Consumer Experiences with Credit Cards
Canner, Glenn B., Elliehausen, Gregory, Federal Reserve Bulletin
By offering consumers both a means to pay for goods and services and a source of credit to finance such purchases, credit cards have become the most widely used credit instrument in the United States. As a payment device, credit cards are a ready substitute for checks, cash, and debit cards for most types of purchases. Credit cards facilitate transactions that would otherwise be difficult or costly, such as purchases over the Internet, by telephone, or outside the country. As a source of unsecured credit, credit cards provide consumers the option to finance at their discretion the purchase of an item over time without having to provide the creditor some form of collateral such as real estate or a vehicle. Moreover, the small required minimum payments on credit card balances allow consumers to determine themselves how quickly they want to repay the borrowed funds. Credit cards have other benefits as well, such as security protections on card transactions and rewards for use. All of these features have been valuable to consumers and have helped promote the widespread holding and use of credit cards.
Recent fluctuations in economic activity and changes in the regulation of credit cards have greatly affected the credit card market. As a consequence of the Great Recession and the slow economic recovery that has ensued, many consumers have experienced difficult financial circumstances. (1) During much of this period large numbers of consumers fell behind on their credit card payments, causing delinquency and charge-off rates to rise sharply. As a further sign of weakness in the market, outstanding balances on revolving credit, nearly all of which is credit card debt, fell for the longest consecutive number of months since national statistics have been kept and have only recently begun to rebound slowly. The situation has improved markedly since the end of the recession, particularly regarding the incidence of delinquency and default, but some of the effects of the downturn still linger, such as reduced levels of borrowing and more-restrictive underwriting.
The credit card market has been further buffeted by new consumer protection regulations, most notably the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit Card Act). (2) The Credit Card Act sought to improve disclosure of account terms and conditions to consumers. The act also restricts a number of card issuer practices that the Congress deemed to be unfair, deceptive, or not sufficiently transparent. The provisions of the Credit Card Act were implemented in phases, but all are now in effect. Among the provisions of the act are limits on "penalty" fees for making late payments or exceeding credit limits; rules that specify how creditors must allocate consumer payments to outstanding balances; and restrictions on certain risk-management practices by card issuers, particularly limiting their ability to raise the interest rate on an outstanding balance unless the account payments are significantly in arrears or the interest rate on the account is variable (tied to an index). Each of these provisions affects the revenues and costs of card issuers. (For further details about the provisions of the Credit Card Act, see the box "The Credit Card Accountability Responsibility and Disclosure Act.")
Card issuers have responded to the changing economic conditions and regulatory environment by altering the prices and terms offered on credit cards, the size of credit lines made available to cardholders, and the marketing of and access to their products. Some of these adjustments are likely to continue to play out over time as card issuers evaluate the effects of their responses and consumers' reactions to these changes.
This article examines consumers' behavior, experiences, and attitudes with regard to credit cards in the aftermath of these economic and regulatory changes. Much of the data for this article are from a Federal Reserve-sponsored nationwide consumer survey conducted in February 2012 by the Thomson Reuters/University of Michigan Surveys of Consumers (Surveys of Consumers). …