Facts Matter: CARD Act Report Highlights Banks’ Positive Impact on Consumers’ Financial Resilience

WASHINGTON, D.C. – The Consumer Bankers Association (CBA) today released the third installment of its “Facts Matter” blog post series that highlights the concerning regularity with which the Consumer Financial Protection Bureau’s (CFPB) press releases differ from their actual data. In October, the CFPB released its sixth report on the credit card market, as required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”). The CFPB’s press release accompanying the CARD Act Report gives the impression that consumers are increasingly falling behind on their credit card payments (emphasis added):

• “The report highlights areas of concern, including more consumers carrying balances month to month, with many falling deeper into debt over time, while credit card company profits remained significantly above pre-pandemic levels.”
• “All in all, the data show more cardholders are being charged late fees, falling behind on payments, and facing higher costs on growing debt.”
• “More borrowers getting caught in debt: More cardholders are carrying balances month to month or falling behind on payments, and a greater percentage of balances are going more than 180 days delinquent. Nearly one-tenth of credit card users find themselves in “persistent debt” where they are charged more in interest and fees each year than they pay toward the principal—a pattern that could become increasingly difficult for some consumers to escape.”

In actuality, the CARD Act Report’s data shows a very different story:

• The CARD Act Report shows a notable shift in consumer behavior, in which more consumers are paying their credit card balances off each month than in prior years.
• Consumers are paying down higher shares of credit card balances than in recent years, reducing their debt burdens and increasing their credit scores.
• While “persistent debt” increased after pandemic stimulus ended, the rates of “persistent debt” with consumers remains lower than each and every pre-pandemic year in the CFPB’s data.
• These improvements in consumer financial resilience are partially due to actions banks have taken to ensure consumers make more progress paying down their balances.

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The CARD Act Report shows a notable shift in consumer behavior, in which more consumers are paying their credit card balances off each month than in prior years.

It’s difficult to understand or defend the CFPB’s assertions that “more cardholders are…falling behind on payments” and “more consumers [are] carrying balances month to month.” The CFPB’s data appears to show the exact opposite trendline: more cardholders are paying their balances in full each month than any year in the CFPB’s data. The CARD Act Report says clearly on page 38: “More than two-fifths of accountholders with a balance pay their balances in full, up two percentage points from our last report.” The CARD Act Report goes on to include a chart (Figure 1, below), which shows that the share of consumers that pay their balances off in full (in light blue, at the top of the graphic) is materially higher than before the pandemic, and any other year in the CFPB’s data. Further, the share of consumers that pay 10 percent or less of their balance (in green, at the bottom of Figure 1) “has declined six percentage points since 2019.” (p.38). That’s over a 15 percent proportionate drop – and a better rate than any pre-pandemic year in the CARD Act Report’s data set. Consumer improvements in paying down debt have been so significant the CARD Act Report specifically mentions that it’s a big deal: “Consumers tend to display consistent transacting and revolving activity over time, which makes the shifts in repayment behavior observed in recent years particularly notable” (p. 38).

Consumers are paying down a higher share of credit card balances, reducing their debt burdens and increasing their credit scores.

Contrary to the bleak conditions described in the CFPB’s press release, the CARD Act Report shows that consumers are paying down their credit card balances at materially higher rates than in previous years. As the CARD Act Report explains, “[t]he payment rate is the share of total cycle-beginning balances paid that cycle” (pg. 36). The CARD Act Report continues: “[g]eneral purpose card repayment averaged 40 percent of balances in 2021 and 2022.” The Report explains that this is “up from pre-pandemic figures of roughly 30 percent” (pg. 36). That’s impressive enough, but Figure 9 in the CARD Act Report (Figure 2, below) shows that consumers are making progress on their credit card debt at the highest rates since 2015. And looking back at the 2015 CARD Act Report, payment rates were only 20 percent prior to the 2008 recession and then grew to around 27 percent – a benchmark that the then-CFPB (led by Director Richard Cordray) lauded because it would “lower the risk of consumer harm in this market” (pg. 49-50). Although the CFPB’s press release opts to not mention the material increases in consumer payment rates, the progress is an important contributing factor to consumer financial resilience. As the CARD Act Report explains on page 37, “higher payment rates tend to reduce revolving debt, lower utilization, and increase [credit] scores.”

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Rates of “persistent debt” remain lower than each and every pre-pandemic year.

The CFPB’s press release goes on to sound the alarm that nearly one-tenth of consumers meet the Bureau’s definition of being in “persistent debt” (paying more in interest and fees than what is paid toward principal each year). However, the press release fails to put this figure in context. A figure from the CARD Act Report tracking the annual share of accounts that meet the CFPB’s definition of persistent debt shows that although rates of persistent debt have risen in the last year from 8.4 percent to 9.9 percent (the dotted “Overall” line in Figure 3, below), the rise coincides with the end of pandemic-era public and private stimulus programs. Importantly, the current rate of accounts that meet the CFPB’s definition of “persistent debt” is lower than each and every year prior to the pandemic.

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These improvements in consumer financial resilience are partially due to actions banks have taken to ensure consumers make more progress paying down their balances.

When pondering the “notable” improvements in consumer repayment behavior, the CARD Act Report notes that “[o]ne explanation may be improving financial conditions for some cardholders, perhaps due to pandemic-era stimulus programs” (pg. 38). But there are other contributing factors. In particular, the CARD Act Report notes that banks made changes to their card agreements, which likely had a role in improving consumer pay-down amounts: raising minimum payment requirements. Card issuers set minimum payment calculations that determine how much cardholders must pay to avoid late fees. On the one hand, higher minimum payments might help consumers, because it helps ensure that consumers make progress paying off their debt. But as the CARD Act Report explains, setting a minimum payment amount presents a difficult balance for card issuers. “While minimum payments that represent a higher share of the total balance may help some cardholders pay less in finance charges over time, this higher minimum payment may cause some cardholders to change their likelihood of borrowing and for others to incur late fees, risk delinquency, and hurt their credit scores” (pg. 41). So, what did the CARD Act Report find? The most common floor set by credit card issuers is now “$35 – a $10 increase since 2015” (pg. 40). Remarkably, card issuers were able to make these increases in minimum payments (a 40 percent increase!) while still making significant progress providing financial services to “credit invisibles” and other consumers on the margins. As described in our last blog post, the CARD Act Report shows that in recent years card issuers have materially expanded access to credit for consumers with the lowest credit scores, growing credit access without causing a corresponding increasing late fees.

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Conclusion

Consistent with our first two blog posts, the CARD Act Report seems to tell a different story than what the CFPB asserts in their press releases. In this case, the distance between the CFPB’s press release and reality is dismaying and concerning. The CFPB’s press release asserts the exact opposite conclusion from what the CFPB’s actual data shows:

• More consumers are paying off their entire credit card balance each month;
• Revolvers are paying down their credit card debt at historically high rates, an important contributor to overall financial resilience;
• The percentage of consumers that meet the CFPB’s definition of “persistent debt” is lower than each and every pre-pandemic year; and
• Card issuers are at least partially responsible for these increased paydown rates because card issuers have managed to raise minimum payment floors (requiring that consumers pay more into their credit card debt each month), without reducing credit access or raising late fees on consumers that are on the margins.

On these particular issues, the CFPB’s misleading headlines are difficult to justify or even explain. But the CARD Act Report and CFPB data demonstrate that, regardless of the CFPB’s press strategy and speeches, banks and credit card issuers continue to make important improvements in consumers’ ability to manage their credit, while still providing services broadly and equitably. To read the previous two Facts Matter blog posts in this series, click HERE and HERE.