Web posted and Copyright © July 13, 1998, American
Recent Trends in Bank Credit Card
Marketing and Indebtedness
Consumer Federation of America
Last year in February and December, the Consumer Federation of America
(CFA) issued reports on credit card debt and its
financial impact on consumers. The reports revealed that 55 to 60
million households (55-60% of all households) carry credit
card balances and that these balances average more than $7,000, costing
these households more than $1,000 per year in interest and fees.
The reports also concluded that this mounting credit card debt was the
most important reason for the rise in personal
bankruptcies (1.3 million in 1997). In recent years, the industry
significantly increased its card marketing to low and
moderate income households. Not surprisingly, then, typical Chapter 7
bankrupts had relatively low incomes and high credit
card debts -- in 1996, after-tax income of $19,800 and credit card debts
of $17,544 according to research by the industry-
funded Credit Research Center.
Experiencing rising losses from these insolvencies, the credit card
industry organized a campaign to persuade Congress to
restrict access to Chapter 7 bankruptcy. The campaign succeeded in
persuading the House of Representatives to pass legislation quite
similar to the proposal developed by the industry. This month, the
Senate will consider only slightly less restrictive legislation.
This report examines the recent behavior of those credit card banks that
have extended the large majority of all revolving
credit. Most importantly, it demonstrates that recently these banks have
expanded their marketing and extension of credit at
the same time they have increased their political spending on a
bankruptcy "reform" campaign intended to reduce their mounting
debt losses. This report also suggests a far more effective and fairer
strategy to reduce consumer financial insolvency and
Banks Expand Card Marketing and Related Credit
Banks now extend the large majority of all credit card debt. As the
table below shows, the ratio of bank credit card debt to all
revolving credit was 79.1% in the first quarter of 1998 and is even
higher for credit card debt since an estimated 5% of
revolving credit is not card debt, according to the Fed. This percentage
has grown significantly in recent years.
Relation of Bank Card Debt to All Revolving Credit
||Bank Card Debt (in billions)
||All Revolving Credit (in billions)
Despite rising chargeoffs (bad debt losses), banks have recently
expanded their card marketing and credit extension. This marketing and
credit extension has risen much more rapidly than bank card debt, as the
table below shows.
Bank Card Mailings, Credit Lines and Debt (in billions)
||Unused Credit Lines
||All Credit Extended (UCL+D)
*Data on mailings for January through March and projected annually;
data on credit lines and debt for end of March.
Sources: Data on mailings from BAI Global Inc.; data on credit lines and
debt from Veribanc, Inc.
The above table suggests two striking trends. First, total credit
extended on bank cards (unused credit lines plus actual
debt) rose to more than $2 trillion by the end of March 1998. Second, in
the past six years, bank mail solicitations and unused
credit lines grew nearly twice as rapidly as bank card debt. Banks have
been far less restrained in their marketing and credit
extension than consumers have in their accumulation of credit card debt.
That has been especially true recently. In the 15-
month period from the beginning of 1997 to the end of March 1998, all
revolving credit increased 7.6% and bank card debt rose 23.5%, but
unused bank credit card lines increased 50.3%.
This latter trend raises the question, why have banks expanded
solicitations and credit lines while forced to write off
increasing bad debt losses -- according to Veribanc, from 3.0% of
outstanding debt in 1994, to 3.4% in 1995, to 4.4% in 1996, to 5.4% in
1997, to an annual rate of 5.6% in the first three months of 1998?
Despite the rising losses, for most banks credit cards are still
profitable. During the past decade, credit cards have been the most
profitable bank product. While profit margins have declined in recent
years, for those banks marketing cards aggressively, they are still
large enough to sustain huge debt losses and marketing expenses. As
CFA's 1997 reports indicate, last year, consumers paid more than $60
billion in interest and about $10 billion in fees on credit cards. Banks
collected the large majority of this revenue.
Who Pays Credit Card Losses
Credit card companies have run ads claiming that all bankruptcy-related
losses are paid by consumers -- an average of $400 per household per
year. That would only be the case if creditors raised prices to cover
bad debt losses.
There is little evidence that creditors have raised prices to cover
increasing losses. A significant percentage of these
losses represent credit card chargeoffs. But, as the table below shows,
there is no relationship between bank card interest rates
and chargeoff rates.
Bank Card Interest Rates and Chargeoff Rates
Sources: Interest rates from Federal Reserve Board; chargeoff rates
from Veribanc, Inc.
The fact is that, for many years, bank decisions about credit card
prices have been independent of credit card losses. For two
decades, the average credit card interest rate has hovered around 18%
(1.5% on the unpaid balance monthly). (The rates reported by the Fed are
somewhat lower than that of other data sources such as Bank Rate
Monitor.) These rates are the highest which banks believe they can
It is true that, recently, banks have raised prices for some of their
riskiest customers. They have hiked typical late payment and
over-the-credit limit fees to $25 and have raised the interest rate
charged to many of these late payer and over-the-limit customers to well
over 20%. But these fees are paid mainly by a minority of customers.
CFA's 1997 reports estimated that about one-third of households with a
card pay off all balances in full, and most other cardholders make
payments on time and do not exceed credit limits.
Who, then, pays for the credit card losses? In the past several years, a
portion has been paid by the minority of cardholders who were assessed
most fees. But most of these losses have been "paid" by bank investors
to the extent bank stocks have been depressed by declining credit card
profitability. Most of the roughly $20 billion in bank card losses last
year was borne by
investors who earned a lower return on their investments. At most, only
several billion dollars of this amount can be
attributed to rising credit card fees.
Which Banks Extend the Most Credit and Do So Most
Just as the portion of credit card debt held by banks has increased
recently, so too has the portion held by a few big
banks. As the table below shows, at the end of last year, a few banks
held more than half of all bank card debt. In fact, if announced mergers
had been consummated, five institutions -- Citicorp; MBNA; Banc
One/First Chicago; Chase Manhattan; and BankAmerica/Nationsbank/Barnett
-- would have held 53% of all this debt. (These institutions also
accounted for most recent mail solicitations; in fact, in 1997 Banc One
accounted for more than one-quarter of all mailings.)
Big Bank Credit Card Debt and Net Chargeoffs
|Net Chargeoffs as % of Yearend Debt (1997)**
|First National (Neb.)
|Bank of Boston
|First of America
*Debt includes that held by institution and that which was
**Chargeoff rate computed only on debt held by institution.
Source: Veribanc, Inc.
The chargeoff rate is the best indicator of the prudence and
responsibility of institutions extending credit. It is not a perfect
index; for example, it can be inflated by selloffs of debt
(securitization) and deflated by rapid increases in outstanding debt.
Nevertheless, it is accurate enough to be used as an important statistic
Banks with chargeoff rates below 3%, even if they market aggressively,
do so fairly prudently and responsibly. On the other hand, banks with
chargeoff rates above 6% are highly likely to extend too much credit to
high-risk consumers. Even if their bank card operations are profitable,
they are lucrative at the expense of many consumers who are loaded up
with debt that they will not be able to repay. It is hypocritical of
these creditors to complain that they need bankruptcy relief.
Creditor Strategies to Restrict Consumer Access to
Last year, credit card companies and banks organized a campaign to
restrict consumer access to Chapter 7 bankruptcy. (In Chapter 7, all or
nearly all unsecured debts are discharged; in Chapter 13, most debts are
repaid over time.) This campaign has been extensively reported on by the
press. (For example, see Jacob M. Schlesinger's lead article in the June
17, 1998 issue of The Wall Street Journal.) Campaign strategies
- research disseminated, among other means, in advertisements;
- campaign contributions totaling millions of dollars;
- lobbying the National Bankruptcy Review Commission;
- lobbying of Congress that cost Visa and MasterCard alone more than
$2 million in 1997;
- grassroots lobbying by creditors in congressional districts and
- attempts to intimidate the bankruptcy bar.
CFA asked the Center for Responsive Politics to compute the campaign
contributions of big banks in the 1997-98 cycle. They found that the 25
largest credit card banks made $3.6 million in PAC, soft money, and
individual contributions. Interestingly, the big five banks (noted in
the previous section) contributed more than $2.5 million of this
Why were these contributions made? Certainly the banks wished to
influence legislators on financial services issues other than bankruptcy
reform, especially modernization. But it should be noted that, since
legislation passed by the House is predicted by the industry to reduce
bankruptcy losses by about $4 billion annually, if this bill becomes
law, big banks could well recover an additional $2 billion or more a
year from their political "investment" of several million dollars.
How Consumer Insolvencies, Including Bankruptcies, Can Be
It is unclear whether contemplated bankruptcy reforms will reduce
personal bankruptcies, let alone consumer financial insolvencies.
On the one hand, restricting access to Chapter 7 bankruptcy, together
with other proposed measures, would prevent consumers from discharging
as much debt and would probably discourage them from declaring
bankruptcy as frequently. On the other hand, by allowing creditors to
collect more debt, bankruptcy reforms would encourage credit card banks
to market and extend credit more aggressively. Thus, it is quite
possible that these reforms would aggravate the problem of consumer
At the very least, bankruptcy legislation should include creditor
responsibility measures that reward responsible credit granting and
punish irresponsible credit extension. Here, irresponsibility is defined
as granting credit to consumers who are highly likely to default on
their debt obligations. One specific measure Congress should seriously
consider is to make it difficult for lenders who extend credit to
consumers with high consumer debt to income ratios to collect this debt
in any bankruptcy proceeding, even one involving Chapter 13. Since most
experts believe that consumer debt to income ratios (excluding mortgage
debt) should not exceed about 20%, 40% is a ratio that should be
considered as a threshhold.
While in most instances it is not politically practical to require
aggressive and irresponsible credit grantors to "cease and desist,"
these lenders could be identified, criticized publicly by opinion
leaders, and jawboned privately by regulators. Most of those big credit
card banks with chargeoff rates over 6%, for example, should be on this
Regardless of the success of any of these efforts, many consumers must
use credit cards more intelligently. Frankly, for most consumers it is
foolish to carry any balance on credit cards. The large majority of the
more than $70 billion cardholders are paying each year in interest and
fees is wasted; it could be allocated much more sensibly and
satisfactorily on other goods and services or on savings.
Even more foolish than carrying large credit card balances for a long
time is using home equity to refinance credit card debt without curbing
credit card use. Fed research suggests that over 40% of home equity
borrowing is used to refinance consumer debt. Even more recent research,
by Brittain Associates Inc., indicates that about two-thirds of
households that use home equity loans to refinance credit card debt run
up new credit card debts. In the future, particularly in any recession,
many of these households risk losing their homes.