The Credit Card Market: Recent Trends and Regulatory Proposals Page: 4 of 28
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The Credit Card Market: Recent Trends and Regulatory Proposals
Introduction
Financial innovations have increased credit availability for U.S. households over the last two
decades. For households with collateral assets, financial innovations, specifically those in the
mortgage market, have allowed households to take on debt and finance large expenditures they
might otherwise have had to forgo. Such developments can be advantageous because they make
some households less sensitive to temporary disruptions in income or cash flow. Financial
innovations, however, can also make consumers more vulnerable to unexpected changes in asset
prices. A sudden increase in the value of underlying collateral assets used to secure consumer
borrowing, such as house prices, may entice some households to increase their borrowing; a
sudden decrease in asset values may translate into financial distress.'
Financial innovations also gave borrowers greater access to revolving credit or credit card loans.
Although all types of lending may reduce sensitivity to cash flow disruptions, unsecured lending
can be used by borrowers who hold few, if any, collateral assets to draw upon to avoid a financial
crisis. Some credit card borrowers may therefore be less affected than those with collateralized or
secured loans when asset values fall. Credit card borrowers, however, generally pay higher rates
relative to secured credit borrowers. The relatively higher borrowing costs, fees, and repricing
practices, therefore, may undermine or offset the financial benefit of being detached from a
decline in collateral asset values, which adds to borrower financial distress.
Rising consumer indebtedness and increased reliance on credit cards over the past two decades
have generated concerns in Congress and among the general public that cardholders may be
paying excessive credit card rates and fees. Specifically, some borrowers have reportedly been
unaware of assessed penalty fees and interest rate increases.2 Because of this and other issues,
legislation such as H.R. 627, Cardholders' Bill of Rights Act of 2009 (introduced by
Representative Carolyn B. Maloney with 42 co-sponsors); S. 235, Credit Cardholders' Bill of
Rights Act of 2009 (introduced by Senators Charles E. Schumer and Mark Udall); and S. 414,
Credit CARD Act of 2009 (introduced by Senator Christopher J. Dodd with 19 co-sponsors) have
been introduced in the 111th Congress.
This report discusses developments in the revolving credit market, including recent trends in
profitability, usage, funding, and repricing practices that have prompted new regulatory action.
The first section provides a brief summary of information regarding issuer profits as well as
descriptive data documenting U.S. household credit card usage and delinquency patterns. The
next section analyzes the funding of credit cards, and specifically the securitization process in
detail, since this method minimizes those costs. Conversely, payoff and default risks, which are
also explained, tend to increase funding costs for credit card loans. A brief summary of credit card
repricing practices is presented, followed by policy responses by the Federal Reserve.
1 For more discussion about why households may increase their indebtedness, see Karen E. Dynan and Donald L.
Kohn, "The Rise in Household Indebtedness: Causes and Consequences," Finance and Economics Discussion Series
2007-37, Board of Governors of the Federal Reserve System (August 2007), at http://www.federalreserve.gov/Pubs/
Feds/2007/200737/200737pap.pdf.
2 For example, see Martin H. Bosworth, "Credit Card Fees Rise, Disclosure Statements Inadequate," at
http://www.consumeraffairs.com/news04/2006/10/gao_credit_cards.html and Anita Hamilton, "Exposing the Credit-
Card Fine Print," at http://www.time.com/time/printout/0,8816,1715293,OO.html#.Congressional Research Service
1
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Getter, Darryl E. The Credit Card Market: Recent Trends and Regulatory Proposals, report, May 11, 2009; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc810279/m1/4/: accessed March 28, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.