NCPA - National Center for Policy Analysis

Credit Card Economics In An Age Of Bankruptcies

June 23, 1999

Bankruptcy filings are at an all-time high. That's not good news for those who issue credit cards. How do these companies protect their profits from customers who run up big bills and then seek legal protection from their debts?

The answer is that they adopt policies which affect those who conscientiously pay their debts.

  • In earlier years, lenders responded by adding a premium to the interest rates they charge, but that practice has fallen out of fashion, analysts report, because of stiff competition in the industry and a desire not to invite political attention.
  • Today, the practice is to raise late fees and increase fees to those who exceed their credit limits.
  • Late payment fees have gone from $5 or $10 several years ago to an average of $25 or $30 today -- and some banks didn't even charge for exceeding the limit earlier.

In addition to credit card companies, hospitals, telephone companies and utilities are also hit when their customers go bankrupt -- with the losses being passed along to everyone else in the form of higher prices.

Analysts say one reason bankruptcies are on the rise is that they have lost their stigma. In addition, however, is the fact that households are saving less. One-third of U.S. households have less than $1,000 in savings and a little more than half have less than $5,000.

A 1995 Federal Reserve Survey revealed that people earning below $50,000 had the highest debt-to-income load, while those making above $50,000 had a lower -- and falling -- debt load.

Source: Charles Oliver, "Bankruptcy Filings Hit New High Despite 8-Year Economic Boom," Investor's Business Daily, June 23, 1999.


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