Washington, DC — Today in the United States, the credit card market is measured on a scale of billions. The amount of debt owed on credit cards in 2005 was $800 billion; $30 billion is how much lenders profit each year. Under the guise of "democratization" the federal government has deregulated the industry over the past 30 years, eliminating caps on interest rates and penalties. Those who can least afford it are paying the price.
A new study published this week by the non-partisan research center Demos outlines who bears the cost of credit card deregulation. "Who Pays? The Winners and Losers of Credit Card Deregulation", reveals how low-income families, African Americans, Latinos and single females bear a disproportionate amount of the cost to subsidize "competitive" credit card offers by paying excessive fees and high interest rates.
In a special briefing featuring Representative Keith Ellison (D-MN), Congress will address this troubling problem. The briefing will take place Wednesday, August 1, 2007, at 3:30pm at the Rayburn House Office Building, Room 2456.
"Credit card companies often offer tempting incentives like low or zero percent APRs, frequent flyer miles or cash back on purchases," said Tamara Draut, co-author of the report and Director of Demos' Economic Opportunity Program. "Someone has to bear the cost of these promotions, and they are often the families already in financial dire straits. The impact of a deregulated credit card industry on American families is clear."
Behind the smokescreen of benefits are hidden traps that frequently keep hard-working American families saddled with long-term debt. Missing a payment by even an hour has the potential to send a cardholders' interest rate sky-high not only on that card, but on other cards as well. Many cardholders purchase goods on one set of conditions — a 16 percent APR for example — and pay them back on another — as high as 40 percent. Changing the conditions of the card agreement "at any time, for any reason" is an industry-wide practice.
Deregulation of the industry began in the late 1970's, when the Supreme Court decided that banks could charge the highest interest rate in the bank's home state instead of the customer's. As a result, regional and national banks moved their operations to states where there were no usury ceilings on credit card interest rates. In the mid-1990s, another Supreme Court ruling further enabled deregulation by defining fees as "interest", subjecting them to the rules of the 1970s decision.
One-third of cardholders are paying interest rates in excess of 20 percent.
In 1990 the lowest APR reported was 11.88 percent, and the highest 22 percent. By 2004, the lowest was 0 percent while the highest jumped to 41 percent.
About a third of credit card accounts with balances pay little or no interest each month, which essentially amounts to a free or very low-cost loan. More than a third (36 percent) of accounts pay the regular interest rate. The final third of accounts pay interest rates that range from more than 20 percent to as high as 41 percent.
Cardholders with balances and household incomes below $25,000 are more than twice as likely as households earning $50,000, and over five times more likely than households earning $100,000, to pay interest rates higher than 20 percent.
Credit card holders in the bottom two income quintiles with credit balances are more than twice as likely to pay penalty 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 and 13 percent of Latinos 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.
"Who Pays?" urges Congressional leaders to institute a Borrower's Security Act which would address a range of unfair practices by limiting interest rate hikes, strengthening card member agreements, and ensuring fair repayment terms.
"It is imperative that our elected officials draft legislation that would reform the relationship between the credit card lender and borrower," said Tamara Draut. "Congressional leaders must advocate for the average American family,"
To view the full report, "Who Pays? The Winners and Losers of Credit Card Deregulation," visit archive.demos.org.