qualitatively, we observe that these platforms continue to add functionality, and appear to be becoming a vector for competition between issuers. In recent years, many consumer financial service providers have made credit scores and related information regularly available to their customers, and credit card issuers have been among the most prominent class of providers doing so.
Issuers we surveyed report significant recent growth in the penetration of free credit score access, with nearly two-thirds of general purpose accounts providing such access. For about one-quarter of accounts, consumers are actually viewing their credit scores within a given year. Consumers, primarily those with higher credit scores, are making increased use of balance transfer features on credit cards. These transfers are usually at promotional interest rates, allowing consumers to carry balances for extended periods of a year or more without incurring any interest charges on that balance. We also document changes to consumer “grace periods” on purchases that are sometimes—but not always—associated with balance transfers. Measuring whether credit card products have become more of less complicated over time is difficult.
We do so by quantifying the number and type of different price points in credit card acquisition disclosures over a decade-long period that extends before and after the CARD Act. We observe a significant and sustained decline in the average number of price points in solicitation disclosures. Some, but not all, of these can be attributed to changes in disclosure rules or practices distinct from whether the underlying product has become more or less complicated. The largest driver of change is the disappearance of overlimit fees from large 12 CONSUMER FINANCIAL PROTECTION BUREAU — CONSUMER CREDIT CARD MARKET REPORT issuers’ solicitation disclosures, but we also observe that foreign transaction fees are on the wane, a finding confirmed by external observers.
PRODUCTS MARKETED TO “NON-PRIME BORROWERS” Many American consumers lack prime credit scores, which makes it difficult for them to access credit card products with the most favorable terms. They often have to choose from among products that generally have terms less favorable than are available to consumers with higher scores. These products offer such consumers the dual possibility of access to the credit card market as well as an avenue for building or rehabilitating credit records when timely repayments are made.
We look at four such product classes in detail: unsecured general purpose cards made available to consumers by mass market issuers; unsecured general purpose cards made available to consumers by “subprime specialist” providers; secured general purpose cards; and private label cards. We review product structure and issuer practices for each of these classes, with an emphasis on secured cards, which are a fast-growing segment of the market that we have not looked at in prior reports. Secured cards are a potential avenue to establishing “credit visibility” for some of the consumers we have identified as “credit invisibles.”8 We also look at a range of market indicators for a late 2014 “vintage” of card originations in each product class, which allows us to illuminate consumer experiences and outcomes in this part of the market.
THIRD-PARTY CREDIT CARD COMPARISON SITES
Digital technologies have transformed the way that consumers shop for credit cards. One of the most visible elements in that transformation is the rise of third-party credit card comparison sites. These sites are neither owned nor operated by credit card providers. They aggregate information about products on the market into dynamic digital platforms that allow consumers to compare credit card products along a number of criteria. 8 See Kenneth P. Brevoort & Michelle Kambara, Office of Research, Consumer Fin. Prot. Bureau, CFPB Data Point: Becoming Credit Visible, (June 2017), available at https://www.consumerfinance.gov/documents/4822/ BecomingCreditVisible_Data_Point_Final.pdf. 13
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In recent years these sites have ballooned in their aggregate effect on the market. We observe that in 2016 they were directly responsible for sourcing almost one-fifth of all general purpose applications submitted to mass market issuers, resulting in the origination of well over five million new credit cards. Issuers paid these sites more than $1 billion for credit card approvals in 2016—representing both the bulk of the sites’ revenue and a significant share of all marketing spending for consumer credit cards. DEBT COLLECTION When consumers fall behind on their credit card bills, issuers use a variety of strategies to collect the delinquent debt. During the initial stages of delinquency, issuers often engage in collection activities using collectors that they employ in-house. As part of their internal collection efforts, some issuers use a combination of in-house and first-party collectors, which collect in the issuer’s name. These first-party collectors generally share responsibility with the issuer’s in-house collectors for the same accounts within a given day based on the availability of resources. Issuers additionally engage with external, third-party collection agencies to handle certain segments of accounts, such as late-stage or high-risk accounts. Over the last two years, issuers appear to have pursued more internal collection activity, either through in-house or firstparty collectors, rather than through third-party collectors. Issuers also employed various contact strategies to collect pre-charge-off debt. Some issuers allow their collectors no more than three attempts per day to make contact regarding a consumer’s delinquent account, compared to four as reported in our 2015 Report, while others permit up to 15 attempts daily. Across surveyed issuers, the average number of call attempts per account per day was 2.4 in 2016. In addition, all surveyed issuers had procedures in place to accommodate the needs of some limited English proficiency consumers when contacting them via telephone regarding a debt. In their efforts to mitigate potential losses on delinquent accounts, issuers offer a variety of programs to help consumers repay their debts. Depending on the account and the consumer’s unique circumstances, these programs offer short-term or long-term plans for repayment. Over the past two years, issuers have exhibited a shift away from short-term programs and have focused their efforts on enrolling consumers in long-term programs. The inventory of balances in loss mitigation programs, which spiked after the recession, has declined steadily as many consumers have completed or left the programs. While issuers’ own loss mitigation programs remain available to all eligible consumers, most issuers maintain policies of not working with third-party debt settlement companies. 14
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If an account becomes 180 days past due, an issuer will charge off the account. At this point, the issuer may continue collections internally, outsource collections to a third party, sell the account to a debt buyer, pursue litigation, or “warehouse” the account (meaning that they hold the account without doing anything to collect). Issuers decreased the size of their third-party collection networks, including collection agencies and law firms, over the past two years, with a decline from 127 unique collectors across all issuers in 2015 to 105 in 2017. Many issuers, particularly for pre-charge-off accounts, reported pursuing a consumer-level collections strategy, which enables collectors to handle consumers with multiple delinquent accounts during a single contact attempt. The share of total pre-charge-off delinquent dollars belonging to consumers with multiple accounts from the same issuer ranged from 10 to 67 percent in 2016. Among issuers that pursued litigation on charged-off accounts, the average balance in 2016 was $6,700. Issuers that tracked default judgments reported that they comprised more than twothirds of all judgments, meaning that a substantial share of consumers who were sued did not appear in court or otherwise respond to the summons. Fewer issuers sold debt in 2015 and 2016 than in prior years. Those that continued to sell debt planned to increase their sales of chargedoff debt in 2017.
In recent years, interest and investment in consumer financial innovation has grown substantially. New entrants into consumer financial markets are introducing a variety of new products that leverage new technologies and business models. Some of these innovations and entrants are focused solely and directly on the credit card market, and many more affect credit cards as part of broader changes in how consumers make payments or compete with credit cards as a source of consumer indebtedness and point-of-sale financing. Increased adoption of EMV “chip” cards appears to have had the intended effect of lowering the rate of counterfeit card fraud, but also may be pushing more fraud activity into “card-notpresent” transactions. The number and variety of products available to consumers that allow them to store payment information and make payments via their smartphones have grown significantly. We conclude by noting an increasing trend towards consumer control over card usage, as well as trends in credit card reward innovation.
A FINAL NOTE
The quantitative and qualitative indicators outlined above generally suggest a positive picture for consumers in the credit card market. Direct surveys of consumers support that proposition. 15
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J.D. Power reported that in 2017 consumers reported their highest levels of satisfaction with this market to date.9 This satisfaction coexists with high levels of profitability for providers. The Board reports that the average return on assets at credit card banks continues to exceed levels at commercial banks generally. In fact, in 2016, large credit card banks had a return on credit card assets three times that of the overall return on assets for commercial banks.10
The potential to earn such returns may explain recent growth in credit card offerings among community banks. The Federal Reserve System and the Conference of State Bank Supervisors found in a mid-2017 survey that “credit cards were offered by 60% of surveyed [community] banks. This is a sharp increase from the 51% identified in the prior year survey.”11 They further found that nearly 10% of community banks that do not offer credit cards plan to offer them in the future—while only one-half of 1% of banks that currently offer credit cards intend to limit their offerings or exit the market.12