GAO Report Looks at US Credit Card Industry Companies Need to Improve Disclosure Statements
Friday, 20 October 2006
A recently released Government Accountability Office (GAO) report takes a look at the US credit card industry and concluded that, for many consumers, reading the fine print on credit card agreements is a challenge. This is just one of the key findings of a 114-page report.
Sen. Carl Levin (D-MI), the ranking minority member of the Senate Committee on Homeland Security and Governmental Affairs’ Permanent Subcommittee on Investigations, requested the report, asking that the GAO review a number of issues related to credit card fees and practices, specifically of the largest issuers of credit cards in the United States.
The resultant report, which was submitted to Congress in September, discusses the following:
1. How the interest, fees, and other practices that affect the pricing structure of cards from the largest US issuers have evolved and cardholders’ experiences under these pricing structures in recent years;
2. How effectively the issuers disclose the pricing structures of cards to their cardholders;
3. Whether credit card debt and penalty interest and fees contribute to cardholder bankruptcies; and
4. The extent to which penalty interest and fees contribute to the revenues and profitability of issuers’ credit card operations.
US Consumers and Their Credit Cards
Among the report’s findings are the following:
· Over the past 25 years, the prevalence and use of credit cards in the United States has grown dramatically. Between 1980 and 2005, the amount that US consumers charged to their cards grew from an estimated $69 billion per year to more than $1.8 trillion, according to one firm that analyzes the card industry.
· The number of US credit cards issued to consumers now exceeds 691 million.
· The increased use of credit cards has contributed to an expansion in household debt, which grew from $59 billion in 1980 to roughly $830 billion by the end of 2005. The Board of Governors of the Federal Reserve System (Federal Reserve) estimates that in 2004, the average American household owed about $2,200 in credit card debt, up from about $1,000 in 1992.
· Originally having fixed interest rates around 20 percent and few fees, popular credit cards now feature a variety of interest rates and other fees, including penalties for making late payments that have increased to as high as $39 per occurrence and interest rates of over 30 percent for cardholders who pay late or exceed a credit limit.
· Issuers explained that these practices represent risk-based pricing that allows them to offer cards with lower costs to less risky cardholders while providing cards to riskier consumers who might otherwise be unable to obtain such credit.
· Although costs can vary significantly, many cardholders now appear to have cards with lower interest rates than those offered in the past, data from the top six issuers reported to GAO indicate that, in 2005, about 80 percent of their accounts were assessed interest rates of less than 20 percent, with over 40 percent having rates below 15 percent.
· The issuers also reported that 35 percent of their active US accounts were assessed late fees and 13 percent were assessed over-limit fees in 2005.
Disclosures Have Weaknesses
· Although issuers must disclose information intended to help consumers compare card costs, disclosures by the largest issuers have various weaknesses that reduced consumers’ ability to use and understand them. According to a usability expert’s review, disclosures from the largest credit card issuers were often written well above the eighth-grade level at which about half of US adults read.
· Contrary to usability and readability best practices, the disclosures buried important information in text, failed to group and label related material, and used small typefaces. Perhaps as a result, cardholders that the expert tested often had difficulty using the disclosures to find and understand key rates or terms applicable to the cards.
· Similarly, GAO’s interviews with 112 cardholders indicated that many failed to understand key aspects of their cards, including when they would be charged for late payments or what actions could cause issuers to raise rates. These weaknesses may arise from issuers drafting disclosures to avoid lawsuits, and from federal regulations that highlight less relevant information and are not well suited for presenting the complex rates or terms that cards currently feature.