Credit card losses in the current downturn mounted faster at banks using unfair, deceptive card practices, new CRL research finds. That's because high-cost penalty fees and interest rates were not used to mitigate risk—as credit card issuers claimed—but instead were the risk that led to higher default rates. Read the report, "Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders."
In addition to showing that practices that hurt consumers also hurt credit card issuers, the study finds:
- Bad practices are a better predictor of consumer complaints and an issuer's losses during a downturn than an institution's type, size or location.
- Consumer safeguards on credit cards enhance banks' financial health, contrary to issuers' past claim that safeguards undermine it.
- Credit card issuers with higher loss rates before the recession did not on average have a bigger jump in losses during the recession, indicating that having more high-risk customers did not predict which company's problems would grow fastest.
New credit card rules have curbed or ended many of the unfair practices the study examined, such as doubling interest rates on existing balances for being a day late in making a payment. But some persist, and none of the new rules apply to business credit cards. Regulators need to better police those areas.
CRL thinks the report's findings apply equally to high-cost fees and interest rates banks charge for overdraft and payday loans. These charges—like their predatory cousins in credit card lending—don't reflect a borrower's risk of default, but are the risk that too often pushes a customer into financial hardship or default.