Credit cards play a critical role in America’s economy, In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act (the CARD Act) to ensure that credit issuers and credit borrowers functioned within a standard set of rules. In the years since its enactment, the Consumer Finance Protection Bureau (CFPB) has issued biennial reports about how the credit markets are faring within the purview of the CARD Act. The 2017 report was released in late December and reviews the current status of the seven-topic scope of the credit card industry:
- Market size and metrics of consumer credit use
- The cost of credit
- The availability of credit
- Issuer practices
- The “non-prime borrower” market
- Third-party comparison sites
- Credit card debt collections
- Product innovations
The report concludes (among other points) that, despite fluctuations in economic markets, America’s credit card costs and availability have remained stable over the past four years, while the market itself has shown an inclination to innovation. Delinquencies and charge-off rates have been rising in the past year, however, as has the total outstanding credit card debt level.
Market Size and Consumer Credit Metrics
The credit card industry is one of the country’s largest consumer financial markets and is continuing to grow. While total credit card debt and availability have remained stable for several years, the volume of credit card purchasing is increasing faster than overall economic activity.
Both high and moderate credit score holders continue to access credit cards for purchasing, although the number of consumers with lower scores is increasing faster than those with higher scores. Lower score holders are also increasing the number of credit cards they carry as well as both their aggregate and average outstanding balances.
Cost of Credit
One effect of the CARD Act is the stabilization of credit card costs; interest charges represent the bulk of all-in expenses for cardholders and, except for changes due to rises in the prime rate, have remained fairly stable. Additionally, while fees are low, those cards that do charge them are usually carried by high-credit score holders and are often attached to significant reward programs.
Availability of Credit
Data submitted reveals that credit availability is significant and growing in both the volume of credit assumed and the number of credit accounts opened. Approval rates for borrowers on all credit score tiers are rising, although the number of submitted applications for credit has stabilized. The CARD Act’s “ability-to-pay” rules continue to constrict credit availability when appropriate.
And digitalization is impacting the credit card world just as it impacts everything else. The number of applications submitted through digital portals is rising, as is the use of mobile devices to manage accounts. Consumers with lower credit scores are more likely to manage their credit accounts online.
Consumer Credit Issuer Practices
Both general credit and private card issuers are moving towards full digitalization of account management and services. More than half of credit card-carrying consumers are now enrolled for online services, and the number of consumers that opt out of paper billing processes is rising. Consumers are also adding automatic payments through their credit card services portal. Vendors who utilize the technology for credit servicing purposes are adding functionality to improve their competitive positioning.
The “Non-Prime” Borrowing Consumer
Consumers with less-than-optimal credit histories are still gaining access to credit cards, although they are not offered the best terms or conditions. Those that take up the offers, however, can also rehabilitate a poor credit score by making appropriate payments on time. The CFPB reports an increase in the number of “secured” credit cards, which require a cash deposit before the card is issued. These cards protect the issuer from assuming the risk of unpaid balances.
Third-Party Comparison Sites
The Internet facilitates online shopping for credit cards through sites that offer head-to-head comparisons of available credit card options. Consumers can evaluate the risks and benefits of various cards while at the site, then click through the card vendor of their choice. In 2016, almost 20 percent of all credit card applications came through one of these sites, which resulted in the issuance of more than five million new cards. Card issuers paid these website hosts more than $1 billion as fees for originating those accounts.
Debt collectors have a bad reputation for harassment, and it appears that credit card companies are backing off from those aggressive tactics. Most now rely on in-house collections departments and restrict the number of contacts those departments can make each day (the industry average was 2.4 calls per day).
Credit card companies have improved collections activities in other ways, too: many offer non- or limited English language services, and many offer short- or long-term repayment programs to their customers in delinquency. When delinquencies pass 180 days, these companies can charge-off the debt, out-source the collections process, file a lawsuit or “warehouse” the account, depending on the status of the delinquent customer. The average value of “charged-off” accounts was $6,700, and more than two-thirds of judgments in lawsuits were “default” judgments, meaning the consumer failed to appear in the case.
New financial products are entering the market, leveraging emerging technology to improve both business and profits. The recently introduced “EMV Chip” cards have apparently reduced the rate of counterfeit card fraud, although there has been a corresponding rise in fraudulent “Card Not Present” transactions. Digitization also appears to be giving consumers more control over their credit card activities while enhanced reward programs encourage even more credit card use.