Credit Card Issuers Expand Marketing and Available Credit While Consumers Increasingly Say No

--New Bankruptcy Law Would Spur Further Credit Expansion--

August 15, 2002
Jack Gillis, 202-737-0766
Travis Plunkett, 202-387-6121

Washington, DC - As a creditor-funded campaign to restrict consumer access to bankruptcy approached enactment in Congress, the Consumer Federation of America today released data that show that, in the past year, credit card issuers have dramatically expanded their marketing and available credit while consumers have increasingly said “no” to new cards and to new lines of credit. Meanwhile, issuers kept credit card interest rates up while the cost of money plummeted, driving up profits by more than 50 percent over five years ago.

In the twelve-month period ending March 31, 2002, these issuers have mailed five billion solicitations -- nearly 50 per U.S. household. And they now make available more than $3 trillion of unused lines of credit -- about $30,000 per household.

At the same time, consumers are increasingly rejecting these solicitations and refusing to draw on the expanding lines of credit. During the first three months of 2002, according to Federal Reserve Board data, revolving consumer debt (almost entirely credit card debt) declined by $29 billion, bringing the ratio of credit used by consumers to credit offered by issuers to a low of 22.1%.

"Credit card issuers are shamelessly escalating their marketing and available credit to stratospheric levels while demanding that Congress give them relief by making it harder for consumers to declare bankruptcy," said Travis Plunkett, CFA Legislative Director. "Can any of them explain why they need this relief when their profits are increasing, they are trying to sell many more cards and are offering cardholders far more credit? What's worse, erecting new bankruptcy barriers will encourage issuers to market and extend credit even more aggressively," he added.

Solicitations Expand While Consumer Response Rate Declines

The data in Table 1 indicate that issuer interest in marketing credit cards is growing much more rapidly than consumer interest in accepting new cards. Issuers market cards primarily through mail solicitations, responsible for three-quarters of consumer requests for cards. Yet, over the past five years, the consumer response rate to mail solicitations has declined by well over one-half -- from 1.3 percent in 1997 to 0.5 percent in the first quarter of 2002.

"The huge increase in industry mail solicitations despite a falling consumer response rate suggests that credit cards are highly profitable," said Plunkett. "In a normal business, declining consumer demand would result in curtailed product marketing."

Table 1: Credit Card Mail Solicitations

  Number (Billions) Response Rate

2002 (1st Quarter)


















Source: BAI Global

Credit Available Expands While Borrowing Rate Declines

At the same time card companies expanded mail solicitations, they have dramatically increased the available lines of credit. Over the past five years, they nearly doubled these lines of credit while consumers were increasing their credit card borrowing by less than one-quarter. As a result, the ratio of revolving credit (almost all of it credit card debt) to unused credit card lines of credit declined from 33.2 percent in 1997 to 22.1 percent at the end of March 2002.

Table 2: Used and Unused Credit Card Lines of Credit


Revolving Credit Used (Billions) Unused Lines of Credit (Billions) RCS/ULC

2002 (3-31)

$ 701



2001 (12-31)




2000 (12-31)




1999 (12-31)




1998 (12-31)




1997 (12-31)




Sources: Federal Reserve Board; Veribanc Inc.

Industry Profits Surge

Bankcard profits increased in 2001 to their second highest level in the last five years, according to the Federal Reserve. Profits are now more than 50 percent higher than in 1997. Growing profits were largely driven by the increasing “interest rate gap” between the benchmark rate set by the Federal Reserve, which continued to drop in 2001, and interest rates charged by major card issuers to consumers. The Federal Reserve last year cut interest rates by 4.75 percent, but creditors cut their rates by only 1.35 points on average. Issuers spent 14 percent less on interest last year than in 2000.

Table 3: Net Before-Tax Earnings as Percentage of Outstanding Balances for Large Credit Card Banks, 1997-2001































Source: Federal Reserve Board, “The Profitability of Credit Card Operations of Depository Institutions,” June 2002.

New Bankruptcy Law Would Hurt Low- and Moderate-Income Individuals and Families

Congress is poised to enact bankruptcy legislation upon its return in September. Shortly before adjourning for their August recess, Senate and House negotiators reached agreement on a final bill. President Bush has indicated his support for the legislation.

The bill places many new restrictions on individuals who liquidate or restructure debts in personal bankruptcy. It would not permit the dissolution of some secured and unsecured debts that can be wiped away under current law and would grant creditors new rights to challenge the liquidation of some debts. The bill’s main thrust is to prohibit debtors who do not meet income and expense requirements (determined by a complicated formula) from declaring chapter 7 bankruptcy, in which most debts are wiped away. Those who don’t qualify for chapter 7 would have to enter chapter 13 bankruptcy, in which most debts are restructured and repaid over several years.

Many public interest organizations, academic scholars and bankruptcy practitioners oppose this legislation because it does not balance responsibility between working families hit by financial misfortune and creditors, whose practices have contributed to the rise in bankruptcies.

The legislation would make it harder for modest-income Americans to get a fresh start in bankruptcy. Research shows that nearly all bankruptcies are triggered by the loss of a job, high medical bills, or divorce. The “one size fits all” means test to determine which debtors can liquidate some debts is arbitrary and inflexible and would bar from chapter 7 bankruptcy many families who have experienced genuine financial misfortune. The bill eliminates the ability of bankruptcy judges to make decisions that take into account individual family needs for expenses like transportation, food and rent. It would also not allow judges to waive income restrictions for consumers who are blameless for their financial problems, such as those who have experienced a medical emergency or a terrorist attack.

It would not curb aggressive lending practices by the credit industry or provide adequate information to consumers about the cost of carrying credit. It does not include proposals that would have targeted abusive lending practices involving college students, predatory mortgage loans and high-cost “payday” loans. The bill requires credit card issuers to provide only very general information to their customers about the cost of paying off balances at the minimum payment rate. This information is too vague to help spur consumers to pay off their balances more quickly and avoid bankruptcy.

The number of consumers who fail in chapter 13 bankruptcy would increase. The bill is supposedly designed to require more debtors to use chapter 13 bankruptcy, where they must repay more of their debt than in chapter 7. However, experts estimate that the number of people who will fail to complete a chapter 13 bankruptcy-which is already two-thirds of those who file--would increase further under the bill. The bill’s “cramdown” provision alone, which makes it harder to write off some car debts, would make it much more difficult for families to use chapter 13 to save their homes and cars.

Corporate executives and affluent debtors would receive favored treatment. While many modest-income debtors could lose their homes under this new law, affluent debtors in some states will be still be allowed to declare bankruptcy and keep multimillion dollar homes. The legislation fails to set a fixed cap on the value of a home that can be kept after bankruptcy. Instead, it prevents only a few people liable for a narrow range of financial frauds and felonies from keeping expensive homes. Moreover, the legislation would provide better treatment to corporate executives who may have driven their companies into ruin, than to the employees who have lost jobs, pensions, and retirement savings. Executives facing bankruptcy as a result of business debt are specifically excluded from the bill’s harsh means test that would apply to employees who have primarily consumer debts.

It would endanger the payment of high-priority debts after bankruptcy, such as child support and alimony, by increasing the amount of debt for which consumers are liable. The legislation would result in new “nondischargeable” debts that must be paid to credit card companies. It would give creditors new leverage to coerce “reaffirmation” agreements that require the debtors to remain legally liable for more consumer debts even after they declare bankruptcy. These provisions would affect debtors of all incomes who file for bankruptcy.

As Congress nears enactment of this law, a rising number of Americans are struggling with serious economic difficulties.

“Terrorist attacks, the recession and ongoing corporate scandals have all taken their toll on the economy and left many families vulnerable to bankruptcy,” said Plunkett. “Congress couldn’t pick a worse time to make it more difficult for families to get back on track financially,” he said.

CFA is a non-profit association of more than 300 organizations that, since 1968, has sought to advance the consumer interest through advocacy and education.