Facts Matter: CARD Act Report Reveals Credit Card Fee Landscape In Stark Contrast To CFPB’s Misleading Headlines

The second installment of the Consumer Bankers Association’s (CBA) “Facts Matter” blog series explains how the Consumer Financial Protection Bureau’s (CFPB) public statements can mislead market observers by painting an inaccurate picture of the credit card marketplace. As CBA illustrates below, the CFPB’s CARD Act Report actually appears to show a different, richer, story about credit card fees, in which:

• Late fees have not meaningfully increased as a proportion of credit card balances for the last several years (excluding the pandemic years, during which consumers received a variety of public and private stimulus benefits that brought down both credit card spending and late payments);
• To the extent that overall fees have grown in proportion to balances, it appears to be attributable to two factors: an increase in credit card availability for subprime and deep subprime cardholders and growth in credit card annual fees; and
• Most of the growth in annual fees is paid by prime and super-prime consumers. In fact, annual fee prevalence has actually decreased in recent years for subprime and deep subprime consumers.

To put it plainly: Late fees appear to have grown only in proportion to the increase in credit card balances, especially as issuers provide greater access to credit cards for consumers with lower credit scores or little-to-no credit history. Issuers have reduced annual fees charged to these consumers and instead charged higher annual fees to the highest-scored consumers. Despite these broader changes, press releases and statements by the current CFPB have consistently repeated the theme that credit card late fees are not “fair and competitive.” And the CFPB regularly talks in terms of rising late fees. For instance, CFPB Director Rohit Chopra has asserted that once credit card issuers “discovered that these fees could be a source of easy profits, late fees shot up, with a surge occurring in the 2000s.” One of the CFPB’s big headlines from its October press release was that: “Credit card companies charged borrowers the highest amount of interest and fees ever measured by the CFPB’s data.” The CFPB often uses this broad statement as support for an assertion about the growth of a specific type of credit card fee: late fees. When the CFPB does this, though, a casual reader can easily miss that the “thing” that has grown isn’t late fees, but rather a mix of things.

• First, the numbers used by the CFPB include not just late fees, but all credit card fees.
• Second, the mix also includes interest expenses. Given the Federal Reserve’s historic series of interest rate hikes in its near two-year fight against inflation, it shouldn’t be surprising that a group of factors that includes interest has grown enormously.
• Third, balances have grown, meaning interest and fees charged have grown proportionately.

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The CFPB’s rhetoric and spin with numbers can mislead readers to think that credit card late fees are dramatically rising – but that misrepresents the true story.

Earlier this month, The Washington Post published an article provocatively titled, “From airlines to ticket sellers, companies fight U.S. [sic] to keep junk fees.” The Post article is a great example of how the CFPB’s grouping of factors when talking about late fees can mislead even sophisticated stakeholders. In describing the CFPB’s recent push to lower credit card late fees, The Post says:

“A similar backlash has greeted the Consumer Financial Protection Bureau over its push to cut credit card late fees. Consumers that fall behind on their bills can face a penalty as high as $41 per month, an amount that can result in some of the most cash-starved Americans falling deeper into debt. The fees have proved lucrative for credit card issuers, which reaped more than $130 billion last year in these charges plus interest on unpaid balances, according to an October report from the CFPB.”

It takes a careful reader to notice that in three short sentences, The Washington Post goes from talking about the impact of late fees, to citing numbers about all credit card fees plus interest (which in total are about nine times the size of late fees). The article makes no attempt to disaggregate the interest component from the number it cites, much less the impact of other types of credit card fees, which is a misrepresentation of the actual story of late fees. The Post at least includes a chart specific to late fees. But the chart is titled “Credit card late fees on the rise” (Figure 1, below). However, it’s not clear that late fees are actually rising, particularly if you put late fees in the appropriate context. As the CARD Act Report explains, “[t]otal late fee volume and incidence in 2022 returned to pre-pandemic levels, following declines in 2020 and 2021.” The pandemic years were somewhat of an anomaly because, as the CARD Act Report notes, “[d]eclines in late fees in 2020 and 2021 may be attributed to card issuer late fee waiver programs and other forms of federal disaster relief implemented on a temporary basis during the pandemic” (pg. 65). Said another way, what The Post describes as a “rise” is more likely fees normalizing after the pandemic. Regulators and reporters can better inform their audiences by putting the nominal amount of late fees in the context of the nominal amount of credit card debt. For instance, The Post and CFPB press release each highlight that late fees have grown to $14.5 billion in 2022. But each source fails to explain that the fees grew commensurate with the growth of credit card accounts and balances. If you have more credit cards and more balances, you’ll have more fees. If you take the time to create that context and look at late fees as a share of balances, late fees have remained relatively constant since 2015 (Figure 2, below).

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The CARD Act Report appears to show that the proportionate growth in overall credit card fees is attributable to the increased availability of credit for lower-scored consumers, as well as higher annual fees.

While the CARD Act Report doesn’t show late fees as a percentage of balances, it does use that measure to show that overall fees “have grown as a share of balances” (pg. 63). What’s driving that growth in overall fees? Looking at the CARD Act Report, we think two different things are happening at once. First, credit card issuers have made significant progress in underwriting more consumers with lower credit scores. The CARD Act Report shows this growth (Figure 3, below). As the CARD Act Report points out, consumers with lower credit scores are more likely to pay late fees each year (pg. 65). But failure to pay bills on time may be why those consumers have subprime and deep subprime credit scores in the first place. (The CFPB has a “How to rebuild your credit” consumer tipsheet that warns that “[t]here are no shortcuts or secrets.” The CFPB’s first step is: “1. Pay your bills on time, every time.”) Second, the CARD Act Report explains that while late fees returned to 2019 levels, annual fees grew in 2021 and 2022 (pg. 5). In fact, “[a]nnual fee volume has more than doubled from $3.0 billion in 2015 to $6.4 billion in 2022.” The CARD Act Report further states that “while the percentage of consumers who pay an annual fee declined, the total dollars paid in annual fees was the highest level in our data.” Per the CARD Act Report:

“The average annual fee is becoming more expensive, partly reflecting the increased prevalence of credit cards with more generous rewards but greater annual fees. Cardholders with super-prime scores were charged an average of $129 in annual fees in 2022 for each account that carried such a fee.”

The CARD Act Report shows the growth in average annual fees over the years, segmented by credit. The green lines show the material growth in super-prime and prime annual fees (Figure 4, below).

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The CARD Act Report shows annual fees are mostly paid by consumers with the highest credit scores.

One of the most interesting parts of the CARD Act Report’s discussion of fees is overlooked by the CFPB’s press releases: while total annual fees have doubled since 2015, card issuers have shifted those fees away from consumers with lower credit scores. Instead, increases in annual fees are primarily paid by high-credit prime and super-prime consumers. Here’s how the CARD Act Report (pg. 63) describes it:

“The typical periodic fee has shifted from being charged to cardholders with subprime scores to being paid by cardholders in the highest score tiers. The share of accounts assessed an annual fee in the Y-14 declined about one percentage point since 2020 to 16.3 percent. More cards in prime plus and super-prime tiers pay this charge each year. In contrast, annual fees have become less prevalent for cardholders with below-prime scores.”

The CARD Act Report has a striking chart (pg. 64), showing the plummeting prevalence of annual fees for subprime and deep subprime accounts. According to the CFPB’s data, consumers in the subprime and deep subprime categories have seen their share of annual fees decline by nearly 25 percent since 2015. We’ve replicated the CFPB’s chart below (showing the decline in prevalence of late fees for subprime and deep subprime consumers in yellow). But in our chart, we’ve also highlighted the corresponding changes for super-prime consumers, in blue, showing annual fees have not only grown larger but have also become more common for consumers with the highest credit scores (Figure 5, below).

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Conclusion

As with our prior blog on competition, the CFPB’s press releases and speechwriters seem to tell a different story than the CFPB’s actual data. If you focus on just late fees, the CARD Act Report appears to show that credit card issuers are holding steady at pre-pandemic averages. But if you broaden the discussion, the CARD Act Report tells a much more interesting story about the credit card market. First, card issuers are making significant progress underwriting consumers with the lowest credit scores. This means that more people now have access to better-regulated credit than ever before. And even accounting for late fees, credit cards usually offer cheaper and more highly regulated credit than what would otherwise be available to those consumers.

• In 2015, the CFPB highlighted that 45 million Americans lacked sufficient credit histories for credit scoring. These “credit invisibles” are effectively shut out of many mainstream financial services. Over time, the CFPB found that credit cards are by far the primary way for “credit invisibles” to become visible.
• Similarly, the CFPB found during the pandemic that minority consumers disproportionately turned to payday, auto title or pawn loans to make ends meet, when they actually could have used credit cards. Credit cards would generally have been less expensive than these alternatives. Just as importantly, credit cards could help these consumers build their credit histories, eventually helping them get access to cheaper auto loans, home mortgages, and other financial tools.

Second, the CARD Act Report shows that issuers are charging consumers with lower credit scores fewer and lower annual fees. Card issuers are instead competing and innovating to offer products to prime and super-prime consumers with higher annual fees. In doing so, they are growing revenue by charging larger fees, more frequently, to consumers with the highest credit scores. Against this backdrop, it is striking that the CFPB’s press release doesn’t mention this change in annual fee practices, credit invisibility, or card issuers’ expansion of credit to subprime and deep subprime consumers. But regardless of the CFPB’s press releases and speeches, banks and credit card issuers continue to provide services broadly and equitably, as represented by the data in the CARD Act Report.