Who Pays?
The Winners and Losers of Credit Card Deregulation
August 1, 2007
By Jennifer Wheary, Tamara Draut

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It has been nearly two decades since the credit card industry was deregulated with the promise of bringing greater competition and lower prices to consumers. In addition, technological advancements in underwriting, commonly referred to as risk-based pricing, have widened the market for credit cards to lower- and moderate-income consumers.

The result: In 2004, 35 percent of households with incomes below $10,000 had credit cards, while more than half of households with incomes between $10,000 and $24,999 had credit cards.

While much is made of this democratization of credit, there is less public awareness and consumer knowledge about how the cost of credit varies across different segments of the population. Last year alone, households received nearly 8 billion credit card solicitations in their mailboxes. Often these solicitations promise teaser rates of 0 percent, or they might dangle the carrot of airline miles or cash-back rewards.

But as our study uncovers, for about one-third of all cardholders, the carrot is not nearly as big as the stick. Today, almost all of the top 10 issuers of credit cards reserve the right to change the APR on the account at any time, for any reason.3 A single late payment--even by as little as minutes--can result in penalty interest rates that average 24.51 percent. Under the shield of deregulation, credit card companies have shifted the cost of credit to individuals least able to afford it--using those profits to underwrite the free loans and bonus miles, rewards and other benefits enjoyed by higher income households. Our research found that four groups--low-income individuals, African Americans, Latinos and single females--bear the brunt of the cost of credit card deregulation through excessive fees and high interest rates.

Key Findings

• One-third of cardholders are paying interest rates in excess of 20 percent.
• Cardholders with household incomes below $25,000 who have credit card balances are two times more likely than households earning $50,000, and five times more likely than households earning over $100,000, to pay interest rates higher than 20 percent.
• Cardholders with balances and household incomes between $25,000 and $50,000 are nearly two times as likely as households earning more than $50,000, and four times more likely than households earning over $100,000, to pay such rates.
• Credit cardholders in the bottom two income quintiles with credit balances are more than twice as likely to pay penalty interest rates as those in the top two income quintiles.
• African-American and Latino credit card holders with balances are more likely than whites to pay interest rates higher than 20 percent.
• Seven percent of white cardholders, 15 percent of African-American cardholders, and 13 percent of Latino cardholders pay interest rates higher than 20 percent.
• Eleven percent of single women with credit card balances pay interest rates higher than 20 percent compared to 6 percent of single men with credit card balances.
• In 2004, 21 percent of consumers reported missing or making a late payment. Forty percent of African-American and 26 percent of Latino borrowers reported paying late or missing a payment.
• Twenty-two percent of single women and more than 30 percent of borrowers with incomes less than $25,000 also reported making a late payment or missing a payment.

While personal responsibility must be exercised by consumers, the lending industry must also exercise corporate responsibility. In the current regulatory environment, bargaining power between lender and borrower is heavily tilted toward the lender. fact that the highest consumer costs are disproportionately borne by low-income families, African Americans, Latinos and single females raises additional moral questions and underscores the need to reexamine the public policy and regulatory framework related to the credit card industry.