At
the end of the year 2000, U.S. households were accruing interest
on $574 billion of revolving credit card debt, or debt carried
over to the next month rather than paid off entirely. The average
household with a credit card balance carried revolving debt of
nearly $10,000. A household making the minimum payments—commonly
only two percent of the unpaid balance or $20, whichever is
greater—on this debt would pay nearly $1,500 in interest just in
the first year. Nationally, consumers pay interest of more than
$87 billion annually on this revolving debt. Cardholders paying
only the minimum balance accumulate interest on top of interest,
paying far more than their share to credit card companies.
An
estimated 55-60 percent of Americans carry credit card balances.
One recent study found that nearly half of those with balances
made just the minimum payment in February 2002. This means that
about one out of four cardholders in the U.S. now make only the
minimum payments. In the same month, about 37 percent of Americans
who could not pay off their balances paid less than half their
outstanding balance, and only 13 percent of consumers with an
outstanding balance could afford to pay more than half the
balance.
While
American consumers accumulate more debt, between 1995 and 1999 the
credit card industry's profits rose by 274 percent, from $7.3
billion to $20 billion. In addition to keeping interest rates
high, the industry has increased its income from late payment fees
and over-the-limit fees, among others. In 2000, fee income
accounted for 25 percent of credit card companies' total income,
and between 1995 and 1999, total fee income increased by 158
percent, from $8.3 billion to $21.4 billion.
Further,
the industry increased its bottom line (at the expense of
consumers) by not passing along massive decreases in its own
"cost of money" when the Federal Reserve reduced the
prime rate. In the past year alone, the Fed has reduced the prime
rate eleven times (from a high of 9.5 percent on May 17, 2000 to a
low of 4.75 percent on December 12, 2001), yet average credit card
rates have remained at or around a 14 percent annual percentage
rate (APR). Many variable rate credit cards—cards with APRs that
fluctuate with the prime rate—now have invoked "floor
rates." Since early 2001, many variable rate card companies
have refused to reduce their APRs as the prime rate fell, arguing
that their contractual floors have been reached.
In
response to these shocking statistics and the lack of government
action to protect consumers, the state PIRGs investigated whether
consumers could fight back on their own against unfair and
unreasonable credit card interest rates. Deflate Your Rate
reports on our study and offers consumers ways to lower their
credit card interest burden.
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Findings
A
1998 Federal Reserve survey of 2,000 credit cardholders found that
81 percent felt their annual percentage rate (APR) was too high.
In January 2002, the state PIRGs conducted a survey to show one
simple action consumers can take to lower their credit card
interest rates and save themselves hundreds or even thousands of
dollars.
Volunteers
participating in the survey called their credit card company and
asked for a lower APR. The results from a national spot survey of
50 consumers were the following:
With
one 5-minute phone call, 56 percent of consumers who called
their credit card company lowered their APRs.
Those
who were successful reduced their APRs by an average of more
than one-third, from an average of 16 percent to an average of
10.47 percent.
Three
consumers were able to reduce their APRs by 15 points.
The
survey results also showed a correlation between the cardholder's
credit history and the likelihood of receiving a reduction in the
APR. Factors affecting the caller's success rate were:
Length
of time with a particular card (longer is better)
Credit
limit on that card (a higher limit is better)
Unpaid
balance-to-limit ratio on that card - how "maxed
out" the cardholder is (a lower balance, making a lower
ratio, is better)
Unpaid
balance-to-limit ratio on all cards (a lower balance is
better)
Number
of times an individual missed or paid late on a loan or a card
other than the one for which they were calling (fewer is
better)
Endnotes
1
www.house.gov/financialservices/110101ds.pdf,
U.S. House of Representatives, Committee on Financial Services,
Subcommittee on Financial Institutions and Consumer Credit.
Testimony of Dolores Smith, Director, Division of Consumer and
Community Affairs, Board of Governors of Federal Reserve System.
Smith estimated the total revolving debt at year-end 2000 to be
$675 billion. According to Stephen Brobeck, PhD, author of several
reports on credit card debt (cited below), about 15% of reported
Federal Reserve Board revolving debt is paid off before incurring
interest, reducing the revolving debt on which interest is accrued
to $574 billion.
2
Since credit card deregulation and elimination of state usury
ceilings by Congress in 1980 and 1982, the use of revolving,
open-end credit has skyrocketed. The formula used to arrive at
this number is ($574 billion in revolving debt)/[(105.5 million
households)(55% carrying balances)] = $9,888 per household. The
debt number in the formula comes from footnote 1; the number of
households comes from the U.S. Census at http://quickfacts.census.gov/qfd/states/00000.html;
the percentage of households carrying a balance is based on an
interview with Stephen Brobeck, Executive Director of Consumer
Federation of America, on March 14, 2002. Brobeck is author of
numerous reports on credit card debt. Brobeck estimates revolving
debt at $10-12,000 household, so our results ($9,888 or
approximately $10,000) compare favorably with his. Total revolving
debt (including the current month) has increased each year since
1980 ($55 billion) and throughout the 1990s-1990 ($238 billion),
1995 ($443 billion), 2000 ($663 billion) to the Fed's 2001 year
end figure of $675 billion. (See Table 1190, Statistical Abstract
of the United States for 2001, http://www.census.gov/statab/www).
For a detailed discussion of the relationship between average
household revolving debt reported by the Federal Reserve (derived
directly from bank data) and analysis of under-reporting by
consumers of their estimated individual debt loads in surveys such
as the Fed's Survey of Consumer Finances, see The Consumer Impacts
of Expanding Credit Card Debt, Stephen Brobeck, Consumer
Federation of America, February 1997. Brobeck reports that
"overall, households may under-report credit card debt by 50%
or more."
3
At the end of the Fourth Quarter 2000, the Federal Reserve
reported the average interest rate on all credit cards carrying
balances to be 15.23% APR. Nationally, with annual compounding
(simple interest) that works out to $87 billion [$574 billion x
1523% = $87 billion.] The amortized annual interest for a family
making a "typical 2% of the balance due" monthly minimum
payment on a $10,000 credit card balance is $1,461.23.
The most recently reported average credit card APR, for cards
carrying balances, was 13.88% APR, 4Q 2001, in the Fed's G-19
release for 7 March 2002, available at http://www.federalreserve.gov/releases/g19/Current/.
4
http://www.cambridgeconsumerindex.com/about.asp.
Cambridge Consumer Index is a monthly random telephone survey of
1,000+ consumers. Its March 7, 2002 report estimated that 60% of
families carry credit card balances. Brobeck (supra, FN 2)
estimates 55% of households carry balances. U.S. PIRG estimates
that typical minimum payments are 2% or $20.
7
For a detailed discussion of credit card interest rates, floors,
and other credit card abuses, see testimony of Edmund Mierzwinski,
U.S. PIRG, before the House Committee on Financial Services,
1November 2001, http://www.pirg.org/consumer/credit/creditcards1nov.htm.
8
http://www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf.
Federal Reserve Bulletin, September, 2000, "Credit Cards: Use
and Consumer Attitudes, 1970-2000" p. 629, chart. The survey
asked consumers to respond to the statement that the
"interest rates charged on credit cards are reasonable."
26% disagreed somewhat and 55% disagreed strongly, for a total of
81%.
If You
Owe The Credit Card Company $5000, Here Are Two Ways To Save:
1.
Deflate Your Rate By One-Third SAVINGS
WHEN YOU DEFLATE YOUR RATE FROM 16% APR TO 10.47% APRWHILE
MAKING MONTHLY MINIMUM PAYMENT = 2% OF UNPAID BALANCE
Total Payments
Monthly Payment
APR
First
yr Interest
Total
Interest
Months
Years
2%
of balance
16%
$770
$8,350
314
26.2
2%
of balance
10.47%
$492
$3,368
206
17.2
Savings
$278
$4,983
108
9
2. Increase Your
Monthly Payment SAVINGS WHEN YOU
INCREASE YOUR MONTHLY PAYMENT FROM 2% OF YOUR BALANCE TO 10% OF YOUR BALANCE:
SAME 16% APR
Total Payments
Monthly
Payment
APR
First
yr Interest
Total
Interest
Months
Years
2%
of balance
16%
$770
$8,350
314
26.2
10%
of balance
16%
$507
$743
46
3.8
Savings
$263
$7,607
268
22.4
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