Message from Richard Cordray - December 2015

Director of the CFPB

Credit cards are unique consumer financial products. Other products offer credit or provide a means to make payment. Credit cards do both. With that unique profile, they serve as the means by which Americans spend trillions of dollars every year and revolve hundreds of billions of dollars in balances every month. It is critical, therefore, that the Bureau does its part to help ensure this vital market is fair, transparent, and efficient.

In 2009, after the onset of the Great Recession, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009. Congress took this step before it turned to reforming financial services markets more broadly with the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. In the midst of one of the greatest financial and economic crises to confront our nation, Congress made sure that addressing this particular market was a top priority.

It is not hard to understand why Congress made this choice. The pre-2009 credit card market was one in which huge numbers of consumers were at needless risk due in large part to inconsistent billing practices, pricing changes, and the proliferation of back-end fees, among other issues.

This report details how over the last few years, conditions for consumers have either remained stable or further improved—even as credit card companies have been able to achieve significant rates of return in line with historic norms. The view expressed by Congress in 2009—that smart and thoughtful guardrails could bring positive change to this market that would benefit all participants—has been thoroughly ratified.

The report, however, also highlights areas of the market that still create risks to consumers. Deferred interest products offer significant benefit to some consumers. But as the main surviving exception to the general shift towards upfront and transparent credit card pricing, they impose significant costs on many consumers. In addition, the total cost of credit on cards issued by subprime specialist credit card companies is significantly higher than on cards offered by their mass market competitors, even after controlling for consumers’ credit risk. And for consumers who have struggled to pay their bills, the debt collection market remains challenging and intimidating.

More broadly, this is also a market in rapid flux. The entire credit card lifecycle is moving online. Consumers increasingly use digital channels to apply for cards, to manage their accounts, and to make payments. Rewards programs have gone from commonplace to ubiquitous. Major security innovations are underway. Digital technology is bringing new forms of competition to an already competitive market. The Bureau intends to monitor the market carefully as these developments unfold. Even as technology changes, our mission remains constant.

Our biennial credit card market report is intended to bring a foundation of common knowledge and insight into this critical and complex market. That foundation will enable consumers and their advocates, industry participants, and regulators alike to move forward toward our common goal of better serving the needs of consumers.

Sincerely,

Table of contents

1.1 Review mandate......................................................................................20

1.2 Scope and methodology.......................................................................... 21

1.3 Limitations .............................................................................................. 27

2.1 Market size ..............................................................................................28

2.2 Card holdings ..........................................................................................36

2.3 Card payment behavior........................................................................... 45

2.4 Credit score changes over time............................................................... 53

2.5 Delinquency and charge-off rates........................................................... 55

3.1 Fees . .......................................................................................................60

3.2 Interest rates ........................................................................................... 72

3.4 Comparative costs...................................................................................80

3.5 Variable APRs .........................................................................................82

3.6 Conclusion and areas for future study....................................................84

4.1 New accounts ..........................................................................................86

4.2 Credit lines ............................................................................................ 106

5.1 Cardholder agreement readability.........................................................119

5.2 Issuer pricing and disclosure practices ................................................ 124

5.3 Online access to account information and disclosures ........................ 133

5.4 Open credit score initiative................................................................... 136

5.5 Ability to pay practices.......................................................................... 139

6.1 Product use ........................................................................................... 154

6.2 Payoff rates............................................................................................ 162

6.3 Repeat use ............................................................................................. 180

6.4 Multiple balances .................................................................................. 185

6.5 Post-promotion costs............................................................................ 194

6.6 Ability to pay .........................................................................................204

6.7 Availability of alternatives ....................................................................206

7.1 Overview................................................................................................209

7.2 Rewards practices .................................................................................226

8.1 Definitions.............................................................................................238

8.2 Debt collection markets ........................................................................239

8.3 Debt collection and recovery practices generally.................................243

8.4 Survey findings ..................................................................................... 247

9.1 Security innovations .............................................................................264

9.2 Mobile payments................................................................................... 277

9.3 New competitors ...................................................................................283

Appendix A: Additional figures.....................................................................289

Executive summary

3 The rules that were published by the OTS, NCUA and Board were to take effect on July 1, 2010. In the interim, however, the CARD Act became law on May 22, 2009. Unfair or Deceptive Acts or Practices, 74 Fed. Reg. 5498 (Jan. 29, 2009) (to be codified at 12 C.F.R. pt. 226).

4 Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734.

The impact of these protections was a major focus of the Bureau’s 2013 CARD Act report. Among the provisions of the CARD Act was a requirement that the Board, within the limits of its existing resources available for reporting purposes, conduct a review of the credit card market on a biennial basis. That responsibility passed from the Board to the Bureau in 2011. In 2013, the Bureau published its first report pursuant to that obligation, making this the second such report.

5 "Total Cost of Credit" (or "TCC") is the Bureau’s index of the annualized sum of consumer costs, including interest charges and fees, divided by the average of outstanding balances.

6 Request for Information Regarding Credit Card Market, 80 Fed. Reg. 14365 (Mar. 19, 2015).

The 2013 report also found that prior to the enactment of the CARD Act, but after the onset of the recession, credit of all kinds became less available to consumers—including in the credit card market. In that market, credit availability picked up again from 2009, although by the end of 2012, it had not returned to pre-recession levels. Even at that point, however, consumers had nearly $2 trillion in unused consumer credit card line. The CARD Act was discernibly responsible for some limits on credit availability, particularly with respect to younger consumers and those who lacked the income to satisfy the Act’s ability to pay requirements. As the Bureau noted, at least some of these impacts on credit availability appear to have been specifically intended by Congress.

of specific research areas: first, deferred interest; second, credit card rewards; and third, debt collection.

We summarize below the findings of the different sections of our report. Overall, however, we find that in most respects conditions for consumers in the credit card market have either remained steady or improved since our prior report. Specifically:

There remain, however, areas of concern for consumers. This report addresses a number of these, but three stand out:

11 CONSUMER FINANCIAL PROTECTION BUREAU – CONSUMER CREDIT CARD MARKET REPORT

The credit card market is vast and multifaceted. Interrupted by a steep decline coinciding with the Great Recession, the credit card market has resumed growing by every measure. Most adult Americans hold at least one credit card, even without counting consumers who are authorized users on another consumer’s credit card account.

7 Consistent with our prior report, we place cardholders in one of four credit score ranges based upon their credit score at a particular point in time.

8 As we discuss, there are certain limitations on our data from subprime specialist issuers that limit the precision of any comparisons we can make. For example, it is possible that within any given credit score range, customers of subprime specialist issuers have lower scores than mass market issuer customers.

The total cost of credit (or "TCC") for credit card holders has also remained unchanged over the last few years, preserving the significant decline from pre-CARD Act levels that our 2013 study reported. This TCC trend was true of the consumer credit card market overall, and for consumers in all credit score segments. Not only has the TCC on consumer credit cards fallen in absolute terms since the CARD Act, it has also fallen relative to the TCC on small business credit cards, which are not subject to the regulatory requirements of the CARD Act. This suggests that CARD Act reforms, in restricting certain kinds of practices, did not result in net increased cost to consumers.

The penetration of variable rate products in the consumer credit card market creates a significant likelihood that consumers will see existing balances repriced if background interest rates increase. Since retroactive rate increases were otherwise generally prohibited in CARD Act rules, background rates have remained unchanged. The potential for variable rate-based cost increases on revolving existing balances, therefore, may not be fully anticipated by consumers.

Answering questions about the availability of credit is systematically more challenging than answering questions about its cost. Disaggregating changes in credit demand from changes in credit supply is challenging. There are practical difficulties, too, in differentiating changes that result from background economic conditions and those traceable to regulatory shifts.

9 Because digital media further blur the boundaries of general marketing and targeted solicitation, we use the term "solicitation" to cover all forms of digital marketing. While email solicitations remain responsible for only a small share of applications, other digital media—such as targeted banner ads, placement on third-party websites, and direct access to the issuer’s website—are collectively responsible for a significant and growing share of applications.

Consumers continue to apply for, and receive, credit cards in substantial numbers. Compared to 2009 lows for almost all major credit products, both general purpose and private label credit cards have seen some of the strongest rebounds in origination volume. This holds true, too, when looking only at originations of cards to consumers with subprime credit scores. The average new line has changed little since our last report, but overall amounts of total and unused line, both general purpose and private label, continue to grow. Even consumers with deep subprime credit scores, despite generally utilizing most of their available card credit, collectively have over $20 billion in total unused line available.

applications are denied solely because they fail to meet these requirements. About 3% of consumer-initiated applications for credit line increases are denied solely due to these same requirements. The outcomes of issuer-initiated credit line increase programs are harder to quantify, but were critically impacted by whether the issuer was able to use "modeled income"—which is derived from statistical models based on a consumer’s other observable qualities—rather than self-reported income.

Whereas the previous report focused on large issuers and their respective consumer base, we have included in this report some analysis of subprime specialist issuers. These issuers specifically market to and provide credit for consumers whose credit scores tend to be core and deep subprime. They also have a different channel marketing strategy than mass market issuers, relying much more heavily on pre-approved mail offers to specific consumers. Their approval rates for consumers with subprime scores are much higher than the approval rates for consumers with comparable scores at mass market issuers.

In the prior report, the Bureau found that credit card agreements had become simpler and shorter. Although that improvement continues, these agreements continue to be complex documents. Working from a larger sample of agreements than in the prior report, we are able to measure more precisely the variance in agreement readability and length across the market. Specifically, agreements for credit card products marketed primarily by subprime specialist issuers are particularly difficult to read. That may be especially problematic because these same products are disproportionally marketed to consumers with less formal education.

Substantial and growing numbers of consumers are managing their financial lives electronically and online, and credit cards are no exception to this development. A majority of active credit card accounts are now enrolled in online service portals, and a growing number are enrolled in issuers’ mobile applications. A significant minority have now elected not to receive paper statements. The Bureau’s data suggest that many of these consumers are likely not accessing their statements online either, in which case they would never see mandatory disclosures, including certain CARD Act disclosures intended to provide important information to consumers. This includes disclosures related to deferred interest promotions.

Many issuers are now providing credit score information to their customers free of charge, though the practice is not yet universal. Some issuers include more comprehensive tools that allow consumers to simulate the impact to their credit score from particular credit and payment decisions. As a result of these changes, tens of millions of consumers now benefit from increased transparency on credit scores. The Bureau will continue to monitor this space so that progress across issuers can be tracked and best practices identified by market participants.

Finally, we identified significant variations in how issuers assess "ability to pay" at origination and in considering credit line increases. In particular, the use of statistical models to estimate income is not consistent across issuers. This is a matter of significant concern to many stakeholders who responded to the Bureau’s Request for Information on the state of the credit card market.

From the consumer perspective, the innovation with perhaps the most impact over the last few years is issuer provision of regular, updated, and free credit score information to their credit cardholders. Because that has gone from pilot projects to being an established industry norm, however, we have covered it under "Issuer Practices," as noted above. With this core exception, credit card products, features, pricing structures, and functionality remain largely unchanged since our prior report.

credit card market. For example, we review consumer adoption of mobile payments applications for credit cards—which in part have been enabled by innovations in payments security.

Digital technology is also opening up certain aspects of the credit card market to competition from non-traditional market players. Some of these innovations are not limited in their reach to the credit card market. Some affect payments or credit markets much more generally. But because they have potential significance for credit card use, we include them in the scope of our review of market innovations.

Many consumers are offered and accept "deferred interest" promotional financing on private label cards. These programs offer "0% interest if paid in full" during a defined promotional period, which is generally six or 12 months. Consumers who repay the full promotional purchase in this window obtain free financing on what is often a large purchase. Those consumers who do not fully pay off the promotional balance by the end of the promotion, however, are subject to the same interest rate they would have paid in the absence of the promotion. Given that the interest rate on these cards is generally around 25%, the magnitude of the interest charge—if and when it is assessed—can be substantial.

Data available to the Bureau indicate that nearly 90% of deferred interest promotional spending is made by consumers with prime or superprime credit scores. Consumers with deep subprime scores and core subprime scores account for 3% and 8% of deferred interest promotional spending, respectively. That is less than their share of private label spending generally, but more than their share of spending on general purpose cards.

Some data suggest that error or confusion may be playing a part in non-payment. Consumers who fail to pay off their promotion in the promotional period tend to repay the full remaining balance, including the deferred finance charge, quite rapidly. Almost a third do so within two months and almost half within four months. That rapid repayment does not prove consumer error. But it appears to be in some tension with the behavior that might be expected of a consumer who understood that interest would be assessed retroactively if the balance was not paid in full by the end of the promotional period and who nonetheless chose to revolve that balance beyond the promotional period. We were able to discern little if any evidence that consumers improve their payoff rates by "learning" from repeated use of the product.

Across credit score levels, consumers who have a regular balance and a promotional balance are less likely to pay off the promotional balance than those who owe only on the promotional balance. In half the cases in which there is an overlapping non-promotional balance and the consumer fails to pay the promotional balance in full during the promotional period, consumers make total payments in excess—and often well in excess—of the full promotional balance during the promotional period.

Non-payment in the promotional period can be costly. The longer the promotional period, the higher the cost. Upfront, there is little variation in pricing by risk tier for private label cards. But that masks significant risk-based effects at the back-end. While the aggregate costs assessed to all deferred interest users are comparable, or even less expensive, than revolving the same balances on general purpose cards, the costs are almost all concentrated on a small share of promotions. These promotions are taken, disproportionally, by consumers with lower credit scores. As a result, consumers with subprime scores comprise only 11% of total promotional spending in our dataset, but incur 24% of the aggregate deferred interest charges. Consumers with prime scores also incur a share of deferred interest charges greater than their share of promotional spending. Consumers with superprime scores, however, have a share of promotional spending that is nearly double their share of deferred interest charges.

Credit card rewards programs have rapidly increased in prevalence over the past decade. As of 2014, accounts with rewards programs represent nearly two-thirds of all credit card balances and four-fifths of all credit card spending. Rewards accounts are even more predominant in the general purpose card market. Issuers are offering a greater diversity of rewards programs—and in many cases more compelling value propositions—to match the increasing popularity of these products with consumers. For many consumers, rewards have become central to the decision of which credit cards to acquire and how to use them.

There are also areas for potential concern in this market. It is not always clear when, where, and from whom consumers can expect to find or receive key program terms and conditions. Seemingly simple programs may have caveats or complexities glossed over by marketing materials. Consumers may not understand when and why rewards might expire or be forfeited, or what their options are when they do. Many rewards cards are based on partnerships between issuers and other companies, such as airlines and hotels, and it may not always be clear to consumers which institutions determine and control certain aspects of the product that they are using. The less that consumers can evaluate the value proposition associated with different rewards programs, the less able they are to select between cards on a rational basis—especially if they are likely to carry a balance on the card at some point in the future.

When consumers fail to pay their credit card bills when due, issuers engage in a range of practices to collect the debt. During the early stages of delinquency, issuers will generally engage in collection activities using collectors they directly employ. The issuers’ policies and practices regarding such collection activity vary widely. For example, among the large issuers surveyed, some permit collectors to make no more than four attempts to reach a consumer on a given day while others will allow up to 15 attempts.

In addition to placing debt with debt collectors, half of large issuers we surveyed also sell charged-off debt to debt buyers. Sold debt constituted 15% of all debt charged off by large issuers in 2014; within issuers that sold debt, that share ranged from less than 15% to greater than 50%. Debt sellers vary in terms of the warranties they provide to the debt buyer. Given that these warranties certify the accuracy and completeness of the information provided to the debt buyer, as well as the debt buyer’s ability to access documents validating the debt, limiting or omitting such warranties can impact the consumer debt collection experience. The price that debt buyers pay for charged-off debt increased in 2014 by over 25% as compared to 2013. The total amount of debt sold declined by 26% over the same period.

1. Introduction

1.1 Review mandate

1 Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734. A full summary of CARD Act rules implemented by the Board is at pages 11 through 13 of the 2013 report. The Bureau subsequently reissued these rules in December 2011. The Bureau later revised one CARD Act rule issued by the Board. On November 7, 2012, the Bureau proposed selected revisions to the ability-to-pay rules, which were intended to address a number of unintended impacts of the prior rule on consumers who did not work outside the home. The final rule implementing this revision became effective on May 3, 2013, with an associated compliance deadline of November 4, 2013. 78 Fed. Reg. 25818 (May 3, 2013). The ability-to-pay rules, including this revision, are discussed in section 5.5 of this report.21 CONSUMER FINANCIAL PROTECTION BUREAU – CONSUMER CREDIT CARD MARKET REPORT

3 Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, § 502, 123 Stat. 1755.

1. Credit card agreement terms;

2. Credit card issuer practices;

3. Disclosure effectiveness, with respect to terms, fees, and other consumer costs associated with credit cards;

4. Adequacy of protections against unfair or deceptive acts or practices relating to credit cards; and

5. Whether, and to what extent, CARD Act provisions and their implementation have affected the cost and availability of credit, particularly with respect to non-prime borrowers; the use of risk-based pricing; or credit card product innovation.

1.2 Scope and methodology

4 All of the data we report throughout this report aggregates data across multiple issuers. None of the results we provide can be used to identify the outcomes or practices of individual entities. Furthermore, the general patterns that we observe in the market may not be true—or may not be as true—for every issuer.

5 The Bureau recognizes that the issuers that supply data to the CCDB constitute a non-random sample because they are larger issuers. The practices and experiences of these issuers are not necessarily representative of the practices and experiences of many small credit card issuers. Thus, we do not attempt in this report to extrapolate from the CCDB data to make projections for the entire market. However, because the participating issuers represent 85% to 90% of credit card industry balances, the Bureau is confident that the findings reported here would not materially change if data from the entire universe of card issuers were available.

6 Issuers sometimes correct data submissions made to the CCDB. As a result, the data in the CCDB are not fully static.

2. Data from the CFPB’s Consumer Credit Panel ("CCP"), which is a 1-in-48 longitudinal sample of de-identified credit records purchased from one of the national credit reporting agencies and representative of the population of consumers with credit records. This dataset contains information on almost five million consumer credit records, including a commercially-available credit score for the consumer. These data contain no direct identifying information, such as name, address, or Social Security number. As with data in the CCDB, the Bureau cannot tie any of the information in the CCP to any particular individual. Like the CCDB, the CCP contains no transaction-level data;

3. The CFPB’s Credit Card Agreement Database, which is an online database available to the public at http://www.consumerfinance.gov/credit-cards/agreements. This database, created pursuant to the CARD Act, contains all the credit card agreements available to

23 CONSUMER FINANCIAL PROTECTION BUREAU – CONSUMER CREDIT CARD MARKET REPORT

consumers as of quarter’s end for each quarter from the third quarter of 2011 to the fourth quarter of 2014;

7 In some cases, the information provided in response to these requests was supplemented with information already obtained in response to examination-related requests made by the Bureau’s Office of Supervision.

8 The issuers covered by the MMI data are not completely identical to the issuers that responded to the Credit Card Practices Inquiry (CCPI) used as a source of data for the Bureau’s 2013 credit card market report. However, they represent an almost identical share of the credit card market and accordingly we use MMI data and CCPI data to present time series that extend beyond the data period covered by the MMI data alone.

9 We define the term "subprime" in the next subsection of the present section.

10 Comments are summarized in relevant sections of this report.24 CONSUMER FINANCIAL PROTECTION BUREAU – CONSUMER CREDIT CARD MARKET REPORT

7. A series of focus groups concentrated on either credit card rewards or deferred interest products. These focus groups were conducted in June 2015. The groups allowed for some exploration of consumer beliefs about and attitudes towards these areas of the consumer credit card market. However, given the number of consumers involved and the method of recruitment, the groups cannot be seen as representative of the broader cardholding population;

8. Commercially available data sources to which the Bureau subscribes that focus on the credit card industry, including mail volume monitoring reports, industry analyst reports, and data services and analytics from industry consultants. As an example, Experian and Oliver Wyman collaborate to produce the quarterly "Market Intelligence Report," which covers product trends in consumer finance, including those in credit card, mortgage, and auto lending markets. In addition, Mintel provides data on card solicitations and other marketing materials, via a range of channels; and

9. Numerous public sources, including but not limited to Securities and Exchange Commission filings, analyst reports, studies by other regulators, academic scholarship, and the trade press.

13 These definitions correspond to one set of industry standard ranges. There is no single industry standard. The one we use here, however, is among the most commonly used.