02/12/2009 - Mr. Chairman, Ranking Member, Members of the Committee:
I am pleased to testify in support of the Credit Card Accountability, Responsibility, and Disclosure Act and other legislation that would create a more efficient and fair credit card market and encourage greater consumer responsibility in the use of credit.1 There are four major points I wish to make in my written testimony: (1) Consumers cannot use credit cards efficiently and responsibly because the price of cards is not transparent, due to the unnecessary and deliberate complexity of credit card price structures and billing practices. Lack of transparent pricing cost American consumers over $12 billion in unnecessary interest and fees in 2007.2 (2) Opaque pricing, including billing tricks and traps, are an essential part of the card industry`s fee-based business model that encourages unsafe lending practices. Eliminating billing tricks and traps is an important step to ensuring sound underwriting in the credit card market and reducing systemic risk…….
Chart 2. Interest Paid on Revolving Debt Per Household
For the average American family, the impact of these billing practices on household finance is staggering.
The Pew Charitable Trusts calculates that a single credit card penalty repricing on a balance of $3,500 is re-priced, the additional interest can consume one-quarter of an average household`s discretionary income during a year.6 As Pew notes ``Though positioned [by the card industry] as necessary to encourage responsible payment behavior, penalty re-pricing practices today can have severe and sometimes devastating effects upon household finances.``7 The card industry itself estimates that just a handful of billing practices accounted for $12 billion dollars in additional revenue.8 Eliminating these hidden price points will help the economy overall by putting more than $12 billion dollars back in the pocket of consumers, which can be used for productive consumer spending.
Disguised credit card price points also contribute to bankruptcy filings. Concealed pricing encourages higher credit card use than would otherwise occur, which leads, inexorably, to more credit card debt. Dollar for dollar, a consumer with credit card debt is more likely to file for bankruptcy than a consumer with any other type of debt.9 Debt is of course a sine qua non of bankruptcy, but credit card debt has a particular and peculiar relationship with bankruptcy filings that other types of debt do not have. Banning unfair credit card billing practices may help limit bankruptcy filings, the costs of which are borne by all creditors, including the government, and thus by all taxpayers. Because of the serious social costs of credit card billing practices and the inherent unfairness of many of them, Congress should act to make the credit card market more efficient and to encourage greater consumer responsibility by banning credit card billing practices that function as covert price points and mask the true cost of credit. Banning these billing practices would bring much needed transparency to the credit card market.
By banning billing practices that function as covert price points, Congress can promote greater competition in the card industry, help consumers exercise control of their finances responsibly, encourage productive consumer spending, and help decrease bankruptcy filings. Currently credit card issuers do not compete with each other on the net price of cards (benefits minus costs). Instead, they compete on selectively highlighted price points, such as teaser interest rates or bundled benefits, like frequent flier miles.
Any card issuer that attempted to advertise its total price would suffer in the market because its total price advertisements would line up against the zero percent teaser rates and triple bonus miles offered by other issuers. It is easier for issuers` to push price points away from easily comparable, up-front costs, like annual fees, toward delayed back-end price points like penalty interest rates, late fees, and overlimit fees. Competition within the card market leads to obfuscated pricing with price points hidden away in fine print billing practices. Eliminating hidden price points encourages card issuers to compete on the basis of total price, which will make the credit card market more efficient.
Banning abusive billing practices will also empower consumers to exercise control of their financial affairs responsibly, both by making the price of credit more easily understandable and by permitting cardholders to opt-out of certain rate increases and opt-out of the ability to exceed their charge limit. Eliminating hidden credit card prices points will make credit card markets more efficient and will help consumers and the economy.
Pew is no longer active in this line of work, but for more information visit the Safe Credit Cards Project on PewHealth.org.