a

GAO

United States Government Accountability Office

Report to the Ranking Minority Member, 

Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

September 2006 CREDIT CARDS

Increased Complexity 

in Rates and Fees 

Heightens Need for 

More Effective 

Disclosures to 

Consumers

GAO-06-929
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

CREDIT CARDS

Increased Complexity in Rates and Fees 

Heightens Need for More Effective 

Disclosures to Consumers 

Highlights of GAO-06-929, a report to the 

Ranking Minority Member, Permanent 

Subcommittee on Investigations, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

With credit card penalty rates and 

fees now common, the Federal 

Reserve has begun efforts to revise

disclosures to better inform

consumers of these costs. 

Questions have also been raised

about the relationship among

penalty charges, consumer 

bankruptcies, and issuer profits. 

GAO examined (1) how card fees

and other practices have evolved

and how cardholders have been 

affected, (2) how effectively these

pricing practices are disclosed to

cardholders, (3) the extent to

which penalty charges contribute 

to cardholder bankruptcies, and (4)

card issuers’ revenues and 

profitability. Among other things, 

GAO analyzed disclosures from

popular cards; obtained data on

rates and fees paid on cardholder 

accounts from 6 large issuers;

employed a usability consultant to 

analyze and test disclosures; 

interviewed a sample of consumers 

selected to represent a range of

education and income levels; and 

analyzed academic and regulatory

studies on bankruptcy and card 

issuer revenues. 

What GAO Recommends

As part of revising card disclosures,

the Federal Reserve should ensure

that such disclosure materials more 

clearly emphasize those terms that

can significantly affect cardholder 

costs, such as the actions that can 

cause default or other penalty 

pricing rates to be imposed. The

Federal Reserve generally

concurred with the report. 

Originally having fixed interest rates around 20 percent and few fees, 

popular credit cards now feature a variety of interest rates and other fees, 

including penalties for making late payments that have increased to as high 

as $39 per occurrence and interest rates of over 30 percent for cardholders 

who pay late or exceed a credit limit. Issuers explained that these practices

represent risk-based pricing that allows them to offer cards with lower costs 

to less risky cardholders while providing cards to riskier consumers who 

might otherwise be unable to obtain such credit. Although costs can vary 

significantly, many cardholders now appear to have cards with lower 

interest rates than those offered in the past; data from the top six issuers 

reported to GAO indicate that, in 2005, about 80 percent of their accounts 

were assessed interest rates of less than 20 percent, with over 40 percent 

having rates below 15 percent. The issuers also reported that 35 percent of 

their active U.S. accounts were assessed late fees and 13 percent were 

assessed over-limit fees in 2005. 

Although issuers must disclose information intended to help consumers 

compare card costs, disclosures by the largest issuers have various 

weaknesses that reduced consumers’ ability to use and understand them. 

According to a usability expert’s review, disclosures from the largest credit 

card issuers were often written well above the eighth-grade level at which 

about half of U.S. adults read. Contrary to usability and readability best 

practices, the disclosures buried important information in text, failed to 

group and label related material, and used small typefaces. Perhaps as a 

result, cardholders that the expert tested often had difficulty using the 

disclosures to find and understand key rates or terms applicable to the 

cards. Similarly, GAO’s interviews with 112 cardholders indicated that many

failed to understand key aspects of their cards, including when they would 

be charged for late payments or what actions could cause issuers to raise 

rates. These weaknesses may arise from issuers drafting disclosures to 

avoid lawsuits, and from federal regulations that highlight less relevant 

information and are not well suited for presenting the complex rates or 

terms that cards currently feature. Although the Federal Reserve has started 

to obtain consumer input, its staff recognizes the challenge of designing 

disclosures that include all key information in a clear manner. 

Although penalty charges reduce the funds available to repay cardholders’ 

debts, their role in contributing to bankruptcies was not clear. The six 

largest issuers reported that unpaid interest and fees represented about 10 

percent of the balances owed by bankrupt cardholders, but were unable to 

provide data on penalty charges these cardholders paid prior to filing for 

bankruptcy. Although revenues from penalty interest and fees have 

increased, profits of the largest issuers have been stable in recent years. 

GAO analysis indicates that while the majority of issuer revenues came from 

interest charges, the portion attributable to penalty rates has grown. 

www.gao.gov/cgi-bin/getrpt?GAO-06-929.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at (202) 512-8678 or woodd@gao.gov. 
Page i GAO-06-929 Credit Cards

Contents

Letter 1

Results in Brief 4

Background 9

Credit Card Fees and Issuer Practices That Can Increase Cardholder 

Costs Have Expanded, but a Minority of Cardholders Appear to 

Be Affected 13

Weaknesses in Credit Card Disclosures Appear to Hinder 

Cardholder Understanding of Fees and Other Practices That Can 

Affect Their Costs 33

Although Credit Card Penalty Fees and Interest Could Increase 

Indebtedness, the Extent to Which They Have Contributed to 

Bankruptcies Was Unclear 56

Although Penalty Interest and Fees Likely Have Grown as a Share of 

Credit Card Revenues, Large Card Issuers’ Profitability Has Been 

Stable 67

Conclusions 77

Recommendation for Executive Action 79

Agency Comments and Our Evaluation 79

Appendixes

Appendix I: Objectives, Scope and Methodology 81

Appendix II: Consumer Bankruptcies Have Risen Along with Debt 86

Appendix III: Factors Contributing to the Profitability of Credit Card 

Issuers 96

Appendix IV: Comments from the Federal Reserve Board 106

Appendix V: GAO Contact and Staff Acknowledgments 108

Tables Table 1: Various Fees for Services and Transactions, Charged in 

2005 on Popular Large-Issuer Cards 23

Table 2: Portion of Credit Card Debt Held by Households 93

Table 3: Credit Card Debt Balances Held by Household Income 93

Table 4: Revenues and Profits of Credit Card Issuers in Card 

Industry Directory per $100 of Credit Card Assets 104

Figures Figure 1: Credit Cards in Use and Charge Volume, 1980-2005 10

Figure 2: The 10 Largest Credit Card Issuers by Credit Card 

Balances Outstanding as of December 31, 2004 11

Figure 3: Credit Card Interest Rates, 1972-2005 16
Contents

Page ii GAO-06-929 Credit Cards

Figure 4: Average Annual Late Fees Reported from Issuer Surveys, 

1995-2005 (unadjusted for inflation) 19

Figure 5: Average Annual Over-limit fees Reported from Issuer 

Surveys, 1995-2005 (unadjusted for inflation) 21

Figure 6: How the Double-Cycle Billing Method Works 28

Figure 7: Example of Important Information Not Prominently 

Presented in Typical Credit Card Disclosure 

Documents 39

Figure 8: Example of How Related Information Was Not Being 

Grouped Together in Typical Credit Card Disclosure 

Documents 40

Figure 9: Example of How Use of Small Font Sizes Reduces 

Readability in Typical Credit Card Disclosure 

Documents 42

Figure 10: Example of How Use of Ineffective Font Types Reduces 

Readability in Typical Credit Card Disclosure 

Documents 43

Figure 11: Example of How Use of Inappropriate Emphasis Reduces 

Readability in Typical Credit Card Disclosure 

Documents 43

Figure 12: Example of Ineffective and Effective Use of Headings in 

Typical Credit Card Disclosure Documents 44

Figure 13: Example of How Presentation Techniques Can Affect 

Readability in Typical Credit Card Disclosure 

Documents 46

Figure 14: Examples of How Removing Overly Complex Language 

Can Improve Readability in Typical Credit Card 

Disclosure Documents 47

Figure 15: Example of Superfluous Detail in Typical Credit Card 

Disclosure Documents 48

Figure 16: Hypothetical Impact of Penalty Interest and Fee Charges 

on Two Cardholders 63

Figure 17: Example of a Typical Bank’s Income Statement 70

Figure 18: Proportion of Active Accounts of the Six Largest Card 

Issuers with Various Interest Rates for Purchases, 2003 to 

2005 71

Figure 19: Example of a Typical Credit Card Purchase Transaction 

Showing How Interchange Fees Paid by Merchants Are 

Allocated 74

Figure 20: Average Pretax Return on Assets for Large Credit Card 

Banks and All Commercial Banks, 1986 to 2004 76

Figure 21: U.S. Consumer Bankruptcy Filings, 1980-2005 86
Contents

Page iii GAO-06-929 Credit Cards

Figure 22: U.S. Household Debt, 1980-2005 87

Figure 23: Credit Card and Other Revolving and Nonrevolving Debt 

Outstanding, 1990 to 2005 89

Figure 24: Percent of Households Holding Credit Card Debt by 

Household Income, 1998, 2001, and 2004 90

Figure 25: U.S. Household Debt Burden and Financial Obligations 

Ratios, 1980 to 2005 92

Figure 26: Households Reporting Financial Distress by Household 

Income, 1995 through 2004 94

Figure 27: Average Credit Card, Car Loans and Personal Loan 

Interest Rates 97

Figure 28: Net Interest Margin for Credit Card Issuers and Other 

Consumer Lenders in 2005 98

Figure 29: Charge-off Rates for Credit Card and Other Consumer 

Lenders, 2004 to 2005 99

Figure 30: Charge-off Rates for the Top 5 Credit Card Issuers, 2003 

to 2005 100

Figure 31: Operating Expense as Percentage of Total Assets for 

Various Types of Lenders in 2005 101

Figure 32: Non-Interest Revenue as Percentage of Their Assets for 

Card Lenders and Other Consumer Lenders 102

Figure 33: Net Interest Margin for All Banks Focusing on Credit 

Card Lending, 1987-2005 103

Abbreviations

APR Annual Percentage Rate

FDIC Federal Deposit Insurance Corporation

OCC Office of the Comptroller of the Currency

ROA Return on assets

SEC Securities and Exchange Commission

TILA Truth in Lending Act

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Page 1 GAO-06-929 Credit Cards

United States Government Accountability Office

Washington, D.C. 20548

A

September 12, 2006 Letr

The Honorable Carl Levin 

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Homeland Security and Governmental Affairs

United States Senate

Dear Senator Levin:

Over the past 25 years, the prevalence and use of credit cards in the United 

States has grown dramatically. Between 1980 and 2005, the amount that 

U.S. consumers charged to their cards grew from an estimated $69 billion 

per year to more than $1.8 trillion, according to one firm that analyzes the 

card industry.1

 This firm also reports that the number of U.S. credit cards 

issued to consumers now exceeds 691 million. The increased use of credit 

cards has contributed to an expansion in household debt, which grew from 

$59 billion in 1980 to roughly $830 billion by the end of 2005.2

 The Board of 

Governors of the Federal Reserve System (Federal Reserve) estimates that 

in 2004, the average American household owed about $2,200 in credit card 

debt, up from about $1,000 in 1992.3

Generally, a consumer’s cost of using a credit card is determined by the 

terms and conditions applicable to the card—such as the interest rate(s), 

minimum payment amounts, and payment schedules, which are typically 

presented in a written cardmember agreement—and how a consumer uses 

1

CardWeb.com, Inc., an online publisher of information about the payment card industry.

2

Based on data from the Federal Reserve Board’s monthly G.19 release on consumer credit. 

In addition to credit card debt, the Federal Reserve also categorizes overdraft lines of credit 

as revolving consumer debt (an overdraft line of credit is a loan a consumer obtains from a 

bank to cover the amount of potential overdrafts or withdrawals from a checking account in 

amounts greater than the balance available in the account). Mortgage debt is not captured in 

these data.

3

B.K. Bucks, A.B. Kennickell, and K.B. Moore, “Recent Changes in U.S. Family Finances: 

Evidence from the 2001 and 2004 Survey of Consumer Finances,” Federal Reserve Bulletin, 

March 22, 2006. Also, A.B. Kennickell and M. Starr-McCluer, “Changes in Family Finances 

from 1989 to 1992: Evidence from the Survey of Consumer Finances,” Federal Reserve 

Bulletin, October 1994. Adjusted for inflation, credit card debt in 1992 was $1,298 for the 

average American household.
Page 2 GAO-06-929 Credit Cards

a card.4 The Federal Reserve, under the Truth in Lending Act (TILA), is 

responsible for creating and enforcing requirements relating to the 

disclosure of terms and conditions of consumer credit, including those 

applicable to credit cards.5

 The regulation that implements TILA’s 

requirements is the Federal Reserve’s Regulation Z.6 As credit card use and 

debt have grown, representatives of consumer groups and issuers have 

questioned the extent to which consumers understand their credit card 

terms and conditions, including issuers’ practices that—even if permitted 

under applicable terms and conditions—could increase consumers’ costs 

of using credit cards. These practices include the application of fees or 

relatively high penalty interest rates if cardholders pay late or exceed credit 

limits. Issuers also can allocate customers’ payments among different 

components of their outstanding balances in ways that maximize total 

interest charges. Although card issuers have argued that these practices are 

appropriate because they compensate for the greater risks posed by 

cardholders who make late payments or exhibit other risky behaviors, 

consumer groups say that the fees and practices are harmful to the 

financial condition of many cardholders and that card issuers use them to 

generate profits. 

You requested that we review a number of issues related to credit card fees 

and practices, specifically of the largest issuers of credit cards in the 

United States. This report discusses (1) how the interest, fees, and other 

practices that affect the pricing structure of cards from the largest U.S. 

issuers have evolved and cardholders’ experiences under these pricing 

structures in recent years; (2) how effectively the issuers disclose the 

pricing structures of cards to their cardholders (3) whether credit card debt 

and penalty interest and fees contribute to cardholder bankruptcies; and 

(4) the extent to which penalty interest and fees contribute to the revenues 

and profitability of issuers’ credit card operations.

To identify the pricing structures of cards—including their interest rates, 

fees, and other practices—we analyzed the cardmember agreements, as 

4

We recently reported on minimum payment disclosure requirements. See GAO, Credit 

Cards: Customized Minimum Payment Disclosures Would Provide More Information to 

Consumers, but Impact Could Vary, GAO-06-434 (Washington, D.C.: Apr. 21, 2006).

5

Pub. L. No. 90-321, Title I, 82 Stat. 146 (1968) (codified as amended at 15 U.S.C. §§ 1601-

1666).

6

Regulation Z is codified at 12 C.F.R. Part 226.
Page 3 GAO-06-929 Credit Cards

well as materials used by the six largest issuers as of December 31, 2004, 

for 28 popular cards used to solicit new credit card customers from 2003 

through 2005.7

 To determine the extent to which these issuers’ cardholders 

were assessed interest and fees, we obtained data from each of the six 

largest issuers about their cardholder accounts and their operations. To 

protect each issuer’s proprietary information, a third-party organization, 

engaged by counsel to the issuers, aggregated these data and then provided 

the results to us. Although the six largest issuers whose accounts were 

included in this survey and whose cards we reviewed may include some 

subprime accounts, we did not include information in this report relating to 

cards offered by credit card issuers that engage primarily in subprime 

lending.8

 To assess the effectiveness of the disclosures that issuers provide 

to cardholders in terms of their usability or readability, we contracted with 

a consulting firm that specializes in assessing the readability and usability 

of written and other materials to analyze a representative selection of the 

largest issuers’ cardmember agreements and solicitation materials, 

including direct mail applications and letters, used for opening an account 

(in total, the solicitation materials for four cards and cardmember 

agreements for the same four cards).9

 The consulting firm compared these 

materials to recognized industry guidelines for readability and presentation 

and conducted testing to assess how well cardholders could use the 

materials to identify and understand information about these credit cards. 

While the materials used for the readability and usability assessments 

appeared to be typical of the large issuers’ disclosures, the results cannot 

be generalized to materials that were not reviewed. We also conducted 

structured interviews to learn about the card-using behavior and 

knowledge of various credit card terms and conditions of 112 consumers 

recruited by a market research organization to represent a range of adult 

income and education levels. However, our sample of cardholders was too 

7

These issuers’ accounts constitute almost 80 percent of credit card lending in the United 

States. Participating issuers were Citibank (South Dakota), N.A.; Chase Bank USA, N.A.; 

Bank of America; MBNA America Bank, N.A.; Capital One Bank; and Discover Financial 

Services. In providing us with materials for the most popular credit cards, these issuers 

determined which of their cards qualified as popular among all cards in their portfolios.

8

Subprime lending generally refers to extending credit to borrowers who exhibit 

characteristics indicating a significantly higher risk of default than traditional bank lending 

customers. Such issuers could have pricing structures and other terms significantly 

different from those of the popular cards offered by the top issuers.

9

Regulation Z defines a “solicitation” as an offer (written or oral) by the card issuer to open 

a credit or charge card account that does not require the consumer to complete an 

application. 12 C.F.R. § 226.5a(a)(1).
Page 4 GAO-06-929 Credit Cards

small to be statistically representative of all cardholders, thus the results of 

our interviews cannot be generalized to the population of all U.S. 

cardholders. We also reviewed comment letters submitted to the Federal 

Reserve in response to its comprehensive review of Regulation Z’s openend credit rules, including rules pertaining to credit card disclosures.10 To 

determine the extent to which credit card debt and penalty interest and 

fees contributed to cardholder bankruptcies, we analyzed studies, reports, 

and bank regulatory data relating to credit card debt and consumer 

bankruptcies, as well as information reported to us as part of the data 

request to the six largest issuers. To determine the extent to which penalty 

interest and fees contributes to card issuers’ revenues and profitability, we 

analyzed publicly available sources of revenue and profitability data for 

card issuers, including information included in reports filed with the 

Securities and Exchange Commission and bank regulatory reports, in 

addition to information reported to us as part of the data request to the six 

largest issuers.11 In addition, we spoke with representatives of other U.S. 

banks that are large credit card issuers, as well as representatives of 

consumer groups, industry associations, academics, organizations that 

collect and analyze information on the credit card industry, and federal 

banking regulators. We also reviewed research reports and academic 

studies of the credit card industry.

We conducted our work from June 2005 to September 2006 in Boston; 

Chicago; Charlotte, North Carolina; New York City; San Francisco; 

Wilmington, Delaware; and Washington, D.C., in accordance with generally 

accepted government auditing standards. Appendix I describes the 

objectives, scope, and methodology of our review in more detail. 

Results in Brief Since about 1990, the pricing structures of credit cards have evolved to 

encompass a greater variety of interest rates and fees that can increase 

10See Truth in Lending, 69 Fed. Reg. 70925 (advanced notice of proposed rulemaking, 

published Dec. 8, 2004). “Open-end credit” means consumer credit extended by a creditor 

under a plan in which: (i) the creditor reasonably contemplates repeated transactions, (ii) 

the creditor may impose a finance charge from time to time on an outstanding unpaid 

balance and (iii) the amount of credit that may be extended to the consumer is generally 

made available to the extent that any outstanding balance is repaid. 12 C.F.R. § 226.2(a)(20). 

11Although we had previously been provided comprehensive data from Visa International on 

credit industry revenues and profits for a past report on credit card issues, we were unable 

to obtain these data for this report. 
Page 5 GAO-06-929 Credit Cards

cardholder’s costs; however, cardholders generally are assessed lower 

interest rates than those that prevailed in the past, and most have not been 

assessed penalty fees. For many years after being introduced, credit cards 

generally charged fixed single rates of interest of around 20 percent, had 

few fees, and were offered only to consumers with high credit standing. 

After 1990, card issuers began to introduce cards with a greater variety of 

interest rates and fees, and the amounts that cardholders can be charged 

have been growing. For example, our analysis of 28 popular cards and 

other information indicates that cardholders could be charged

• up to three different interest rates for different transactions, such as one 

rate for purchases and another for cash advances, with rates for 

purchases that ranged from about 8 percent to about 19 percent;

• penalty fees for certain cardholder actions, such as making a late 

payment (an average of almost $34 in 2005, up from an average of about 

$13 in 1995) or exceeding a credit limit (an average of about $31 in 2005, 

up from about $13 in 1995); and

• a higher interest rate—some charging over 30 percent—as a penalty for 

exhibiting riskier behavior, such as paying late.

Although consumer groups and others have criticized these fees and other 

practices, issuers point out that the costs to use a card can now vary 

according to the risk posed by the cardholder, which allows issuers to offer 

credit with lower costs to less-risky cardholders and credit to consumers 

with lower credit standing, who likely would have not have received a 

credit card in the past. Although cardholder costs can vary significantly in 

this new environment, many cardholders now appear to have cards with 

interest rates less than the 20 percent rate that most cards charged prior to 

1990. Data reported by the top six issuers indicate that, in 2005, about 80 

percent of their active U.S. accounts were assessed interest rates of less 

than 20 percent—with more than 40 percent having rates of 15 percent or 

less.12 Furthermore, almost half of the active accounts paid little or no 

interest because the cardholder generally paid the balance in full. The 

issuers also reported that, in 2005, 35 percent of their active U.S. accounts 

were assessed late fees and 13 percent were assessed over-limit fees. 

12For purposes of this report, active accounts refer to accounts of the top six issuers that 

had had a debit or credit posted to them by December 31 in 2003, 2004, and 2005.
Page 6 GAO-06-929 Credit Cards

Although credit card issuers are required to provide cardholders with 

information aimed at facilitating informed use of credit and enhancing 

consumers’ ability to compare the costs and terms of credit, we found that 

these disclosures have serious weaknesses that likely reduced consumers’ 

ability to understand the costs of using credit cards. Because the pricing of 

credit cards, including interest rates and fees, is not generally subject to 

federal regulation, the disclosures required under TILA and Regulation Z 

are the primary means under federal law for protecting consumers against 

inaccurate and unfair credit card practices.13 However, the assessment by 

our usability consultant found that the disclosures in the customer 

solicitation materials and cardmember agreements provided by four of the 

largest credit card issuers were too complicated for many consumers to 

understand. For example, although about half of adults in the United States 

read at or below the eighth-grade level, most of the credit card materials 

were written at a tenth- to twelfth-grade level. In addition, the required 

disclosures often were poorly organized, burying important information in 

text or scattering information about a single topic in numerous places. The 

design of the disclosures often made them hard to read, with large amounts 

of text in small, condensed typefaces and poor, ineffective headings to 

distinguish important topics from the surrounding text. Perhaps as a result 

of these weaknesses, the cardholders tested by the consultant often had 

difficulty using these disclosures to locate and understand key rates or 

terms applicable to the cards. Similarly, our interviews with 112 

cardholders indicated that many failed to understand key terms or 

conditions that could affect their costs, including when they would be 

charged for late payments or what actions could cause issuers to raise 

rates. The disclosure materials that consumers found so difficult to use 

resulted from issuers’ attempts to reduce regulatory and liability exposure 

by adhering to the formats and language prescribed by federal law and 

regulations, which no longer suit the complex features and terms of many 

cards. For example, current disclosures require that less important terms, 

such as minimum finance charge or balance computation method, be 

prominently disclosed, whereas information that could more significantly 

affect consumers’ costs, such as the actions that could raise their interest 

rate, are not as prominently disclosed. With the goal of improving credit 

card disclosures, the Federal Reserve has begun obtaining public and 

industry input as part of a comprehensive review of Regulation Z. Industry 

participants and others have provided various suggestions to improve 

13TILA also contains procedural and substantive protections for consumers for credit card 

transactions.
Page 7 GAO-06-929 Credit Cards

disclosures, such as placing all key terms in one brief document and other 

details in a much longer separate document, and both our work and that of 

others illustrated that involving consultants and consumers can help 

develop disclosure materials that are more likely to be effective. Federal 

Reserve staff told us that they have begun to involve consumers in the 

preparation of potentially new and revised disclosures. Nonetheless, 

Federal Reserve staff recognize the challenge of presenting the variety of 

information that consumers may need to understand the costs of their 

cards in a clear way, given the complexity of credit card products and the 

different ways in which consumers use credit cards. 

Although paying penalty interest and fees can slow cardholders’ attempts 

to reduce their debt, the extent to which credit card penalty fees and 

interest have contributed to consumer bankruptcies is unclear. The number 

of consumers filing for bankruptcy has risen more than sixfold over the 

past 25 years—a period when the nation’s population grew by 29 percent—

to more than 2 million filings in 2005, but debate continues over the reasons 

for this increase. Some researchers attribute the rise in bankruptcies to the 

significant increase in household debt levels that also occurred over this 

period, including the dramatic increase in outstanding credit card debt. 

However, others have found that relatively steady household debt burden 

ratios over the last 15 years indicate that the ability of households to make 

payments on this expanded indebtedness has kept pace with growth in 

their incomes. Similarly, the percentage of households that appear to be in 

financial distress—those with debt payments that exceed 40 percent of 

their income—did not change much during this period, nor did the 

proportion of lower-income households with credit card balances. Because 

debt levels alone did not appear to clearly explain the rise in bankruptcies, 

some researchers instead cited other explanations, such as a general 

decline in the stigma associated with bankruptcies or the increased costs of 

major life events—such as health problems or divorce—to households that 

increasingly rely on two incomes. Although critics of the credit card 

industry have cited the emergence of penalty interest rates and growth in 

fees as leading to increased financial distress, no comprehensive data exist 

to determine the extent to which these charges contributed to consumer 

bankruptcies. Any penalty charges that cardholders pay would consume 

funds that could have been used to repay principal, and we obtained 

anecdotal information on a few court cases involving consumers who 

incurred sizable penalty charges that contributed to their financial distress. 

However, credit card issuers said that they have little incentive to cause 

their customers to go bankrupt. The six largest issuers reported to us that 

of their active accounts in 2005 pertaining to cardholders who had filed for 
Page 8 GAO-06-929 Credit Cards

bankruptcy before their account became 6 months delinquent, about 10 

percent of the outstanding balances on those accounts represented unpaid 

interest and fees. However, issuers told us that their data system and 

recordkeeping limitations prevented them from providing us with data that 

would more completely illustrate a relationship between penalty charges 

and bankruptcies, such as the amount of penalty charges that bankrupt 

cardholders paid in the months prior to filing for bankruptcy or the amount 

of penalty charges owed by cardholders who went bankrupt after their 

accounts became more than 6 months delinquent.

Although penalty interest and fees have likely increased as a portion of 

issuer revenues, the largest issuers have not experienced greatly increased 

profitability over the last 20 years. Determining the extent to which penalty 

interest charges and fees contribute to issuers’ revenues and profits was 

difficult because issuers’ regulatory filings and other public sources do not 

include such detail. Using data from bank regulators, industry analysts, and 

information reported by the five largest issuers, we estimate that the 

majority—about 70 percent in recent years—of issuer revenues came from 

interest charges, and the portion attributable to penalty rates appears to 

have been growing. The remaining issuer revenues came from penalty 

fees—which had generally grown and were estimated to represent around 

10 percent of total issuer revenues—as well as fees that issuers receive for 

processing merchants’ card transactions and other sources. The profits of 

the largest credit-card-issuing banks, which are generally the most 

profitable group of lenders, have generally been stable over the last 7 years.

This report recommends that, as part of its effort to increase the 

effectiveness of disclosure materials, the Federal Reserve should ensure 

that such disclosures, including model forms and formatting requirements, 

more clearly emphasize those terms that can significantly affect cardholder 

costs, such as the actions that can cause default or other penalty pricing 

rates to be imposed. We provided a draft of this report to the Federal 

Reserve, the Office of the Comptroller of the Currency (OCC), the Federal 

Deposit Insurance Corporation (FDIC), the Federal Trade Commission, the 

National Credit Union Administration, and the Office of Thrift Supervision 

for comment. In its written comments, the Federal Reserve agreed that 

current credit card pricing structures have added to the complexity of card 

disclosures and indicated that it is studying alternatives for improving both 

the content and format of disclosures, including involving consumer testing 

and design consultants.
Page 9 GAO-06-929 Credit Cards

Background Credit card use has grown dramatically since the introduction of cards 

more than 5 decades ago. Cards were first introduced in 1950, when Diners 

Club established the first general-purpose charge card that allowed its 

cardholders to purchase goods and services from many different 

merchants. In the late 1950s, Bank of America began offering the first 

widely available general purpose credit card, which, unlike a charge card 

that requires the balance to be paid in full each month, allows a cardholder 

to make purchases up to a credit limit and pay the balance off over time. To 

increase the number of consumers carrying the card and to reach retailers 

outside of Bank of America’s area of operation, other banks were given the 

opportunity to license Bank of America’s credit card. As the network of 

banks issuing these credit cards expanded internationally, administrative 

operations were spun off into a separate entity that evolved into the Visa 

network. In contrast to credit cards, debit cards result in funds being 

withdrawn almost immediately from consumers’ bank accounts (as if they 

had a written a check instead). According to CardWeb.com, Inc., a firm that 

collects and analyzes data relating to the credit card industry, the number 

of times per month that credit or debit cards were used for purchases or 

other transactions exceeded 2.3 billion in May 2003, the last month for 

which the firm reported this data. 

The number of credit cards in circulation and the extent to which they are 

used has also grown dramatically. The range of goods and services that can 

be purchased with credit cards has expanded, with cards now being used 

to pay for groceries, health care, and federal and state income taxes. As 

shown in figure 1, in 2005, consumers held more than 691 million credit 

cards and the total value of transactions for which these cards were used 

exceeded $1.8 trillion. 
Page 10 GAO-06-929 Credit Cards

Figure 1: Credit Cards in Use and Charge Volume, 1980-2005

The largest issuers of credit cards in the United States are commercial 

banks, including many of the largest banks in the country. More than 6,000 

depository institutions issue credit cards, but, over the past decade, the 

majority of accounts have become increasingly concentrated among a 

small number of large issuers. Figure 2 shows the largest bank issuers of 

credit cards by their total credit card balances outstanding as of December 

31, 2004 (the most recent data available) and the proportion they represent 

of the overall total of card balances outstanding. 

0

100

200

300

400

500

600

700

800

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Cards in use (millions) Charge volume (dollars in billions)

Cards in use

Charge volume

Source: GAO analysis of CardWeb.com, Inc. data.
Page 11 GAO-06-929 Credit Cards

Figure 2: The 10 Largest Credit Card Issuers by Credit Card Balances Outstanding 

as of December 31, 2004 

TILA is the primary federal law pertaining to the extension of consumer 

credit. Congress passed TILA in 1968 to provide for meaningful disclosure 

of credit terms in order to enable consumers to more easily compare the 

various credit terms available in the marketplace, to avoid the uninformed 

use of credit, and to protect themselves against inaccurate and unfair credit 

billing and credit card practices. The regulation that implements TILA’s 

requirements is Regulation Z, which is administered by the Federal 

Reserve. 

Under Regulation Z, card issuers are required to disclose the terms and 

conditions to potential and existing cardholders at various times. When 

first marketing a card directly to prospective cardholders, written or oral 

applications or solicitations to open credit card accounts must generally 

disclose key information relevant to the costs of using the card, including 

the applicable interest rate that will be assessed on any outstanding 

balances and several key fees or other charges that may apply, such as the 

Card issuer Outstanding

receivables Percent of total market 

$623,219,460,059 90.0 

Citigroup Inc. $139,600,000,000 20.2

Chase Card Services 135,370,000,000 19.5

MBNA America 101,900,000,000 14.7

Bank of America 58,629,000,000 8.5

Capital One Financial Corp. 48,609,571,000 7.0

Discover Financial Services, Inc. 48,261,000,000 7.0

American Express Centurion Bank 39,600,000,000 5.7

HSBC Credit Card Services 19,670,000,000 2.8

Providian Financial Corp. 18,100,000,000 2.6

Wells Fargo 13,479,889,059 1.9

Source: GAO analysis of Card Industry Directory data. 
Page 12 GAO-06-929 Credit Cards

fee for making a late payment.14 In addition, issuers must provide 

consumers with an initial disclosure statement, which is usually a 

component of the issuer’s cardmember agreement, before the first 

transaction is made with a card. The cardmember agreement provides 

more comprehensive information about a card’s terms and conditions than 

would be provided as part of the application or a solicitation letter. 

In some cases, the laws of individual states also can affect card issuers’ 

operations. For example, although many credit card agreements permit 

issuers to make unilateral changes to the agreement’s terms and 

conditions, some state laws require that consumers be given the right to 

opt out of changes. However, as a result of the National Bank Act, and its 

interpretation by the U.S. Supreme Court, the interest and fees charged by 

a national bank on credit card accounts is subject only to the laws of the 

state in which the bank is chartered, even if its lending activities occur 

outside of its charter state.15 As a result, the largest banks have located 

their credit card operations in states with laws seen as more favorable for 

the issuer with respect to credit card lending. 

Various federal agencies oversee credit card issuers. The Federal Reserve 

has responsibility for overseeing issuers that are chartered as state banks 

and are also members of the Federal Reserve System. Many card issuers 

are chartered as national banks, which OCC supervises. Other regulators of 

bank issuers are FDIC, which oversees state-chartered banks with federally 

insured deposits that are not members of the Federal Reserve System; the 

Office of Thrift Supervision, which oversees federally chartered and statechartered savings associations with federally insured deposits; or the 

14Issuers have several disclosure options with respect to applications or solicitations made 

available to the general public, including those contained in catalogs or magazines. 

Specifically, on such applications or solicitations issuers may, but are not required to, 

disclose the same key pricing terms required to be disclosed on direct mail applications and 

solicitations. Alternatively, issuers may include in a prominent location on the application or 

solicitation a statement that costs are associated with use of the card and a toll-free 

telephone number and mailing address where the consumer may contact the issuer to 

request specific information. 12 C.F.R. § 226.5a(e)(3).

15The National Bank Act provision codified at 12 U.S.C. § 85 permits national banks to 

charge interest at a rate allowed by laws of the jurisdiction in which the bank is located. In 

Marquette National Bank v. First of Omaha Service Corp. et al., 439 U.S. 299 (1978), the 

U.S. Supreme Court held that a national bank is deemed to be “located” in the state in which 

it is chartered. See also Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996) 

(holding that “interest” under 12 U.S.C. § 85 includes any charges attendant to credit card 

usage). 
Page 13 GAO-06-929 Credit Cards

National Credit Union Administration, which oversees federally-chartered 

and state-chartered credit unions whose member accounts are federally 

insured. As part of their oversight, these regulators review card issuers’ 

compliance with TILA and ensure that an institution’s credit card 

operations do not pose a threat to the institutions’ safety and soundness. 

The Federal Trade Commission generally has responsibility for enforcing 

TILA and other consumer protection laws for credit card issuers that are 

not depository institutions. 

Credit Card Fees and 

Issuer Practices That 

Can Increase 

Cardholder Costs Have 

Expanded, but a 

Minority of 

Cardholders Appear to 

Be Affected

Prior to about 1990, card issuers offered credit cards that featured an 

annual fee, a relatively high, fixed interest rate, and low penalty fees, 

compared with average rates and fees assessed in 2005. Over the past 15 

years, typical credit cards offered by the largest U.S. issuers evolved to 

feature more complex pricing structures, including multiple interest rates 

that vary with market fluctuations. The largest issuers also increased the 

number, and in some cases substantially increased the amounts, of fees 

assessed on cardholders for violations of the terms of their credit 

agreement, such as making a late payment. Issuers said that these changes 

have benefited a greater number of cardholders, whereas critics contended 

that some practices unfairly increased cardholder costs. The largest six 

issuers provided data indicating that most of their cardholders had interest 

rates on their cards that were lower than the single fixed rates that 

prevailed on cards prior to the 1990s and that a small proportion of 

cardholders paid high penalty interest rates in 2005. In addition, although 

most cardholders did not appear to be paying penalty fees, about one-third 

of the accounts with these largest issuers paid at least one late fee in 2005. 

Issuers Have Developed 

More Complex Credit Card 

Pricing Structures

The interest rates, fees, and other practices that represent the pricing 

structure for credit cards have become more complex since the early 

1990s. After first being introduced in the 1950s, for the next several 

decades, credit cards commonly charged a single fixed interest rate around 

20 percent—as the annual percentage rate (APR)—which covered most of 

an issuer’s expenses associated with card use.16 Issuers also charged 

cardholders an annual fee, which was typically between $20 and $50 

16Unless otherwise noted, in this report we will use the term “interest rate” to describe 

annual percentage rates, which represent the rates expressed on an annual basis even 

though interest may be assessed more frequently. 
Page 14 GAO-06-929 Credit Cards

beginning in about 1980, according to a senior economist at the Federal 

Reserve Board. Card issuers generally offered these credit cards only to the 

most creditworthy U.S. consumers. According to a study of credit card 

pricing done by a member of the staff of one of the Federal Reserve Banks, 

few issuers in the late 1980s and early 1990s charged cardholders fees as 

penalties if they made late payments or exceeded the credit limit set by the 

issuer.17 Furthermore, these fees, when they were assessed, were relatively 

small. For example, the Federal Reserve Bank staff member’s paper notes 

that the typical late fee charged on cards in the 1980s ranged from $5 to 

$10.

Multiple Interest Rates May 

Apply to a Single Account and 

May Change Based on Market 

Fluctuations

After generally charging just a single fixed interest rate before 1990, the 

largest issuers now apply multiple interest rates to a single card account 

balance and the level of these rates can vary depending on the type of 

transaction in which a cardholder engages. To identify recent pricing trends 

for credit cards, we analyzed the disclosures made to prospective and 

existing cardholders for 28 popular credit cards offered during 2003, 2004, 

and 2005 by the six largest issuers (based on credit card balances 

outstanding at the end of 2004).18 At that time, these issuers held almost 80 

percent of consumer debt owed to credit card issuers and as much as 61 

percent of total U.S. credit card accounts. As a result, our analysis of these 

28 cards likely describes the card pricing structure and terms that apply to 

the majority of U.S. cardholders. However, our sample of cards did not 

include subprime cards, which typically have higher cost structures to 

compensate for the higher risks posed by subprime borrowers.

We found that all but one of these popular cards assessed up to three 

different interest rates on a cardholder’s balance. For example, cards 

assessed separate rates on

• balances that resulted from the purchase or lease of goods and services, 

such as food, clothing, and home appliances; 

17M. Furletti, “Credit Card Pricing Developments and Their Disclosure,” Federal Reserve 

Bank of Philadelphia’s Payment Cards Center, January 2003. In preparing this paper, the 

author relied on public data, proprietary issuer data, and data from a review of more than 

150 cardmember agreements from 15 of the largest issuers in the United States for the 5-year 

period spanning 1997 to 2002.

18See Card Industry Directory: The Blue Book of the Credit and Debit Card Industry in 

North America, 17th Edition, (Chicago, IL: 2005). These issuers were Bank of America, 

Capital One Bank; Chase Bank USA: Citibank (South Dakota), N.A.; Discover Financial 

Services; and MBNA America Bank.
Page 15 GAO-06-929 Credit Cards

• balances that were transferred from another credit card, which 

cardholders may do to consolidate balances across cards to take 

advantage of lower interest rates; and

• balances that resulted from using the card to obtain cash, such as a 

withdrawal from a bank automated teller machine. 

In addition to having separate rates for different transactions, popular 

credit cards increasingly have interest rates that vary periodically as 

market interest rates change. Almost all of the cards we analyzed charged 

variable rates, with the number of cards assessing these rates having 

increased over the most recent 3-year period. More specifically, about 84 

percent of cards we reviewed (16 of 19 cards) assessed a variable interest 

rate in 2003, 91 percent (21 of 23 cards) in 2004, and 93 percent (25 of 27 

cards) in 2005.19 Issuers typically determine these variable rates by taking 

the prevailing level of a base rate, such as the prime rate, and adding a fixed 

percentage amount.20 In addition, the issuers usually reset the interest rates 

on a monthly basis.

Issuers appear to have assessed lower interest rates in recent years than 

they did prior to about 1990. Issuer representatives noted that issuers used 

to generally offer cards with a single rate of around 20 percent to their 

cardholders, and the average credit card rates reported by the Federal 

Reserve were generally around 18 percent between 1972 and 1990. 

According to the survey of credit card plans, conducted every 6 months by 

the Federal Reserve, more than 100 card issuers indicated that these 

issuers charged interest rates between 12 and 15 percent on average from 

2001 to 2005. For the 28 popular cards we reviewed, the average interest 

rate that would be assessed for purchases was 12.3 percent in 2005, almost 

6 percentage points lower than the average rates that prevailed until about 

1990. We found that the range of rates charged on these cards was between 

about 8 and 19 percent in 2005. The average rate on these cards climbed 

slightly during this period, having averaged about 11.5 percent in 2003 and 

about 12 percent in 2004, largely reflecting the general upward movement 

19Although we reviewed a total of 28 card products for 2003 to 2005, we did not obtain 

disclosure documents for all card products for every year.

20The prime rate is the rate that commercial banks charge to the most creditworthy 

borrowers, such as large corporations for short-term loans. The prime rate reported by The 

Wall Street Journal is often used as a benchmark for credit card loans made in the United 

States.
Page 16 GAO-06-929 Credit Cards

in prime rates. Figure 3 shows the general decline in credit card interest 

rates, as reported by the Federal Reserve, between about 1991 and 2005 

compared with the prime rate over this time. As these data show, credit 

card interest rates generally were stable regardless of the level of market 

interest rates until around 1996, at which time changes in credit card rates 

approximated changes in market interest rates. In addition, the spread 

between the prime rate and credit card rates was generally wider in the 

period before the 1980s than it has been since 1990, which indicates that 

since then cardholders are paying lower rates in terms of other market 

rates. 

Figure 3: Credit Card Interest Rates, 1972-2005

Recently, many issuers have attempted to obtain new customers by offering 

low, even zero, introductory interest rates for limited periods. According to 

an issuer representative and industry analyst we interviewed, low 

introductory interest rates have been necessary to attract cardholders in 

the current competitive environment where most consumers who qualify 

0

5

10

15

20

Prime rate

Credit card interest rate

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

Percent

Changes in credit

card interest rates

reflect changes in

the prime rate

from 1996 on

Source: GAO analysis of Federal Reserve data. 
Page 17 GAO-06-929 Credit Cards

for a credit card already have at least one. Of the 28 popular cards that we 

analyzed, 7 cards (37 percent) offered prospective cardholders a low 

introductory rate in 2003, but 20 (74 percent) did so in 2005—with most 

rates set at zero for about 8 months. According to an analyst who studies 

the credit card industry for large investors, approximately 25 percent of all 

purchases are made with cards offering a zero percent interest rate. 

Increased competition among issuers, which can be attributed to several 

factors, likely caused the reductions in credit card interest rates. In the 

early 1990s, new banks whose operations were solely focused on credit 

cards entered the market, according to issuer representatives. Known as 

monoline banks, issuer representatives told us these institutions competed 

for cardholders by offering lower interest rates and rewards, and expanded 

the availability of credit to a much larger segment of the population. Also, 

in 1988, new requirements were implemented for credit card disclosures 

that were intended to help consumers better compare pricing information 

on credit cards. These new requirements mandated that card issuers use a 

tabular format to provide information to consumers about interest rates 

and some fees on solicitations and applications mailed to consumers. 

According to issuers, consumer groups, and others, this format, which is 

popularly known as the Schumer box, has helped to significantly increase 

consumer awareness of credit card costs.21 According to a study authored 

by a staff member of a Federal Reserve Bank, consumer awareness of 

credit card interest rates has prompted more cardholders to transfer card 

balances from one issuer to another, further increasing competition among 

issuers.22 However, another study prepared by the Federal Reserve Board 

also attributes declines in credit card interest rates to a sharp drop in 

issuers’ cost of funds, which is the price issuers pay other lenders to obtain 

the funds that are then lent to cardholders.23 (We discuss issuers’ cost of 

funds later in this report.)

21The Schumer box is the result of the Fair Credit and Charge Card Disclosure Act, Pub. L. 

No. 100-583, 102 Stat. 2960 (1988), which amended TILA to provide for more detailed and 

uniform disclosures of rates and other cost information in applications and solicitations to 

open credit and charge card accounts. The act also required issuers to disclose pricing 

information, to the extent practicable as determined by the Federal Reserve, in a tabular 

format. This table is also known as the Schumer box, named for the Congressman that 

introduced the provision requiring this disclosure into the legislation.

22Furletti, “Credit Card Pricing Developments and Their Disclosure.”

23Board of Governors of the Federal Reserve System, The Profitability of Credit Card 

Operations of Depository Institutions, (Washington, D.C.: June 2005). 
Page 18 GAO-06-929 Credit Cards

Our analysis of disclosures also found that the rates applicable to balance 

transfers were generally the same as those assessed for purchases, but the 

rates for cash advances were often higher. Of the popular cards offered by 

the largest issuers, nearly all featured rates for balance transfers that were 

substantially similar to their purchase rates, with many also offering low 

introductory rates on balance transfers for about 8 months. However, the 

rates these cards assessed for obtaining a cash advance were around 20 

percent on average. Similarly to rates for purchases, the rates for cash 

advances on most cards were also variable rates that would change 

periodically with market interest rates.

Credit Cards Increasingly Have 

Assessed Higher Penalty Fees

Although featuring lower interest rates than in earlier decades, typical 

cards today now include higher and more complex fees than they did in the 

past for making late payments, exceeding credit limits, and processing 

returned payments. One penalty fee, commonly included as part of credit 

card terms, is the late fee, which issuers assess when they do not receive at 

least the minimum required payment by the due date indicated in a 

cardholder’s monthly billing statement. As noted earlier, prior to 1990, the 

level of late fees on cards generally ranged from $5 to $10. However, late 

fees have risen significantly. According to data reported by CardWeb.com, 

Inc., credit card late fees rose from an average of $12.83 in 1995 to $33.64 in 

2005, an increase of over 160 percent. Adjusted for inflation, these fees 

increased about 115 percent on average, from $15.61 in 1995 to $33.64 in 

2005.24 Similarly, Consumer Action, a consumer interest group that 

conducts an annual survey of credit card costs, found late fees rose from an 

average of $12.53 in 1995 to $27.46 in 2005, a 119 percent increase (or 80 

percent after adjusting for inflation).25 Figure 4 shows trends in average 

late fee assessments reported by these two groups.

24Dollar values adjusted using the Gross Domestic Product (GDP) deflator, with 2005 as the 

base year.

25Consumer Action analyzed more than 100 card products offered by more than 40 issuers in 

each year they conducted the survey, except in 1995, when 71 card products were included.
Page 19 GAO-06-929 Credit Cards

Figure 4: Average Annual Late Fees Reported from Issuer Surveys, 1995-2005 

(unadjusted for inflation)

Notes: Consumer Action data did not report values for 1996 and 1998. 

CardWeb.com, Inc. data are for financial institutions with more than $100 million in outstanding 

receivables.

In addition to increased fees a cardholder may be charged per occurrence, 

many cards created tiered pricing that depends on the balance held by the 

cardholder.26 Between 2003 and 2005, all but 4 of the 28 popular cards that 

we analyzed used a tiered fee structure. Generally, these cards included 

three tiers, with the following range of fees for each tier: 

• $15 to $19 on accounts with balances of $100 or $250; 

• $25 to $29 on accounts with balances up to about $1,000; and

26Based on our analysis of the Consumer Action survey data, issuers likely began 

introducing tiered late fees in 2002.

0

5

10

15

20

25

30

35

CardWeb.com, Inc.

Consumer Action

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Source: GAO analysis of Consumer Action Credit Card Survey, CardWeb.com, Inc.

Fee (in dollars)
Page 20 GAO-06-929 Credit Cards

• $34 to $39 on accounts with balances of about $1,000 or more. 

Tiered pricing can prevent issuers from assessing high fees to cardholders 

with comparatively small balances. However, data from the Federal 

Reserve’s Survey of Consumer Finances, which is conducted every 3 years, 

show that the median total household outstanding balance on U.S. credit 

cards was about $2,200 in 2004 among those that carried balances. When 

we calculated the late fees that would be assessed on holders of the 28 

cards if they had the entire median balance on one card, the average late 

fee increased from $34 in 2003 to $37 in 2005, with 18 of the cards assessing 

the highest fee of $39 in 2005. 

Issuers also assess cardholders a penalty fee for exceeding the credit limit 

set by the issuer. In general, issuers assess over-limit fees when a 

cardholder exceeds the credit limit set by the card issuer. Similar to late 

fees, over-limit fees also have been rising and increasingly involve a tiered 

structure. According to data reported by CardWeb.com, Inc., the average 

over-limit fees that issuers assessed increased 138 percent from $12.95 in 

1995 to $30.81 in 2005. Adjusted for inflation, average over-limit fees 

reported by CardWeb.com increased from $15.77 in 1995 to $30.81 in 2005, 

representing about a 95 percent increase.27 Similarly, Consumer Action 

found a 114 percent increase in this period (or 76 percent, after adjusting 

for inflation). Figure 5 illustrates the trend in average over-limit fees over 

the past 10 years from these two surveys. 

27Dollar values adjusted using the Gross Domestic Product (GDP) deflator, with 2005 as the 

base year.
Page 21 GAO-06-929 Credit Cards

Figure 5: Average Annual Over-limit fees Reported from Issuer Surveys, 1995-2005 

(unadjusted for inflation) 

Notes: Consumer Action did not report values for 1996 and 1998. 

CardWeb.com, Inc. data are for financial institutions with more than $100 million in outstanding 

receivables.

The cards we analyzed also increasingly featured tiered structures for overlimit fees, with 29 percent (5 of 17 cards) having such structures in 2003, 

and 53 percent (10 of 19 cards) in 2005. Most cards that featured tiered 

over-limit fees assessed the highest fee on accounts with balances greater 

than $1,000. But not all over-limit tiers were based on the amount of the 

cardholder’s outstanding balance. Some cards based the amount of the 

over-limit fee on other indicators, such as the amount of the cardholder’s 

credit limit or card type. For the six largest issuers’ popular cards with 

over-limit fees, the average fee that would be assessed on accounts that 

carried the median U.S. household credit card balance of $2,200 rose from 

$32 in 2003 to $34 in 2005. Among cards that assessed over-limit fees in 

2005, most charged an amount between $35 and $39. 

0

5

10

15

20

25

30

35

CardWeb.com, Inc.

Consumer Action

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Source: GAO analysis of Consumer Action Credit Card Survey, CardWeb.com, Inc.

Fee (in dollars)
Page 22 GAO-06-929 Credit Cards

Not all of the 28 popular large-issuer cards included over-limit fees and the 

prevalence of such fees may be declining. In 2003, 85 percent, or 17 of 20 

cards, had such fees, but only 73 percent, or 19 of 26 cards, did in 2005. 

According to issuer representatives, they are increasingly emphasizing 

competitive strategies that seek to increase the amount of spending that 

their existing cardholders do on their cards as a way to generate revenue. 

This could explain a movement away from assessing over-limit fees, which 

likely discourage cardholders who are near their credit limit from 

spending. 

Cards also varied in when an over-limit fee would be assessed. For 

example, our analysis of the 28 popular large-issuer cards showed that, of 

the 22 cards that assessed over-limit fees, about two-thirds (14 of 22) would 

assess an over-limit fee if the cardholder’s balance exceeded the credit limit 

within a billing cycle, whereas the other cards (8 of 22) would assess the 

fee only if a cardholder’s balance exceeded the limit at the end of the billing 

cycle. In addition, within the overall limit, some of the cards had separate 

credit limits on the card for how much a cardholder could obtain in cash or 

transfer from other cards or creditors, before similarly triggering an overlimit fee.

Finally, issuers typically assess fees on cardholders for submitting a 

payment that is not honored by the issuer or the cardholder’s paying bank. 

Returned payments can occur when cardholders submit a personal check 

that is written for an amount greater than the amount in their checking 

account or submit payments that cannot be processed. In our analysis of 28 

popular cards offered by the six largest issuers, we found the average fee 

charged for such returned payments remained steady between 2003 and 

2005 at about $30. 

Cards Now Frequently Include a 

Range of Other Fees 

Since 1990, issuers have appended more fees to credit cards. In addition to 

penalties for the cardholder actions discussed above, the 28 popular cards 

now often include fees for other types of transactions or for providing 

various services to cardholders. As shown in table 1, issuers assess fees for 

such services as providing cash advances or for making a payment by 

telephone. According to our analysis, not all of these fees were disclosed in 

the materials that issuers generally provide to prospective or existing 

cardholders. Instead, card issuers told us that they notified their customers 

of these fees by other means, such as telephone conversations. 
Page 23 GAO-06-929 Credit Cards

Table 1: Various Fees for Services and Transactions, Charged in 2005 on Popular Large-Issuer Cards 

Source: GAO.

Note: Cash equivalent transactions include the purchase of items such as money orders, lottery tickets 

and casino chips. Convenience checks are personalized blank checks that issuers provide cardholders 

that can be written against the available credit limit of a credit card account. 

a

We were unable to determine the number of cards that assessed telephone payment, duplicate copy, 

or rush delivery fees in 2005 because these fees are not required by regulation to be disclosed with 

either mailed solicitation letters or initial disclosure statements. We obtained information about the 

level of these fees from a survey of the six largest U.S. issuers.

While issuers generally have been including more kinds of fees on credit 

cards, one category has decreased: most cards offered by the largest 

issuers do not require cardholders to pay an annual fee. An annual fee is a 

fixed fee that issuers charge cardholders each year they continue to own 

that card. Almost 75 percent of cards we reviewed charged no annual fee in 

2005 (among those that did, the range was from $30 to $90). Also, an 

industry group representative told us that approximately 2 percent of cards 

featured annual fee requirements. Some types of cards we reviewed were 

more likely to apply an annual fee than others. For example, cards that 

offered airline tickets in exchange for points that accrue to a cardholder for 

using the card were likely to apply an annual fee. However, among the 28 

popular cards that we reviewed, not all of the cards that offered rewards 

charged annual fees.

Fee type Assessed for:

Number of cards that 

assessed fee in 2005

Average or range of amounts 

generally assessed (if 

charged)

Cash advance Obtaining cash or cash equivalent 

item using credit card or convenience 

checks

26 of 27 3% of cash advance amount or 

$5 minimum

Balance transfer Transferring all or part of a balance 

from another creditor

15 of 27 3% of transfer amount or $5 to 

$10 minimum

Foreign transaction Making purchases in a foreign 

country or currency

19 of 27 3% of transaction amount (in 

U.S. dollars)

Returned convenience check Using a convenience check that the 

issuer declines to honor

20 of 27 $31

Stop payment Requesting to stop payment on a 

convenience check written against 

the account

20 of 27 $26

Telephone payment Arranging a single payment through a 

customer service agent

N/Aa $5-$15

Duplicate copy of account 

records

Obtaining a copy of a billing 

statement or other record

N/Aa $2-$13 per item

Rush delivery of credit card Requesting that a card be sent by 

overnight delivery

N/Aa $10-$20
Page 24 GAO-06-929 Credit Cards

Recently, some issuers have introduced cards without certain penalty fees. 

For example, one of the top six issuers has introduced a card that does not 

charge a late fee, over-limit fee, cash-advance fee, returned payment fee, or 

an annual fee. Another top-six issuer’s card does not charge the cardholder 

a late fee as long as one purchase is made during the billing cycle. However, 

the issuer of this card may impose higher interest rates, including above 30 

percent, if the cardholder pays late or otherwise defaults on the terms of 

the card. 

Issuers Have Introduced 

Various Practices that Can 

Significantly Affect 

Cardholder Costs

Popular credit cards offered by the six largest issuers involve various issuer 

practices that can significantly affect the costs of using a credit card for a 

cardholder. These included practices such as raising a card’s interest rates 

in response to cardholder behaviors and how payments are allocated 

across balances. 

Interest Rate Changes One of the practices that can significantly increase the costs of using 

typical credit cards is penalty pricing. Under this practice, the interest rate 

applied to the balances on a card automatically can be increased in 

response to behavior of the cardholder that appears to indicate that the 

cardholder presents greater risk of loss to the issuer. For example, 

representatives for one large issuer told us they automatically increase a 

cardholder’s interest rate if a cardholder makes a late payment or exceeds 

the credit limit. Card disclosure documents now typically include 

information about default rates, which represent the maximum penalty rate 

that issuers can assess in response to cardholders’ violations of the terms 

of the card. According to an industry specialist at the Federal Reserve, 

issuers first began the practice of assessing default interest rates as a 

penalty for term violations in the late 1990s. As of 2005, all but one of the 

cards we reviewed included default rates. The default rates were generally 

much higher than rates that otherwise applied to purchases, cash advances, 

or balance transfers. For example, the average default rate across the 28 

cards was 27.3 percent in 2005—up from the average of 23.8 percent in 

2003—with as many as 7 cards charging rates over 30 percent. Like many of 

the other rates assessed on these cards in 2005, default rates generally were 

variable rates. Increases in average default rates between 2003 and 2005 

resulted from increases both in the prime rate, which rose about 2 

percentage points during this time, and the average fixed amount that 

issuers added. On average, the fixed amount that issuers added to the index 

rate in setting default rate levels increased from about 19 percent in 2003 to 

22 percent in 2005.
Page 25 GAO-06-929 Credit Cards

Four of the six largest issuers typically included conditions in their 

disclosure documents that could allow the cardholder’s interest rate to be 

reduced from a higher penalty rate. For example some issuers would lower 

a cardholders’ rate for not paying late and otherwise abiding by the terms 

of the card for a period of 6 or 12 consecutive months after the default rate 

was imposed. However, at least one issuer indicated that higher penalty 

rates would be charged on existing balances even after six months of good 

behavior. This issuer assessed lower nonpenalty rates only on new 

purchases or other new balances, while continuing to assess higher penalty 

rates on the balance that existed when the cardholder was initially 

assessed a higher penalty rate. This practice may significantly increase 

costs to cardholders even after they’ve met the terms of their card 

agreement for at least six months. 

The specific conditions under which the largest issuers could raise a 

cardholder’s rate to the default level on the popular cards that we analyzed 

varied. The disclosures for 26 of the 27 cards that included default rates in 

2005 stated that default rates could be assessed if the cardholders made 

late payments. However, some cards would apply such default rates only 

after multiple violations of card terms. For example, issuers of 9 of the 

cards automatically would increase a cardholder’s rates in response to two 

late payments. Additionally, for 18 of the 28 cards, default rates could apply 

for exceeding the credit limit on the card, and 10 cards could also impose 

such rates for returned payments. Disclosure documents for 26 of the 27 

cards that included default rates also indicated that in response to these 

violations of terms, the interest rate applicable to purchases could be 

increased to the default rate. In addition, such violations would also cause 

issuers to increase the rates applicable to cash advances on 16 of the cards, 

as well as increase rates applicable to balance transfers on 24 of the cards. 

According to a paper by a Federal Reserve Bank researcher, some issuers 

began to increase cardholders’ interest rates in the early 2000s for actions 

they took with other creditors.28 According to this paper, these issuers 

would increase rates when cardholders failed to make timely payments to 

other creditors, such as other credit card issuers, utility companies, and 

mortgage lenders. Becoming generally known as “universal default,” 

consumer groups criticized these practices. In 2004, OCC issued guidance 

to the banks that it oversees, which include many of the largest card 

28Furletti, “Credit Card Pricing Developments and Their Disclosure.”
Page 26 GAO-06-929 Credit Cards

issuers, which addressed such practices.29 While OCC noted that the 

repricing might be an appropriate way for banks to manage their credit 

risk, they also noted that such practices could heighten a bank’s 

compliance and reputation risks. As a result, OCC urged national banks to 

fully and prominently disclose in promotional materials the circumstances 

under which a cardholder’s interest rates, fees, or other terms could be 

changed and whether the bank reserved the right to change these 

unilaterally. Around the time of this guidance, issuers generally ceased 

automatically repricing cardholders to default interest rates for risky 

behavior exhibited with other creditors. Of the 28 popular large issuer 

cards that we reviewed, three cards in 2005 included terms that would 

allow the issuer to automatically raise a cardholder’s rate to the default rate 

if they made a late payment to another creditor. 

Although the six largest U.S. issuers appear to have generally ceased 

making automatic increases to a default rate for behavior with other 

creditors, some continue to employ practices that allow them to seek to 

raise a cardholder’s interest rates in response to behaviors with other 

creditors. During our review, representatives of four of these issuers told us 

that they may seek to impose higher rates on a cardholder in response to 

behaviors related to other creditors but that such increases would be done 

as a change-in-terms, which can require prior notification, rather than 

automatically.30 Regulation Z requires that the affected cardholders be 

notified in writing of any such proposed changes in rate terms at least 15 

days before such change becomes effective.31 In addition, under the laws of 

the states in which four of the six largest issuers are chartered, cardholders 

would have to be given the right to opt out of the change.32 However, issuer 

representatives told us that few cardholders exercise this right. The ability 

of cardholders to opt out of such increases also has been questioned. For 

example, one legal essay noted that some cardholders may not be able to 

reject the changed terms of their cards if the result would be a requirement 

29Credit Card Practices, OCC Advisory Letter AL 2004-10 (Sept. 14, 2004). 

30At least one of the six largest issuers may automatically increase a cardholder’s rates for 

violations of terms on any loan the cardholder held with the issuer or bank with which it 

was affiliated.

3112 C.F.R. § 226.9(c). 

32States in which issuers have a statutory obligation to afford cardholders an opportunity to 

opt-out or reject a change-in-terms to increase the interest rate on their credit card account 

include Delaware, South Dakota, New Hampshire, Florida and Georgia.
Page 27 GAO-06-929 Credit Cards

to pay off the balance immediately.33 In addition, an association for 

community banks that provided comments to the Federal Reserve as part 

of the ongoing review of card disclosures noted that 15 days does not 

provide consumers sufficient time to make other credit arrangements if the 

new terms were undesirable.

Payment Allocation Method The way that issuers allocate payments across balances also can increase 

the costs of using the popular cards we reviewed. In this new credit 

environment where different balances on a single account may be assessed 

different interest rates, issuers have developed practices for allocating the 

payments cardholders make to pay down their balance. For 23 of the 28 

popular larger-issuer cards that we reviewed, cardholder payments would 

be allocated first to the balance that is assessed the lowest rate of 

interest.34 As a result, the low interest balance would have to be fully paid 

before any of the cardholder’s payment would pay down balances assessed 

higher rates of interest. This practice can prolong the length of time that 

issuers collect finance charges on the balances assessed higher rates of 

interest. 

Balance Computation Method Additionally, some of the cards we reviewed use a balance computation 

method that can increase cardholder costs. On some cards, issuers have 

used a double-cycle billing method, which eliminates the interest-free 

period of a consumer who moves from nonrevolving to revolving status, 

according to Federal Reserve staff. In other words, in cases where a 

cardholder, with no previous balance, fails to pay the entire balance of new 

purchases by the payment due date, issuers compute interest on the 

original balance that previously had been subject to an interest-free period. 

This method is illustrated in figure 6.

33Samuel Issacharoff and Erin F. Delaney, “Symposium: Homo Economicus, Homo 

Myopicus, and the Law and Economics of Consumer Choice,” University of Chicago Law 

Review 73 (Winter: 2006).

34Issuers of the remaining five cards would apply cardholder payments in a manner subject 

to their discretion.
Page 28 GAO-06-929 Credit Cards

Figure 6: How the Double-Cycle Billing Method Works 

Note: We calculated finance charges assuming a 13.2 percent APR, 30-day billing cycle, and that the 

cardholder’s payment is credited on the first day of cycle 2. We based our calculations on an average 

daily balance method and daily compounding of finance charges.

In our review of 28 popular cards from the six largest issuers, we found that 

two of the six issuers used the double-cycle billing method on one or more 

popular cards between 2003 and 2005. The other four issuers indicated they 

would only go back one cycle to impose finance charges.

New Practices Appear to 

Affect a Minority of 

Cardholders

Representatives of issuers, consumer groups, and others we interviewed 

generally disagreed over whether the evolution of credit card pricing and 

other practices has been beneficial to consumers. However, data provided 

by the six largest issuers show that many of their active accounts did not 

pay finance charges and that a minority of their cardholders were affected 

by penalty charges in 2005.

• Cycle 1 bill arrives

 (no interest due under

 either billing plan)

• Balance: 

• Card holder pays: 

$1,000

$990

• Cycle 2 bill arrives

 (interest applied differs by

billing plan--see below)

• Balance: $10 + interest

January February March

January 10th credit card purchase

totalling $1,000

Days with no balance carried on credit card

Days with balance carried on credit card

Days for which interest is due

$0.11 on $10 (Cycle 2 balance)

$11.02 on $1,000 (Cycle 1 balance)

and $10 (Cycle 2 balance)

Cycle 2 bill interest charges:

Sources: GAO analysis of Federal Reserve Bank data; Art Explosion (images).

$0

balance

(no interest due)

Days for which interest is due

Single-cycle billing

Cycle 1 (balance: $1,000)

Double-cycle

billing

Cycle 2 (balance: $10)

$10 balance

carried over

to next month
Page 29 GAO-06-929 Credit Cards

Issuers Say Practices Benefit 

More Cardholders, but Critics 

Say Some Practices Harm 

Consumers

The movement towards risk-based pricing for cards has allowed issuers to 

offer better terms to some cardholders and more credit cards to others. 

Spurred by increased competition, many issuers have adopted risk-based 

pricing structures in which they assess different rates on cards depending 

on the credit quality of the borrower. Under this pricing structure, issuers 

have offered cards with lower rates to more creditworthy borrowers, but 

also have offered credit to consumers who previously would not have been 

considered sufficiently creditworthy. For example, about 70 percent of 

families held a credit card in 1989, but almost 75 percent held a card by 

2004, according to the Federal Reserve Board’s Survey of Consumer 

Finances. Cards for these less creditworthy consumers have featured 

higher rates to reflect the higher repayment risk that such consumers 

represented. For example, the initial purchase rates on the 28 popular 

cards offered by the six largest issuers ranged from about 8 percent to 19 

percent in 2005.

According to card issuers, credit cards offer many more benefits to users 

than they did in the past. For example, according to the six largest issuers, 

credit cards are an increasingly convenient and secure form of payment. 

These issuers told us credit cards are accepted at more than 23 million 

merchants worldwide, can be used to make purchases or obtain cash, and 

are the predominant form of payment for purchases made on the Internet. 

They also told us that rewards, such as cash-back and airline travel, as well 

as other benefits, such as rental car insurance or lost luggage protection, 

also have become standard. Issuers additionally noted that credit cards are 

reducing the need for cash. Finally, they noted that cardholders typically 

are not responsible for loss, theft, fraud, or misuse of their credit cards by 

unauthorized users, and issuers often assist cardholders that are victims of 

identity theft. 

In contrast, according to some consumer groups and others, the newer 

pricing structures have resulted in many negative outcomes for some 

consumers. Some consumer advocates noted adverse consequences of 

offering credit, especially at higher interest rates, to less creditworthy 

consumers. For example, lower-income or young consumers, who do not 

have the financial means to carry credit card debt, could worsen their 

financial condition.35 In addition, consumer groups and academics said that 

35We previously reported on the marketing of credit cards to students and student 

experiences with credit cards. See GAO Consumer Finance: College Students and Credit 

Cards, GAO-01-773, (Washington, D.C.: June 20, 2001).
Page 30 GAO-06-929 Credit Cards

various penalty fees could increase significantly the costs of using cards for 

some consumers. Some also argued that card issuers were overly 

aggressive in their assessment of penalty fees. For instance, a 

representative of a consumer group noted that issuers do not reject 

cardholders’ purchases during the sale authorization, even if the 

transaction would put the cardholder over the card’s credit limit, and yet 

will likely later assess that cardholder an over-limit fee and also may 

penalize them with a higher interest rate. Furthermore, staff for one 

banking regulator told us that they have received complaints from 

consumers who were assessed over-limit fees that resulted from the 

balance on their accounts going over their credit limit because their card 

issuer assessed them a late fee. At the same time, credit card issuers have 

incentives not to be overly aggressive with their assessment of penalty 

charges. For example, Federal Reserve representatives told us that major 

card issuers with long-term franchise value are concerned that their banks 

not be perceived as engaging in predatory lending because this could pose 

a serious risk to their brand reputation. As a result, they explained that 

issuers may be wary of charging fees that could be considered excessive or 

imposing interest rates that might be viewed as potentially abusive. In 

contrast, these officials noted that some issuers, such as those that focus 

on lending to consumers with lower credit quality, may be less concerned 

about their firm’s reputation and, therefore, more likely to charge higher 

fees. 

Controversy also surrounds whether higher fees and other charges were 

commensurate with the risks that issuers faced. Consumer groups and 

others questioned whether the penalty interest rates and fees were 

justifiable. For example, one consumer group questioned whether 

submitting a credit card payment one day late made a cardholder so risky 

that it justified doubling or tripling the interest rate assessed on that 

account. Also, as the result of concerns over the level of penalty fees being 

assessed by banks in the United Kingdom, a regulator there has recently 

announced that penalty fees greater than 12 pounds (about $23) may be 

challenged as unfair unless they can be justified by exceptional factors.36

Representatives of several of the issuers with whom we spoke told us that 

the levels of the penalty fees they assess generally were set by considering 

various factors. For example, they noted that higher fees help to offset the 

increased risk of loss posed by cardholders who pay late or engage in other 

36Office of Fair Trading, Calculating Fair Default Charges in Credit Card Contracts: A 

Statement of the OFT's Position, OFT842 (April 2006).
Page 31 GAO-06-929 Credit Cards

negative behaviors. Additionally, they noted a 2006 study, which compared 

the assessment of penalty fees that credit card banks charged to 

bankruptcy rates in the states in which their cards were marketed, and 

found that late fee assessments were correlated with bankruptcy rates.37

Some also noted that increased fee levels reflected increased operating 

costs; for example, not receiving payments when due can cause the issuer 

to incur increased costs, such as those incurred by having to call 

cardholders to request payment. Representatives for four of the largest 

issuers also told us that their fee levels were influenced by what others in 

the marketplace were charging. 

Concerns also have been expressed about whether consumers adequately 

consider the potential effect of penalty interest rates and fees when they 

use their cards. For example, one academic researcher, who has written 

several papers about the credit card industry, told us that many consumers 

do not consider the effect of the costs that can accrue to them after they 

begin using a credit card. According to this researcher, many consumers 

focus primarily on the amount of the interest rate for purchases when 

deciding to obtain a new credit card and give less consideration to the level 

of penalty charges and rates that could apply if they were to miss a 

payment or violate some other term of their card agreement. An analyst 

that studies the credit card industry for large investors said that consumers 

can obtain low introductory rates but can lose them very easily before the 

introductory period expires.

Most Active Accounts Are 

Assessed Lower Rates Than in 

the Past 

As noted previously, the average credit card interest rate assessed for 

purchases has declined from almost 20 percent, that prevailed until the late 

1980s, to around 12 percent, as of 2005. In addition, the six largest issuers—

whose accounts represent 61 percent of all U.S. accounts—reported to us 

that the majority of their cardholders in 2005 had cards with interest rates 

lower than the rate that generally applied to all cardholders prior to about 

1990. According to these issuers, about 80 percent of active accounts were 

assessed interest rates below 20 percent as of December 31, 2005, with 

37Massoud, N., Saunders A., and Scholnick B., “The Cost of Being Late: The Case of Credit 

Card Penalty Fees,” January 2006. Published with financial assistance from the Social 

Sciences Research Council of Canada and the National Research Program on Financial 

Services and Public Policy at the Schulich School of Business, York University in Toronto, 

Ontario (Canada). This study examined data from the Federal Reserve’s survey of U.S. 

credit card rates and fees and compared them to bankruptcy rates across states. 
Page 32 GAO-06-929 Credit Cards

more than 40 percent having rates below 15 percent.38 However, the 

proportion of active accounts assessed rates below 15 percent declined 

since 2003, when 71 percent received such rates. According to issuer 

representatives, a greater number of active accounts were assessed higher 

interest rates in 2004 and 2005 primarily because of changes in the prime 

rate to which many cards’ variable rates are indexed. Nevertheless, 

cardholders today have much greater access to cards with lower interest 

rates than existed when all cards charged a single fixed rate. 

A large number of cardholders appear to avoid paying any significant 

interest charges. Many cardholders do not revolve a balance from month to 

month, but instead pay off the balance owed in full at the end of each 

month. Such cardholders are often referred to as convenience users. 

According to one estimate, about 42 percent of cardholders are 

convenience users.39 As a result, many of these cardholders availed 

themselves of the benefits of their cards without incurring any direct 

expenses. Similarly, the six largest issuers reported to us that almost half, 

or 48 percent, of their active accounts did not pay a finance charge in at 

least 10 months in 2005, similar to the 47 percent that did so in 2003 and 

2004.

Minority of Cardholders Appear 

to Be Affected by Penalty 

Charges Assessed by the Largest 

U.S. Issuers

Penalty interest rates and fees appear to affect a minority of the largest six 

issuers’ cardholders.40 No comprehensive sources existed to show the 

extent to which U.S. cardholders were paying penalty interest rates, but, 

according to data provided by the six largest issuers, a small proportion of 

their active accounts were being assessed interest rates above 25 percent—

which we determined were likely to represent penalty rates. However, this 

proportion had more than doubled over a two-year period by having 

increased from 5 percent at the end of 2003 to 10 percent in 2004 and 11 

percent in 2005.

38For purposes of this report, active accounts refer to accounts of the top six issuers that 

had had a debit or credit posted to them by December 31 in 2003, 2004, and 2005.

39CardWeb.com, Inc.

40Our data likely undercounted the cards and cardholders that were affected by these 

charges because our data was comprised of active accounts for the six largest U.S. issuers. 

Although these issuers have some subprime accounts (accounts held by less-creditworthy 

borrowers), we did not include issuers in our sample that predominantly market to 

subprime borrowers. 
Page 33 GAO-06-929 Credit Cards

Although still representing a minority of cardholders, cardholders paying at 

least one type of penalty fee were a significant proportion of all 

cardholders. According to the six largest issuers, 35 percent of their active 

accounts had been assessed at least one late fee in 2005. These issuers 

reported that their late fee assessments averaged $30.92 per active account. 

Additionally, these issuers reported that they assessed over-limit fees on 13 

percent of active accounts in 2005, with an average over-limit fee of $9.49 

per active account.

Weaknesses in Credit 

Card Disclosures 

Appear to Hinder 

Cardholder 

Understanding of Fees 

and Other Practices 

That Can Affect Their 

Costs

The disclosures that issuers representing the majority of credit card 

accounts use to provide information about the costs and terms of using 

credit cards had serious weaknesses that likely reduce their usefulness to 

consumers. These disclosures are the primary means under federal law for 

protecting consumers against inaccurate and unfair credit card practices. 

The disclosures we analyzed had weaknesses, such as presenting 

information written at a level too difficult for the average consumer to 

understand, and design features, such as text placement and font sizes, that 

did not conform to guidance for creating easily readable documents. When 

attempting to use these disclosures, cardholders were often unable to 

identify key rates or terms and often failed to understand the information in 

these documents. Several factors help explain these weaknesses, including 

outdated regulations and guidance. With the intention of improving the 

information that consumers receive, the Federal Reserve has initiated a 

comprehensive review of the regulations that govern credit card 

disclosures. Various suggestions have been made to improve disclosures, 

including testing them with consumers. While Federal Reserve staff have 

begun to involve consumers in their efforts, they are still attempting to 

determine the best form and content of any revised disclosures. Without 

clear, understandable information, consumers risk making poor choices 

about using credit cards, which could unnecessarily result in higher costs 

to use them.

Mandatory Disclosure of 

Credit Card Terms and 

Conditions Is the Primary 

Means Regulators Use for 

Ensuring Competitive 

Credit Card Pricing 

Having adequately informed consumers that spur competition among 

issuers is the primary way that credit card pricing is regulated in the United 

States. Under federal law, a national bank may charge interest on any loan 
Page 34 GAO-06-929 Credit Cards

at a rate permitted by the law of the state in which the bank is located.41 In 

1978, the U.S. Supreme Court ruled that a national bank is “located” in the 

state in which it is chartered, and, therefore, the amount of the interest 

rates charged by a national bank are subject only to the laws of the state in 

which it is chartered, even if its lending activities occur elsewhere.42 As a 

result, the largest credit card issuing banks are chartered in states that 

either lacked interest rate caps or had very high caps from which they 

would offer credit cards to customers in other states. This ability to 

“export” their chartered states’ interest rates effectively removed any caps 

applicable to interest rates on the cards from these banks. In 1996, the U.S. 

Supreme Court determined that fees charged on credit extended by 

national banks are a form of interest, allowing issuers to also export the 

level of fees allowable in their state of charter to their customers 

nationwide, which effectively removed any caps on the level of fees that 

these banks could charge.43

In the absence of federal regulatory limitations on the rates and fees that 

card issuers can assess, the primary means that U.S. banking regulators 

have for influencing the level of such charges is by facilitating competition 

among issuers, which, in turn, is highly dependent on informed consumers. 

The Truth in Lending Act of 1968 (TILA) mandates certain disclosures 

aimed at informing consumers about the cost of credit. In approving TILA, 

Congress intended that the required disclosures would foster price 

competition among card issuers by enabling consumers to discern 

differences among cards while shopping for credit. TILA also states that its 

purpose is to assure that the consumer will be able to compare more 

readily the various credit terms available to him or her and avoid the 

uninformed use of credit. As authorized under TILA, the Federal Reserve 

has promulgated Regulation Z to carry out the purposes of TILA. The 

Federal Reserve, along with the other federal banking agencies, enforces 

compliance with Regulation Z with respect to the depository institutions 

under their respective supervision. 

In general, TILA and the accompanying provisions of Regulation Z require 

credit card issuers to inform potential and existing customers about 

specific pricing terms at specific times. For example, card issuers are 

4112 U.S.C. § 85.

42Marquette National Bank v First of Omaha Service Corp. et. al, 439 U.S. 299 (1978).

43Smiley v. Citibank, 517 U.S. 735 (1996). 
Page 35 GAO-06-929 Credit Cards

required to make various disclosures when soliciting potential customers, 

as well as on the actual applications for credit. On or with card applications 

and solicitations, issuers generally are required to present pricing terms, 

including the interest rates and various fees that apply to a card, as well as 

information about how finance charges are calculated, among other things. 

Issuers also are required to provide cardholders with specified disclosures 

prior to the cardholder’s first transaction, periodically in billing statements, 

upon changes to terms and conditions pertaining to the account, and upon 

account renewal. For example, in periodic statements, which issuers 

typically provide monthly to active cardholders, issuers are required to 

provide detailed information about the transactions on the account during 

the billing cycle, including purchases and payments, and are to disclose the 

amount of finance charges that accrued on the cardholder’s outstanding 

balance and detail the type and amount of fees assessed on the account, 

among other things.

In addition to the required timing and content of disclosures, issuers also 

must adhere to various formatting requirements. For example, since 1989, 

certain pricing terms must be disclosed in direct mail, telephone, and other 

applications and solicitations and presented in a tabular format on mailed 

applications or solicitations.44 This table, generally referred to as the 

Schumer box, must contain information about the interest rates and fees 

that could be assessed to the cardholder, as well as information about how 

finance charges are calculated, among other things.45 According to a 

Federal Reserve representative, the Schumer box is designed to be easy for 

consumers to read and use for comparing credit cards. According to a 

consumer group representative, an effective regulatory disclosure is one 

that stimulates competition among issuers; the introduction of the 

Schumer box in the late 1980s preceded the increased price competition in 

the credit card market in the early 1990s and the movement away from 

uniform credit card products.

Not all fees that are charged by card issuers must be disclosed in the 

Schumer box. Regulation Z does not require that issuers disclose fees 

unrelated to the opening of an account. For example, according to the 

Official Staff Interpretations of Regulation Z (staff interpretations), 

nonperiodic fees, such as fees charged for reproducing billing statements 

44See generally 12 C.F.R. § 226.5a.

45See supra note 21. 
Page 36 GAO-06-929 Credit Cards

or reissuing a lost or stolen card, are not required to be disclosed. Staff 

interpretations, which are compiled and published in a supplement to 

Regulation Z, are a means of guiding issuers on the requirements of 

Regulation Z.46 Staff interpretations also explain that various fees are not 

required in initial disclosure statements, such as a fee to expedite the 

delivery of a credit card or, under certain circumstances, a fee for arranging 

a single payment by telephone. However, issuers we surveyed told us they 

inform cardholders about these other fees at the time the cardholders 

request the service, rather than in a disclosure document. 

Although Congress authorized solely the Federal Reserve to adopt 

regulations to implement the purposes of TILA, other federal banking 

regulators, under their authority to ensure the safety and soundness of 

depository institutions, have undertaken initiatives to improve the credit 

card disclosures made by the institutions under their supervision. For 

example, the regulator of national banks, OCC, issued an advisory letter in 

2004 alerting banks of its concerns regarding certain credit card marketing 

and account management practices that may expose a bank to compliance 

and reputation risks. One such practice involved the marketing of 

promotional interest rates and conditions under which issuers reprice 

accounts to higher interest rates.47 In its advisory letter, OCC recommended 

that issuers disclose any limits on the applicability of promotional interest 

rates, such as the duration of the rates and the circumstances that could 

shorten the promotional rate period or cause rates to increase. 

Additionally, OCC advised issuers to disclose the circumstances under 

which they could increase a consumer’s interest rate or fees, such as for 

failure to make timely payments to another creditor.

Credit Card Disclosures 

Typically Provided to Many 

Consumers Have Various 

Weaknesses

The disclosures that credit card issuers typically provide to potential and 

new cardholders had various weaknesses that reduced their usefulness to 

consumers. These weaknesses affecting the disclosure materials included 

the typical grade level required to comprehend them, their poor 

organization and formatting of information, and their excessive detail and 

length.

46Compliance with these official staff interpretations afford issuers protection from liability 

under Section 130(f) of TILA, which protects issuers from civil liability for any act done or 

omitted in good faith compliance with any official staff interpretation. 12 C.F.R. Part 226, 

Supp. I.

47Credit Card Practices, OCC Advisory Letter AL 2004-10 (Sept. 14, 2004).
Page 37 GAO-06-929 Credit Cards

Disclosures Written at Too High 

a Level

The typical credit card disclosure documents contained content that was 

written at a level above that likely to be understandable by many 

consumers. To assess the readability of typical credit card disclosures, we 

contracted with a private usability consultant to evaluate the two primary 

disclosure documents for four popular, widely-held cards (one each from 

four large credit card issuers). The two documents were (1) a direct mail 

solicitation letter and application, which must include information about 

the costs and fees associated with the card; and (2) the cardmember 

agreement that contains the full range of terms and conditions applicable 

to the card.48 Through visual inspection, we determined that this set of 

disclosures appeared representative of the disclosures for the 28 cards we 

reviewed from the six largest issuers that accounted for the majority of 

cardholders in the United States. To determine the level of education likely 

needed for someone to understand these disclosures, the usability 

consultant used computer software programs that applied three widely 

used readability formulas to the entire text of the disclosures. These 

formulas determined the readability of written material based on 

quantitative measures, such as average number of syllables in words or 

numbers of words in sentences. For more information about the usability 

consultant’s analyses, see appendix I.

On the basis of the usability consultant’s analysis, the disclosure 

documents provided to many cardholders likely were written at a level too 

high for the average individual to understand. The consultant found that 

the disclosures on average were written at a reading level commensurate 

with about a tenth- to twelfth-grade education. According to the 

consultant’s analysis, understanding the disclosures in the solicitation 

letters would require an eleventh-grade level of reading comprehension, 

while understanding the cardmember agreements would require about a 

twelfth-grade education. A consumer advocacy group that tested the 

reading level needed to understand credit card disclosures arrived at a 

similar conclusion. In a comment letter to the Federal Reserve, this 

consumer group noted it had measured a typical passage from a change-interms notice on how issuers calculate finance charges using one of the 

readability formulas and that this passage required a twelfth-grade reading 

level. 

48We did not evaluate disclosures that issuers are required to provide at other times—such 

as in periodic billing statements or change in terms notices.
Page 38 GAO-06-929 Credit Cards

These disclosure documents were written such that understanding them 

required a higher reading level than that attained by many U.S. cardholders. 

For example, a nationwide assessment of the reading level of the U.S. 

population cited by the usability consultant indicated that nearly half of the 

adult population in the United States reads at or below the eighth-grade 

level.49 Similarly, to ensure that the information that public companies are 

required to disclose to prospective investors is adequately understandable, 

the Securities and Exchange Commission (SEC) recommends that such 

disclosure materials be written at a sixth- to eighth-grade level.50

In addition to the average reading level, certain portions of the typical 

disclosure documents provided by the large issuers required even higher 

reading levels to be understandable. For example, the information that 

appeared in cardmember agreements about annual percentage rates, grace 

periods, balance computation, and payment allocation methods required a 

minimum of a fifteenth-grade education, which is the equivalent of 3 years 

of college education. Similarly, text in the documents describing the 

interest rates applicable to one issuer’s card were written at a twentyseventh-grade level. However, not all text in the disclosures required such 

high levels. For example, the consultant found that the information about 

fees that generally appeared in solicitation letters required only a seventhand eighth-grade reading level to be understandable. Solicitation letters 

likely required lower reading levels to be understandable because they 

generally included more information in a tabular format than cardmember 

agreements. 

Poor Organization and 

Formatting 

The disclosure documents the consultant evaluated did not use designs, 

including effective organizational structures and formatting, that would 

have made them more useful to consumers. To assess the adequacy of the 

design of the typical large issuer credit card solicitation letters and 

cardmember agreements, the consultant evaluated the extent to which 

these disclosures adhered to generally accepted industry standards for 

491992 National Adult Literacy Survey. The 2003 National Assessment of Adult Literacy 

(renamed from 1992) found that reading comprehension levels did not significantly change 

between 1992 and 2003 and that there was little change in adults' ability to read and 

understand sentences and paragraphs.

50U.S. Securities and Exchange Commission, Plain English Handbook: How to Create Clear 

SEC Disclosure Documents (Washington, D.C.: 1998). The Securities and Exchange 

Commission regulates the issuance of securities to the public, including the information that 

companies provide to their investors. 
Page 39 GAO-06-929 Credit Cards

effective organizational structures and designs intended to make 

documents easy to read. In the absence of best practices and guidelines 

specifically for credit card disclosures, the consultant used knowledge of 

plain language, publications design guidelines, and industry best practices 

and also compared the credit card disclosure documents to the guidelines 

in the Securities and Exchange Commission’s plain English handbook. The 

usability consultant used these standards to identify aspects of the design 

of the typical card disclosure documents that could cause consumers using 

them to encounter problems. 

On the basis of this analysis, the usability consultant concluded that the 

typical credit card disclosures lacked effective organization. For example, 

the disclosure documents frequently placed pertinent information toward 

the end of sentences. Figure 7 illustrates an example taken from the 

cardmember agreement of one of the large issuers that shows that a 

consumer would need to read through considerable amounts of text before 

reaching the important information, in this case the amount of the annual 

percentage rate (APR) for purchases. Best practices would dictate that 

important information—the amount of the APR—be presented first, with 

the less important information—the explanation of how the APR is 

determined—placed last.

Figure 7: Example of Important Information Not Prominently Presented in Typical 

Credit Card Disclosure Documents 

In addition, the disclosure documents often failed to group relevant 

information together. Although one of the disclosure formats mandated by 

law—the Schumer box—has been praised as having simplified the 

presentation of complex information, our consultant observed that the 

amount of information that issuers typically presented in the box 

compromised the benefits of using a tabular format. Specifically, the typical 

credit card solicitation letter, which includes a Schumer box, may be 

Sources: UserWorks, Inc.; Information International Associates. 

Usability consultant’s comments: 

Placing pertinent information, in this

case the APR for purchases, near the 

end of sentences requires readers to 

wade through considerable amounts

of text before reaching important 

information.
Page 40 GAO-06-929 Credit Cards

causing difficulties for consumers because related information generally is 

not grouped appropriately, as shown in figure 8. 

Figure 8: Example of How Related Information Was Not Being Grouped Together in Typical Credit Card Disclosure Documents 

Sources: GAO analysis of data from UserWorks, Inc.; Information International Associates.

Current rate for purchases

How the rate is determined

Usability consultant’s comments: 

Related information, in this case the APR for purchases, is not grouped together, potentially causing difficulties for readers.

How the prime rate is determined
Page 41 GAO-06-929 Credit Cards

As shown in figure 8, information about the APR that would apply to 

purchases made with the card appeared in three different locations. The 

first row includes the current prevailing rate of the purchase APR; text that 

describes how the level of the purchase APR could vary according to an 

underlying rate, such as the prime rate, is included in the third row; and 

text describing how the issuer determines the level of this underlying rate 

is included in the footnotes. According to the consultant, grouping such 

related information together likely would help readers to more easily 

understand the material.

In addition, of the four issuers whose materials were analyzed, three 

provided a single document with all relevant information in a single 

cardmember agreement, but one issuer provided the information in 

separate documents. For example, this issuer disclosed specific 

information about the actual amount of rates and fees in one document and 

presented information about how such rates were determined in another 

document. According to the readability consultant, disclosures in multiple 

documents can be more difficult for the reader to use because they may 

require more work to find information. 

Formatting weaknesses also likely reduced the usefulness of typical credit 

card disclosure documents. The specific formatting issues were as follows: 

• Font sizes. According to the usability consultant’s analysis, many of the 

disclosure documents used font sizes that were difficult to read and 

could hinder consumers’ ability to find information. For example, the 

consultant found extensive use of small and condensed typeface in 

cardmember agreements and in footnotes in solicitation materials when 

best practices would suggest using a larger, more legible font size. 

Figure 9 contains an illustration of how the disclosures used condensed 

text that makes the font appear smaller than it actually is. Multiple 

consumers and consumer groups who provided comments to the 

Federal Reserve noted that credit card disclosures were written in a 

small print that reduces a consumer’s ability to read or understand the 

document. For example, a consumer who provided comments to the 

Federal Reserve referred to the text in card disclosures as “mice type.” 

This example also illustrates how notes to the text, which should be less 

important, were the same size and thus given the same visual emphasis 

as the text inside the box. Consumers attempting to read such 

disclosures may have difficulty determining which information is more 

important. 
Page 42 GAO-06-929 Credit Cards

Figure 9: Example of How Use of Small Font Sizes Reduces Readability in Typical Credit Card Disclosure Documents

Note: Graphic shown is the actual size it appears in issuer disclosure documents. Graphic is 

intentionally portioned off to focus attention to headings.

• Ineffective font placements. According to the usability consultant, some 

issuers’ efforts to distinguish text using different font types sometimes 

had the opposite effect. The consultant found that the disclosures from 

all four issuers emphasized large amounts of text with all capital letters 

and sometimes boldface. According to the consultant, formatting large 

blocks of text in capitals makes it harder to read because the shapes of 

the words disappear, forcing the reader to slow down and study each 

letter (see figure 10). In a comment letter to the Federal Reserve, an 

industry group recommended that boldfaced or capitalized text should 

be used discriminately, because in its experience, excessive use of such 

font types caused disclosures to lose all effectiveness. SEC’s guidelines 

for producing clear disclosures contain similar suggestions. 

Sources: UserWorks, Inc.; Information International Associates.

Condensed 11 pt. text Regular 11 pt. text

Usability

consultant’s

comments: 

Using condensed

text makes the font

appear smaller

than it acutally is.
Page 43 GAO-06-929 Credit Cards

Figure 10: Example of How Use of Ineffective Font Types Reduces Readability in 

Typical Credit Card Disclosure Documents 

• Selecting text for emphasis. According to the usability consultant, most 

of the disclosure documents unnecessarily emphasized specific terms. 

Inappropriate emphasis of such material could distract readers from 

more important messages. Figure 11 contains a passage from one 

cardmember agreement that the readability consultant singled out for 

its emphasis of the term “periodic finance charge,” which is repeated six 

times in this example. According to the consultant, the use of boldface 

and capitalized text calls attention to the word, potentially requiring 

readers to work harder to understand the entire passage’s message.

Figure 11: Example of How Use of Inappropriate Emphasis Reduces Readability in 

Typical Credit Card Disclosure Documents

Sources: UserWorks, Inc.; Information International Associates. 

Usability

consultant’s

comments: 

By emphasizing all 

the text in a paragraph,

nothing is emphasized.

Sources: UserWorks, Inc.; Information International Associates.

Usability

consultant’s

comments: 

Repeated use of 

boldface and caps

calls attention to a

word, potentially 

requiring readers to 

work harder to 

understand the 

passage’s message.
Page 44 GAO-06-929 Credit Cards

• Use of headings. According to the usability consultant, disclosure 

documents from three of the four issuers analyzed contained 

headings that were difficult to distinguish from surrounding text. 

Headings, according to the consultant, provide a visual hierarchy to 

help readers quickly identify information in a lengthy document. 

Good headers are easy to identify and use meaningful labels. Figure 

12 illustrates two examples of how the credit card disclosure 

documents failed to use headings effectively. 

Figure 12: Example of Ineffective and Effective Use of Headings in Typical Credit Card Disclosure Documents

Sources: UserWorks, Inc.; Information International Associates. 

3 

1 

1 

2 

2

Effective heading use (shading added by GAO)

Usability consultant’s comments: 

Headings are easy to identify, but are preceded by an unnecessary string 

of numbers that do not correspond to anything useful like a table of contents.

Headings are not substantially different from the text.

3 

Usability consultant’s comments: 

Headings are easy to distinguish from the surrounding text.

Ineffective heading use (shading added by GAO)
Page 45 GAO-06-929 Credit Cards

In the first example, the headings contained an unnecessary string of 

numbers that the consultant found would make locating a specific topic in 

the text more difficult. As a result, readers would need to actively ignore 

the string of numbers until the middle of the line to find what they wanted. 

The consultant noted that such numbers might be useful if this document 

had a table of contents that referred to the numbers, but it did not. In the 

second example, the consultant noted that a reader’s ability to locate 

information using the headings in this document was hindered because the 

headings were not made more visually distinct, but instead were aligned 

with other text and printed in the same type size as the text that followed. 

As a result, these headings blended in with the text. Furthermore, the 

consultant noted that because the term “Annual Percentage Rates” was 

given the same visual treatment as the two headings in the example, finding 

headings quickly was made even more difficult. In contrast, figure 12 also 

shows an example that the consultant identified in one of the disclosure 

documents that was an effective use of headings. 

• Presentation techniques. According to the usability consultant, the 

disclosure documents analyzed did not use presentation techniques, 

such as tables, bulleted lists, and graphics, that could help to simplify 

the presentation of complicated concepts, especially in the cardmember 

agreements. Best practices for document design suggest using tables 

and bulleted lists to simplify the presentation of complex information. 

Instead, the usability consultant noted that all the cardmember 

agreements reviewed almost exclusively employed undifferentiated 

blocks of text, potentially hindering clear communication of complex 

information, such as the multiple-step procedures issuers use for 

calculating a cardholder’s minimum required payment. Figure 13 below 

presents two samples of text from different cardmember agreements 

describing how minimum payments are calculated. According to the 

consultant, the sample that used a bulleted list was easier to read than 

the one formatted as a paragraph. Also, an issuer stated in a letter to the 

Federal Reserve that their consumers have welcomed the issuer’s use of 

bullets to format information, emphasizing the concept that the visual 

layout of information either facilitates or hinders consumer 

understanding. 
Page 46 GAO-06-929 Credit Cards

Figure 13: Example of How Presentation Techniques Can Affect Readability in Typical Credit Card Disclosure Documents

Excessive Complexity and 

Volume of Information 

The content of typical credit card disclosure documents generally was 

overly complex and presented in too much detail, such as by using 

unfamiliar or complex terms to describe simple concepts. For example, the 

usability consultant identified one cardmember agreement that used the 

term “rolling consecutive twelve billing cycle period” instead of saying 

“over the course of the next 12 billing statements” or “next 12 months”—if 

that was appropriate. Further, a number of consumers, consumer advocacy 

groups, and government and private entities that have provided comments 

to the Federal Reserve agreed that typical credit card disclosures are 

written in complex language that hinders consumers’ understanding. For 

example, a consumer wrote that disclosure documents were “loaded with 

booby traps designed to trip consumers, and written in intentionally 

impenetrable and confusing language.” One of the consumer advocacy 

groups stated the disclosures were “full of dense, impenetrable legal jargon 

that even lawyers and seasoned consumer advocates have difficulty 

understanding.” In addition, the consultant noted that many of the 

disclosures, including solicitation letters and cardmember agreements, 

contained overly long and complex sentences that increase the effort a 

reader must devote to understanding the text. Figure 14 contains two 

Sources: UserWorks, Inc.; Information International Associates. 

Usability consultant’s comments: 

Expressing a complicated, multistep process as prose makes

it difficult to understand the relationships between steps. 

Usability consultant’s comments: 

By using bullet points, it is much easier to see multiple steps

broken out into individual steps and when they are applied. 
Page 47 GAO-06-929 Credit Cards

examples of instances in which the disclosure documents used uncommon 

words and phrases to express simple concepts. 

Figure 14: Examples of How Removing Overly Complex Language Can Improve Readability in Typical Credit Card Disclosure 

Documents

In addition, the disclosure documents regularly presented too much or 

irrelevant detail. According to the usability consultant’s analysis, the credit 

card disclosures often contained superfluous information. For example, 

figure 15 presents an example of text from one cardmember agreement that 

described the actions the issuer would take if its normal source for the rate 

information used to set its variable rates—The Wall Street Journal—were 

to cease publication. Including such an arguably unimportant detail 

lengthens and makes this disclosure more complex. According to SEC best 

practices for creating clear disclosures, disclosure documents are more 

effective when they adhere to the rule that less is more. By omitting 

unnecessary details from disclosure documents, the usability consultant 

indicated that consumers would be more likely to read and understand the 

information they contain. 

Sources: UserWorks, Inc.; Information International Associates.

101

words

69

words

50

words Usability consultant’s rewrite: 

If you pay late or go over your credit limit twice in a year, the interest rate you pay on most things goes up to the default rate, currently 30.49%. It will go back 

down when you pay on time and do not go over your credit limit for six months. 

20

words Usability consultant’s rewrite: 

You can use this card to buy things, pay off other accounts, transfer

balances, or keep from bouncing a check.
Page 48 GAO-06-929 Credit Cards

Figure 15: Example of Superfluous Detail in Typical Credit Card Disclosure 

Documents

Consumer Confusion 

Indicated That Disclosures 

Were Not Communicating 

Credit Card Cost 

Information Clearly 

Many of the credit cardholders that were tested and interviewed as part of 

our review exhibited confusion over various fees, practices, and other 

terms that could affect the cost of using their credit cards. To understand 

how well consumers could use typical credit card disclosure documents to 

locate and understand information about card fees and other practices, the 

usability consultant with whom we contracted used a sample of 

cardholders to perform a usability assessment of the disclosure documents 

from the four large issuers. As part of this assessment, the consultant 

conducted one-on-one sessions with a total of 12 cardholders so that each 

set of disclosures, which included a solicitation letter and a cardmember 

agreement, was reviewed by 3 cardholders.51 Each of these cardholders 

were asked to locate information about fee levels and rates, the 

circumstances in which they would be imposed, and information about 

changes in card terms. The consultant also tested the cardholders’ ability to 

explain various practices used by the issuer, such as the process for 

determining the amount of the minimum monthly payment, by reading the 

disclosure documents. Although the results of the usability testing cannot 

Sources: UserWorks, Inc.; Information International Associates. 

Usability

consultant’s comments: 

This section provides

superfluous information on 

how the prime rate is

determined. For example, the 

explanation of the actions if 

the Wall Street Journal was

to cease publication. 

51According to the consultant, testing with small numbers of individuals can generally 

identify many of the problems that can affect the readability and usability of materials.
Page 49 GAO-06-929 Credit Cards

be used to make generalizations about all cardholders, the consultant 

selected cardholders based on the demographics of the U.S. adult 

population, according to age, education level, and income, to ensure that 

the cardholders tested were representative of the general population. In 

addition, as part of this review, we conducted one-on-one interviews with 

112 cardholders to learn about consumer behavior and knowledge about 

various credit card terms and practices.52 Although we also selected these 

cardholders to reflect the demographics of the U.S. adult population, with 

respect to age, education level, and income, the results of these interviews 

cannot be generalized to the population of all U.S. cardholders.53

Based on the work with consumers, specific aspects of credit card terms 

that apparently were not well understood included: 

• Default interest rates. Although issuers can penalize cardholders for 

violating the terms of the card, such as by making late payments or by 

increasing the interest rates in effect on the cardholder’s account to 

rates as high as 30 percent or more, only about half of the cardholders 

that the usability consultant tested were able to use the typical credit 

card disclosure documents to successfully identify the default rate and 

the circumstances that would trigger rate increases for these cards. In 

addition, the usability consultant observed the cardholders could not 

identify this information easily. Many also were unsure of their answers, 

especially when rates were expressed as a “prime plus” number, 

indicating the rate varied based on the prime rate. Locating information 

in the typical cardmember agreement was especially difficult for 

cardholders, as only 3 of 12 cardholders were able to use such 

documents to identify the default interest rate applicable to the card. 

More importantly, only about half of the cardholders tested using 

solicitation letters were able to accurately determine what actions could 

potentially cause the default rate to be imposed on these cards.

• Other penalty rate increases. Although card issuers generally reserve 

the right to seek to raise a cardholder’s rate in other situations, such as 

when a cardholder makes a late payment to another issuer’s credit card, 

(even if the cardholder has not defaulted on the cardmember 

52We also used this data in a previous report to show cardholder preferences for customized 

information in their monthly billing statements about the consequences of making minimum 

payments on their outstanding balance. GAO-06-434.

53For more information about our scope and methodology, see appendix I. 
Page 50 GAO-06-929 Credit Cards

agreement), about 71 percent of the 112 cardholders we interviewed 

were unsure or did not believe that issuers could increase their rates in 

such a case. In addition, about two-thirds of cardholders we interviewed 

were unaware or did not believe that a drop in their credit score could 

cause an issuer to seek to assess higher interest rates on their account.54

• Late payment fees. According to the usability assessment, many of the 

cardholders had trouble using the disclosure documents to correctly 

identify what would occur if a payment were to be received after the due 

date printed in the billing statement. For example, nearly half of the 

cardholders were unable to use the cardmember agreement to 

determine whether a payment would be considered late based on the 

date the issuer receives the payment or the date the payment was mailed 

or postmarked. Additionally, the majority of the 112 cardholders we 

interviewed also exhibited confusion over late fees: 52 percent indicated 

that they have been surprised when their card company applied a fee or 

penalty to their account. 

• Using a credit card to obtain cash. Although the cardholders tested by 

the consultant generally were able to use the disclosures to identify how 

a transaction fee for a cash advance would be calculated, most were 

unable to accurately use this information to determine the transaction 

fee for withdrawing funds, usually because they neglected to consider 

the minimum dollar amount, such as $5 or $10, that would be assessed. 

• Grace periods. Almost all 12 cardholders in the usability assessment 

had trouble using the solicitation letters to locate and define the grace 

period, the period during which the a cardholder is not charged interest 

on a balance. Instead, many cardholders incorrectly indicated that the 

grace period was instead when their lower, promotional interest rates 

would expire. Others incorrectly indicated that it was the amount of 

time after the monthly bill’s due date that a cardholder could submit a 

payment without being charged a late fee. 

• Balance computation method. Issuers use various methods to calculate 

interest charges on outstanding balances, but only 1 of the 12 

cardholders the usability consultant tested correctly described average 

54A credit score is a number, roughly between 300 and 800, that reflects the credit history 

detailed by a person's credit report. Lenders use borrowers’ credit scores in the process of 

assigning rates and terms to the loans they make.
Page 51 GAO-06-929 Credit Cards

daily balance, and none of the cardholders were able to describe twocycle average daily balance accurately. At least nine letters submitted to 

the Federal Reserve in connection with its review of credit card 

disclosures noted that few consumers understand balance computation 

methods as stated in disclosure documents. 

Perhaps as a result of weaknesses previously described, cardholders 

generally avoid using the documents issuers provide with a new card to 

improve their understanding of fees and practices. For example, many of 

the cardholders interviewed as part of this report noted that the length, 

format, and complexity of disclosures led them to generally disregard the 

information contained in them. More than half (54 percent) of the 112 

cardholders we interviewed indicated they read the disclosures provided 

with a new card either not very closely or not at all. Instead, many 

cardholders said they would call the issuer’s customer service 

representatives for information about their card’s terms and conditions. 

Cardholders also noted that the ability of issuers to change the terms and 

conditions of a card at any time led them to generally disregard the 

information contained in card disclosures. Regulation Z allows card issuers 

to change the terms of credit cards provided that issuers notify cardholders 

in writing within 15 days of the change. As a result, the usability consultant 

observed some participants were dismissive of the information in the 

disclosure documents because they were aware that issuers could change 

anything. 

Federal Reserve Effort to 

Revise Regulations Presents 

Opportunity to Improve 

Disclosures

With liability concerns and outdated regulatory requirements seemingly 

explaining the weaknesses in card disclosures, the Federal Reserve has 

begun efforts to review its requirements for credit card disclosures. 

Industry participants have advocated various ways in which the Federal 

Reserve can act to improve these disclosures and otherwise assist 

cardholders. 

Regulations and Guidance May 

Contribute to Weaknesses in 

Current Disclosures 

Several factors may help explain why typical credit card disclosures exhibit 

weaknesses that reduce their usefulness to cardholders. First, issuers make 

decisions about the content and format of their disclosures to limit 

potential legal liability. Issuer representatives told us that the disclosures 

made in credit card solicitations and cardmember agreements are written 

for legal purposes and in language that consumers generally could not 

understand. For example, representatives for one large issuer told us they 

cannot always state information in disclosures clearly because the 

increased potential that simpler statements would be misinterpreted would 
Page 52 GAO-06-929 Credit Cards

expose them to litigation. Similarly, a participant of a symposium on credit 

card disclosures said that disclosures typically became lengthier after the 

issuance of court rulings on consumer credit issues. Issuers can attempt to 

reduce the risk of civil liability based on their disclosures by closely 

following the formats that the Federal Reserve has provided in its model 

forms and other guidance. According to the regulations that govern card 

disclosures, issuers acting in good faith compliance with any interpretation 

issued by a duly authorized official or employee of the Federal Reserve are 

afforded protection from liability.55

Second, the regulations governing credit card disclosures have become 

outdated. As noted earlier in this report, TILA and Regulation Z that 

implements the act’s provisions are intended to ensure that consumers 

have adequate information about potential costs and other applicable 

terms and conditions to make appropriate choices among competing credit 

cards. The most recent comprehensive revisions to Regulation Z’s open-end 

credit rules occurred in 1989 to implement the provisions of the Fair Credit 

and Charge Card Act. As we have found, the features and cost structures of 

credit cards have changed considerably since then. An issuer 

representative told us that current Schumer box requirements are not as 

useful in presenting the more complicated structures of many current 

cards. For example, they noted that it does not easily accommodate 

information about the various cardholder actions that could trigger rate 

increases, which they argued is now important information for consumers 

to know when shopping for credit. As a result, some of the specific 

requirements of Regulation Z that are intended to ensure that consumers 

have accurate information instead may be diminishing the usefulness of 

these disclosures. 

Third, the guidance that the Federal Reserve provides issuers may not be 

consistent with guidelines for producing clear, written documents. Based 

on our analysis, many issuers appear to adhere to the formats and model 

forms that the Federal Reserve staff included in the Official Staff 

Interpretations of Regulation Z, which are prepared to help issuers comply 

with the regulations. For example, the model forms present text about how 

rates are determined in footnotes. However, as discussed previously, not 

grouping related information undermines the usability of documents. The 

55Under Section 130(f) of the TILA, creditors are protected from civil liability for any act 

done or omitted in good faith in conformity with any interpretation issued by a duly 

authorized official or employee of the Federal Reserve System. 15 U.S.C. § 1640.
Page 53 GAO-06-929 Credit Cards

Schumer box format requires a cardholder to look in several places, such 

as in multiple rows in the table and in notes to the table, for information 

about related aspects of the card. Similarly, the Federal Reserve’s model 

form for the Schumer box recommends that the information about the 

transaction fee and interest rate for cash advances be disclosed in different 

areas.

Finally, the way that issuers have implemented regulatory guidance may 

have contributed to the weaknesses typical disclosure materials exhibited. 

For example, in certain required disclosures, the terms “annual percentage 

rate” and “finance charge,” when used with a corresponding amount or 

percentage rate, are required to be more conspicuous than any other 

required disclosures.56 Staff guidance suggests that such terms may be 

made more conspicuous by, for example, capitalizing these terms when 

other disclosures are printed in lower case or by displaying these terms in 

larger type relative to other disclosures, putting them in boldface print or 

underlining them.57 Our usability consultant’s analysis found that card 

disclosure documents that followed this guidance were less effective 

because they placed an inappropriate emphasis on terms. As shown 

previously in figure 11, the use of bold and capital letters to emphasize the 

term “finance charge” in the paragraph unnecessarily calls attention to that 

term, potentially distracting readers from information that is more 

important. The excerpt shown in figure 11 is from an initial disclosure 

document which, according to Regulation Z, is subject to the “more 

conspicuous” rule requiring emphasis of the terms “finance charge” and 

“annual percentage rate.”

Suggestions for Improving 

Disclosures Included Obtaining 

Input from Consumers 

With the intention of improving credit card disclosures, the Federal 

Reserve has begun efforts to develop new regulations. According to its 

2004 notice seeking public comments on Regulation Z, the Federal Reserve 

hopes to address the length, complexity, and superfluous information of 

disclosures and produce new disclosures that will be more useful in 

helping consumers compare credit products.58 After the passage of the 

56See generally 12 C.F.R. 225.5(a)(3) and the corresponding staff commentary.

57Notwithstanding the more conspicuous rule, Regulation Z expressly provides that the 

annual percentage rate for purchases required to be disclosed in the Schumer box must be 

in at least 18-point type. 12 C.F.R. § 226.5a(b)(1).

58Truth in Lending, 69 Fed. Reg. 70925 (advanced notice of proposed rulemaking, published 

Dec. 8, 2004).
Page 54 GAO-06-929 Credit Cards

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 

(Bankruptcy Act) in October of that year, which included amendments to 

TILA, the Federal Reserve sought additional comments from the public to 

prepare to implement new disclosure requirements including disclosures 

intended to advise consumers of the consequences of making only 

minimum payments on credit cards.59 According to Federal Reserve staff, 

new credit card disclosure regulations may not be in effect until sometime 

in 2007 or 2008 because of the time required to conduct consumer testing, 

modify the existing regulations, and then seek comment on the revised 

regulation.

Industry participants and others have provided input to assist the Federal 

Reserve in this effort. Based on the interviews we conducted, documents 

we reviewed, and our analysis of the more than 280 comment letters 

submitted to the Federal Reserve, issuers, consumer groups, and others 

provided various suggestions to improve the content and format of credit 

card disclosures, including: 

• Reduce the amount of information disclosed. Some industry 

participants said that some of the information currently presented in the 

Schumer box could be removed because it is too complicated to 

disclose meaningfully or otherwise lacks importance compared to other 

credit terms that are arguably more important when choosing among 

cards. Such information included the method for computing balances 

and the amount of the minimum finance charge (the latter because it is 

typically so small, about 50 cents in 2005). 

• Provide a shorter document that summarizes key information. Some 

industry participants advocated that all key information that could 

significantly affect a cardholder’s costs be presented in a short 

document that consumers could use to readily compare across cards, 

with all other details included in a longer document. For example, 

although the Schumer box includes several key pieces of information, it 

does not include other information that could be as important for 

consumer decisions, such as what actions could cause the issuer to raise 

the interest rate to the default rate. 

59Truth in Lending, 70 Fed. Reg. 60235 (request for comments; extension of comment period, 

published October 17, 2005).
Page 55 GAO-06-929 Credit Cards

• Revise disclosure formats to improve readability. Various suggestions 

were made to improve the readability of card disclosures, including 

making more use of tables of contents, making labels and headings more 

prominent, and presenting more information in tables instead of in text. 

Disclosure documents also could use consistent wording that could 

allow for better comparison of terms across cards.

Some issuers and others also told us that the new regulations should allow 

for more flexibility in card disclosure formats. Regulations mandating 

formats and font sizes were seen as precluding issuers from presenting 

information in more effective ways. For example, one issuer already has 

conducted market research and developed new formats for the Schumer 

box that it says are more readable and contain new information important 

to choosing cards in today’s credit card environment, such as cardholder 

actions that would trigger late fees or penalty interest rate increases.

In addition to suggestions about content, obtaining the input of consumers, 

and possibly other professionals, was also seen as an important way to 

make any new disclosures more useful. For example, participants in a 

Federal Reserve Bank symposium on credit card disclosures recommended 

that the Federal Reserve obtain the input of marketers, researchers, and 

consumers as part of developing new disclosures. OCC staff suggested that 

the Federal Reserve also employ qualitative research methods such as indepth interviews with consumers and others and that it conduct usability 

testing. 

Consumer testing can validate the effectiveness or measure the 

comprehension of messages and information, and detect document design 

problems. Many issuers are using some form of market research to test 

their disclosure materials and have advocated improving disclosures by 

seeking the input of marketers, researchers, and consumers.60 SEC also has 

recently used consumer focus groups to test the format of new disclosures 

related to mutual funds. According to an SEC staff member who 

participated in this effort, their testing provided them with valuable 

information on what consumers liked and disliked about some of the initial 

forms that the regulator had drafted. In some cases, they learned that 

60Consumer testing can be conducted in several ways, such as focus groups, where 

consumers analyze products in a group setting, and conjoint analysis, which helps 

companies understand the extent to which consumers prefer certain product attributes over 

others. 
Page 56 GAO-06-929 Credit Cards

information that SEC staff had considered necessary to include was not 

seen as important by consumers. As a result, they revised the formats for 

these disclosures substantially to make them simpler and may use graphics 

to present more information rather than text.61 According to Federal 

Reserve staff, they have begun to involve consumers in the development of 

new credit card disclosures. According to Federal Reserve staff, they have 

already conducted some consumer focus groups. In addition, they have 

contracted with a design consultant and a market research firm to help 

them develop some disclosure formats that they can then use in one-on-one 

testing with consumers. However, the Federal Reserve staff told us they 

recognize the challenge of designing disclosures that include all key 

information in a clear manner, given the complexity of credit card products 

and the different ways in which consumers use credit cards. 

Although Credit Card 

Penalty Fees and 

Interest Could Increase 

Indebtedness, the 

Extent to Which They 

Have Contributed to 

Bankruptcies Was 

Unclear

The number of consumers filing for bankruptcy has risen more than sixfold over the past 25 years, and various factors have been cited as possible 

explanations. While some researchers have pointed to increases in total 

debt or credit card debt in particular, others found that debt burdens and 

other measures of financial distress had not increased and thus cite other 

factors, such as a general decline in the stigma of going bankrupt or the 

potentially increased costs of major life events such as health problems or 

divorce. Some critics of the credit card industry have cited penalty interest 

and fees as leading to increased financial distress; however, no 

comprehensive data existed to determine the extent to which these charges 

were contributing to consumer bankruptcies. Data provided by the six 

largest card issuers indicated that unpaid interest and fees represented a 

small portion of the amounts owed by cardholders that filed for 

bankruptcy; however, these data alone were not sufficient to determine any 

relationship between the charges and bankruptcies filed by cardholders. 

Researchers Cited Various 

Factors as Explanations for 

Rise in Consumer 

Bankruptcies 

According to U.S. Department of Justice statistics, consumer bankruptcy 

filings generally rose steadily from about 287,000 in 1980 to more than 2 

million as of December 31, 2005, which represents about a 609 percent 

61Securities Exchange Act Release No. 33-8544 (Feb. 28, 2005).
Page 57 GAO-06-929 Credit Cards

increase over the last 25 years.62 Researchers have cited a number of 

factors as possible explanations for the long-term trend. 

Increase in Household 

Indebtedness

The total debt of American households is composed of mortgages on real 

estate, which accounts for about 80 percent of the total, and consumer 

credit debt, which includes revolving credit, such as balances owed on 

credit cards, and nonrevolving credit, primarily consisting of auto loans. 

According to Federal Reserve statistics, consumers’ use of debt has 

expanded over the last 25 years, increasing more than sevenfold from $1.4 

trillion in 1980 to about $11.5 trillion in 2005. Some researchers pointed to 

this rise in overall indebtedness as contributing to the rise in bankruptcies. 

For example, a 2000 Congressional Budget Office summary of bankruptcy 

research noted that various academic studies have argued that consumer 

bankruptcies are either directly or indirectly caused by heavy consumer 

indebtedness. 

Rather than total debt, some researchers and others argue that the rise in 

bankruptcies is related to the rise in credit card debt in particular. 

According to the Federal Reserve’s survey of consumer debt, the amount of 

credit card debt reported as outstanding rose from about $237 billion to 

more than $802 billion—a 238 percent increase between 1990 and 2005.63

One academic researcher noted that the rise in bankruptcies and chargeoffs by banks in credit card accounts grew along with the increase in credit 

card debt during the 1973 to 1996 period he examined.64 According to some 

consumer groups, the growth of credit card debt is one of the primary 

explanations of the increased prevalence of bankruptcies in the United 

States. For example, one group noted in a 2005 testimony before Congress 

that growth of credit card debt—particularly among lower and moderate 

income households, consumers with poor credit scores, college students, 

62Bankruptcy filings sharply increased recently, with filings in 2005 30 percent higher than in 

2004. This increase likely resulted from the accelerated rate of filing that occurred in the 

months before the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 

which tightened eligibility for filing, became effective on October 17, 2005.

63In addition to capturing amounts outstanding on credit cards, the number reported in the 

Federal Reserve’s survey of consumer debt for revolving debt also includes other types of 

revolving debt. However, Federal Reserve staff familiar with the survey’s results indicated 

that the vast majority of the amount reported as revolving debt is from credit cards. 

64L. Ausubel, “Credit Card Defaults, Credit Card Profits, and Bankruptcy,” The American 

Bankruptcy Law Journal, 71 (Spring 1997).
Page 58 GAO-06-929 Credit Cards

older Americans, and minorities—was contributing to the rise in 

bankruptcies.65

However, other evidence indicates that increased indebtedness has not 

severely affected the financial condition of U.S. households in general. For 

example: 

• Some researchers note that the ability of households to make payments 

on debt appears to be keeping pace. For example, total household debt 

levels as a percentage of income has remained relatively constant since 

the 1980s. According to the Federal Reserve, the aggregate debt burden 

ratio—which covers monthly aggregate required payments of all 

households on mortgage debt and both revolving and non-revolving 

consumer loans relative to the aggregate monthly disposable income of 

all households—for U.S. households has been above 13 percent in the 

last few years but generally fluctuated between 11 percent and 14 

percent from 1990 to 2005, similar to the levels observed during the 

1980s. According to one researcher, although the debt burden ratio has 

risen since the 1980s, the increase has been gradual and therefore 

cannot explain the six-fold increase in consumer bankruptcy filings over 

the same period. 

• Credit card debt remains a small portion of overall household debt, even 

among households with the lowest income levels. According to the 

Federal Reserve, credit card balances as a percentage of total household 

debt have declined from 3.9 percent of total household debt in 1995 to 

just 3.0 percent as of 2004. 

• The proportion of households that could be considered to be in financial 

distress does not appear to be increasing significantly. According to the 

Federal Reserve Board’s Survey of Consumer Finances, the proportion 

of households that could be considered to be in financial distress—

those that report debt-to-income ratios exceeding 40 percent and that 

have had at least one delinquent payment within the last 60 days—was 

relatively stable between 1995 and 2004. Further, the proportion of the 

65Consumer Federation of America testimony before the Committee on Banking, Housing, 

and Urban Affairs of the United States Senate, “Examining the Current Legal and 

Regulatory Requirements and Industry Practices for Credit Card Issuers with Respect to 

Consumer Disclosures and Marketing Efforts,” 109th Congress, 2nd sess., May 17, 2005. We 

reported on issues relating to college students and credits in 2001. See GAO, Consumer 

Finance: College Students and Credit Cards, GAO-01-773 (Washington, D.C.; June 20, 2001).
Page 59 GAO-06-929 Credit Cards

lowest-income households exhibiting greater levels of distress was 

lower in 2004 than it was in the 1990s.

Other Explanations With the effect of increased debt unclear, some researchers say that other 

factors may better explain the surge in consumer bankruptcy filings over 

the past 25 years. For example, the psychological stigma of declaring 

bankruptcy may have lessened. One academic study examined a range of 

variables that measured the credit risk (risk of default) of several hundred 

thousand credit card accounts and found that because the bankruptcy rate 

for the accounts was higher than the credit-risk variables could explain, the 

higher rate must be the result of a reduced level of stigma associated with 

filing.66 However, others have noted that reliably measuring stigma is 

difficult. Some credit card issuers and other industry associations also have 

argued that the pre-2005 bankruptcy code was too debtor-friendly and 

created an incentive for consumers to borrow beyond the ability to repay 

and file for bankruptcy.

In addition to the possibly reduced stigma, some academics, consumer 

advocacy groups, and others noted that the normal life events that reduce 

incomes or increase expenses for households may have a more serious 

effect today. Events that can reduce household incomes include job losses, 

pay cuts, or having a full-time position converted to part-time work. With 

increasing health care costs, medical emergencies can affect household 

expenses and debts more significantly than in the past, and, with more 

families relying on two incomes, so can divorces. As a result, one 

researcher explains that while these risks have always faced households, 

their effect today may be more severe, which could explain higher 

bankruptcy rates.67

Researchers who assert that life events are the primary explanation for 

bankruptcy filings say that the role played by credit cards can vary. They 

acknowledged that credit card debt can be a contributing factor to a 

bankruptcy filing if a person’s income is insufficient to meet all financial 

obligations, including payments to credit card issuers. For example, some 

individuals experiencing an adverse life event use credit cards to provide 

66David B. Gross and Nicholas S. Souleles, “Explaining the Increase in Bankruptcy and 

Delinquency: Stigma Versus Risk-Composition.” Mimeo, University of Chicago, (August 28, 

1998).

67Elizabeth Warren, Leo Gottlieb Professor of Law, Harvard Law School, “The Growing 

Threat to Middle Class Families,” Brooklyn Law Review, (April 2003).
Page 60 GAO-06-929 Credit Cards

additional funds to satisfy their financial obligations temporarily but 

ultimately exhaust their ability to meet all obligations. However, because 

the number of people that experience financially troublesome life events 

likely exceeds the number of people who file for bankruptcy, credit cards 

in other cases may serve as a critical temporary source of funding they 

needed to avert a filing until that person’s income recovers or expenses 

diminish. (Appendix II provides additional detail about the factors that may 

have affected the rise in consumer bankruptcy filings and its relationship 

with credit card debt.)

The Extent to Which Credit 

Card Penalty Interest and 

Fees Contribute to 

Consumer Bankruptcies 

Remains Controversial in 

the Absence of 

Comprehensive Data

With very little information available on the financial condition of 

individuals filing for bankruptcy, assessing the role played by credit card 

debt, including penalty interest and fees, is difficult. According to 

Department of Justice officials who oversee bankruptcy trustees in most 

bankruptcy courts, the documents submitted as part of a bankruptcy filing 

show the total debt owed to each card issuer but not how much of this total 

consists of unpaid principal, interest, or fees. Similarly, these Justice 

officials told us that the information that credit card issuers submit when 

their customers reaffirm the debts owed to them—known as proofs of 

claim—also indicate only the total amount owed. Likewise, the amount of 

any penalty interest or fees owed as part of an outstanding credit card 

balance is generally not required to be specified when a credit card issuer 

seeks to obtain a court judgment that would require payment from a 

customer as part of a collection case. 

Opinions on the Link between 

Credit Card Practices and 

Bankruptcies Vary

Although little comprehensive data exist, some consumer groups and 

others have argued that penalty interest and fees materially harm the 

financial condition of some cardholders, including those that later file for 

bankruptcy. Some researchers who study credit card issues argue that high 

interest rates (applicable to standard purchases) for higher risk 

cardholders, who are also frequently lower-income households, along with 

penalty and default interest rates and fees, contribute to more consumer 

bankruptcy filings. Another researcher who has studied issues relating to 

credit cards and bankruptcy asserted that consumers focus too much on 

the introductory purchase interest rates when shopping for credit cards 

and, as a result, fail to pay close attention to penalty interest rates, default 

clauses, and other fees that may significantly increase their costs later. 

According to this researcher, it is doubtful that penalty fees (such as late 

fees and over-limit fees) significantly affect cardholders’ debt levels, but 

accrued interest charges—particularly if a cardholder is being assessed a 
Page 61 GAO-06-929 Credit Cards

high penalty interest rate—can significantly worsen a cardholder’s financial 

distress. 

Some consumer advocacy groups and academics say that the credit card 

industry practice of raising cardholder interest rates for default or 

increased risky behavior likely has contributed to some consumer 

bankruptcy filings. According to these groups, cardholders whose rates are 

raised under such practices can find it more difficult to reduce their credit 

card debt and experience more rapid declines in their overall financial 

conditions as they struggle to make the higher payments that such interest 

rates may entail. As noted earlier in this report, card issuers have generally 

ceased practicing universal default, although representatives for four of the 

six issuers told us that they might increase their cardholder’s rates if they 

saw indications that the cardholder’s risk has increased, such as how well 

they were making payments to other creditors. In such cases, the card 

issuers said they notify the cardholders in advance, by sending a change in 

terms notice, and provide an option to cancel the account but keep the 

original terms and conditions while paying off the balance. 

Some organizations also have criticized the credit card industry for 

targeting lower-income households that they believe may be more likely to 

experience financial distress or file for bankruptcy. One of the criticisms 

these organizations have made is that credit card companies have been 

engaging in bottom-fishing by providing increasing amounts of credit to 

riskier lower-income households that, as a result, may incur greater levels 

of indebtedness than appropriate. For example, an official from one 

consumer advocacy group testified in 2005 that card issuers target lowerincome and minority households and that this democratization of credit 

has had serious negative consequences for these households, placing them 

one financial emergency away from having to file for bankruptcy.68 Some 

consumer advocacy group officials and academics noted that card issuers 

market high-cost cards, with higher interest rates and fees, to customers 

with poor credit histories—called subprime customers—including some 

just coming out of bankruptcy. However, as noted earlier, Federal Reserve 

survey data indicate that the proportion of lower-income households—

those with incomes below the fortieth percentile—exhibiting financial 

distress has not increased since 1995. In addition, in a June 2006 report that 

the Federal Reserve Board prepared for Congress on the relationship 

68See above: Consumer Federation of America testimony before the Committee on Banking, 

Housing, and Urban Affairs of the United States Senate on May 17, 2005.
Page 62 GAO-06-929 Credit Cards

between credit cards and bankruptcy, it stated that credit card issuers do 

not solicit customers or extend credit to them indiscriminately or without 

assessing their ability to repay debt as issuers review all received 

applications for risk factors.69 

In addition, representatives of credit card issuers argued that they do not 

offer credit to those likely to become financially bankrupt because they do 

not want to experience larger losses from higher-risk borrowers. Because 

card accounts belonging to cardholders that filed for bankruptcy account 

for a sizeable portion of issuers’ charge-offs, card issuers do not want to 

acquire new customers with high credit risk who may subsequently file for 

bankruptcy. However, one academic researcher noted that, if card issuers 

could increase their revenue and profits by offering cards to more 

customers, including those with lower creditworthiness, they could 

reasonably be expected to do so until the amount of expected losses from 

bankruptcies becomes larger than the expected additional revenues from 

the new customers. 

In examining the relationship between the consumer credit industry and 

bankruptcy, the Federal Reserve Board’s 2006 report comes to many of the 

same conclusions as the studies of other researchers we reviewed. The 

Federal Reserve Board’s report notes that despite large growth in the 

proportion of households with credit cards and the rise in overall credit 

card debt in recent decades, the debt-burden ratio and other potential 

measures of financial distress have not significantly changed over this 

period. The report also found that, while data on bankruptcy filings 

indicate that most filers have accumulated consumer debt and the 

proportion of filings and rise in revolving consumer debt have risen in 

tandem, the decision to file for bankruptcy is complex and tends to be 

driven by distress arising from life events such as job loss, divorce, or 

uninsured illness.

Penalty Interest and Fees Can 

Affect Cardholders’ Ability to 

Reduce Outstanding Balances 

While the effect of credit card penalty interest charges and fees on 

consumer bankruptcies was unclear, such charges do reduce the ability of 

cardholders to reduce their overall indebtedness. Generally, any penalty 

charges that cardholders pay would consume funds that could have been 

used to repay principal. Figure 16 below, compares two hypothetical 

69Board of Governors of the Federal Reserve System, Report to the Congress on Practices of 

the Consumer Credit Industry in Soliciting and Extending Credit and their Effects on 

Consumer Debt and Insolvency (Washington, D.C.: June 2006). 
Page 63 GAO-06-929 Credit Cards

cardholders with identical initial outstanding balances of $2,000 that each 

make monthly payments of $100. The figure shows how the total amounts 

of principal are paid down by each of these two cardholders over the 

course of 12 months, if penalty interest and fees apply. Specifically, 

cardholder A (1) is assessed a late payment fee in three of those months 

and (2) has his interest rate increased to a penalty rate of 29 percent after 6 

months, while cardholder B does not experience any fees or penalty 

interest charges. At the end of 12 months, the penalty and fees results in 

cardholder A paying down $260 or 27 percent less of the total balance owed 

than does cardholder B who makes on-time payments for the entire period. 

Figure 16: Hypothetical Impact of Penalty Interest and Fee Charges on Two Cardholders 

0

200

400

600

800

1,000

1 2 3 4 5 6 7 8 9 10 11 12

Dollars Dollars

Months

Months

0

50

100

150

200

250

300

0

50

100

150

200

250

300

1 12 2 3 4 5 6 7 8 9 10 11

Cumulative principal paid

Cumulative additional 

interest and fees cardholder A pays

$964.53

$704.47

$260.06

Cardholder B (no fees or interest rate changes)

Cardholder A (late payment fee for 3 months and rate increase to the 29% penalty rate after 6 months)

Additional interest and payments paid by Cardholder A

$100 monthly

payments made

Source: GAO.
Page 64 GAO-06-929 Credit Cards

In Some Court Cases, 

Cardholders Paid Significant 

Amounts of Penalty Interest and 

Fees

In reviewing academic literature, hearings, and comment letters to the 

Federal Reserve, we identified some court cases, including some involving 

the top six issuers, that indicated that cardholders paid large amounts of 

penalty interest and fees. For example: 

• In a collections case in Ohio, the $1,963 balance on one cardholder’s 

credit card grew by 183 percent to $5,564 over 6 years, despite the 

cardholder making few new purchases. According to the court’s 

records, although the cardholder made payments totaling $3,492 over 

this period, the holder’s balance grew as the result of fees and interest 

charges. According to the court’s determinations, between 1997 and 

2003, the cardholder was assessed a total of $9,056, including $1,518 in 

over-limit fees, $1,160 in late fees, $369 in credit insurance, and $6,009 in 

interest charges and other fees. Although the card issuer had sued to 

collect, the judge rejected the issuer’s collection demand, noting that the 

cardholder was the victim of unreasonable, unconscionable practices.70

• In a June 2004 bankruptcy case filed in the U.S. Bankruptcy Court for 

the Eastern District of Virginia, the debtor objected to the proofs of 

claim filed by two companies that had been assigned the debt 

outstanding on two of the debtor’s credit cards. One of the assignees 

submitted monthly statements for the credit card account it had 

assumed. The court noted that over a two-year period (during which 

balance on the account increased from $4,888 to $5,499), the debtor 

made only $236 in purchases on the account, while making $3,058 in 

payments, all of which had gone to pay finance charges, late charges, 

over-limit fees, bad check fees and phone payment fees.71

• In a bankruptcy court case filed in July 2003 in North Carolina, 18 

debtors filed objections to the claims by one card issuer of the amounts 

owed on their credit cards.72 In response to an inquiry by the judge, the 

card issuer provided data for these accounts that showed that, in the 

70“Comments of the National Consumer Law Center et al. regarding Advance Notice of 

Proposed Rulemaking Review of the Revolving Credit Rules of Regulation Z,” p. 7-9.

71McCarthy vs. eCast Settlement Corporation et al., No.04-10493-SSM (Bankr. E.D. Va. filed 

June 9, 2004).

72See Blair v. Capital One Bank, No. 02-11400, Amended Order Overruling Objection to 

Claim(s)s (Bankr. W.D. NC filed Feb. 10, 2004) (disposing of, on a consolidated basis, 

similar objections filed in 18 separate Chapter 13 cases against a common creditor) 

(Additional docket numbers omitted.).
Page 65 GAO-06-929 Credit Cards

aggregate, 57 percent of the amounts owed by these 18 accounts at time 

of their bankruptcy filings represented interest charges and fees. 

However, the high percentage of interest and fees on these accounts 

may stem from the size of these principal balances, as some were as low 

as $95 and none was larger than $1,200.

Regulatory interagency guidance published in 2003 for all depository 

institutions that issue credit cards may have reduced the potential for 

cardholders who continue to make minimum payments to experience 

increasing balances.73 In this guidance, regulators suggested that card 

issuers require minimum repayment amounts so that cardholders’ current 

balance would be paid off–amortized–over a reasonable amount of time. In 

the past, some issuers’ minimum monthly payment formulas were such that 

a full payment may have resulted in little or no principal being paid down, 

particularly if the cardholder also was assessed any fees during a billing 

cycle. In such cases, these cardholders’ outstanding balances would 

increase (or negatively amortize). In response to this guidance, some card 

issuers we interviewed indicated that they have been changing their 

minimum monthly payment formulas to ensure that credit card balances 

will be paid off over a reasonable period by including at least some amount 

of principal in each payment due. 

Representatives of card issuers also told us that the regulatory guidance, 

issued in 2003, addressing credit card workout programs—which allow a 

distressed cardholder’s account to be closed and repaid on a fixed 

repayment schedule—and other forbearance practices, may help 

cardholders experiencing financial distress avoid fees. In this guidance, the 

regulators stated that (1) any workout program offered by an issuer should 

be designed to have cardholders repay credit card debt within 60 months 

and (2) to meet this time frame, interest rates and penalty fees may have to 

be substantially reduced or eliminated so that principal can be repaid. As a 

result, card issuers are expected to stop imposing penalty fees and interest 

charges on delinquent card accounts or hardship card accounts enrolled in 

repayment workout programs. According to this guidance, issuers also can 

negotiate settlement agreements with cardholders by forgiving a portion of 

73Credit Card Lending: Account Management and Loss Allowance Guidance (January 

2003), joint guidance issued under the auspices of the Federal Financial Institutions 

Examination Council by the Office of the Comptroller of the Currency (OCC Bulletin 2003-

1), Federal Reserve (Supervisory Letter SR-03-1), Federal Deposit Insurance Corporation 

(Financial Institution Letter, FIL-2-2003), and Office of Thrift Supervision (OTS Release 03-

01).
Page 66 GAO-06-929 Credit Cards

the amount owed. In exchange, a cardholder can be expected to pay the 

remaining balance either in a lump-sum payment or by amortizing the 

balance over a several month period. Staff from OCC and an association of 

credit counselors told us that, since the issuance of this guidance, they 

have noticed that card issuers are increasingly both reducing and waiving 

fees for cardholders who get into financial difficulty. OCC officials also 

indicated that issuers prefer to facilitate repayment of principal when 

borrowers adopt debt management plans and tend to reduce or waive fees 

so the accounts can be amortized. On the other hand, FDIC staff indicated 

that criteria for waiving fees and penalties are not publicly disclosed to 

cardholders. These staff noted that most fee waivers occurs after 

cardholders call and complain to the issuer and are handled on a case-bycase basis. 

Data for Some Bankrupt 

Cardholders Shows Little in 

Interest and Fees Owed, but 

Comprehensive Data Were Not 

Available

Card issuers generally charge-off credit card loans that are no longer 

collectible because they are in default for either missing a series of 

payments or filing for bankruptcy. According to the data provided by the 

six largest issuers, the number of accounts that these issuers collectively 

had to charge off as a result of the cardholders filing for bankruptcy ranged 

from about 1.3 million to 1.6 million annually between 2003 and 2005. 

Collectively, these represented about 1 percent of the six issuers’ active 

accounts during this period. Also, about 60 percent of the accounts were 2 

or more months delinquent at the time of the charge-off. Most of the 

cardholders whose accounts were charged off as the result of a bankruptcy 

owed small amounts of fees and interest charges at the time of their 

bankruptcy filing. According to the data the six issuers provided, the 

average account that they charged off in 2005 owed approximately $6,200 

at the time that bankruptcy was filed. Of this amount, the issuers reported 

that on average 8 percent represented unpaid interest charges; 2 percent 

unpaid fees, including any unpaid penalty charges; and about 90 percent 

principal. 

However, these data do not provide complete information about the extent 

to which the financial condition of the cardholders may have been affected 

by penalty interest and fee charges. First, the amounts that these issuers 

reported to us as interest and fees due represent only the unpaid amounts 

that were owed at the time of bankruptcy. According to representatives of 

the issuers we contacted, each of their firms allocates the amount of any 

payment received from their customers first to any outstanding interest 

charges and fees, then allocates any remainder to the principal balance. As 

a result, the amounts owed at the time of bankruptcy would not reflect any 

previously paid fees or interest charges. According to representatives of 
Page 67 GAO-06-929 Credit Cards

these issuers, data system and recordkeeping limitations prevented them 

from providing us the amounts of penalty interest and fees assessed on 

these accounts in the months prior to the bankruptcy filings. 

Furthermore, the data do not include information on all of the issuers’ 

cardholders who went bankrupt, but only those whose accounts the issuers 

charged off as the result of a bankruptcy filing. The issuers also charge off 

the amounts owed by customers who are delinquent on their payments by 

more than 180 days, and some of those cardholders may subsequently file 

for bankruptcy. Such accounts may have accrued larger amounts of unpaid 

penalty interest and fees than the accounts that were charged off for 

bankruptcy after being delinquent for less than 180 days, because they 

would have had more time to be assessed such charges. Representatives of 

the six issuers told us that they do not maintain records on these customers 

after they are charged off, and, in many cases, they sell the accounts to 

collection firms. 

Although Penalty 

Interest and Fees 

Likely Have Grown as a 

Share of Credit Card 

Revenues, Large Card 

Issuers’ Profitability 

Has Been Stable

Determining the extent to which penalty interest charges and fees 

contribute to issuers’ revenues and profits was difficult because issuers’ 

regulatory filings and other public sources do not include such detail. 

According to bank regulators, industry analysts, and information reported 

by the five largest issuers, we estimate that the majority of issuer 

revenues—around 70 percent in recent years—came from interest charges, 

and the portion attributable to penalty rates appears to be growing. Of the 

remaining issuer revenues, penalty fees had increased and were estimated 

to represent around 10 percent of total issuer revenues. The remainder of 

issuer revenues came from fees that issuers receive for processing 

merchants’ card transactions and other types of consumer fees. The largest 

credit card-issuing banks, which are generally the most profitable group of 

lenders, have not greatly increased their profitability over the last 20 years. 

Publicly Disclosed Data on 

Revenues and Profits from 

Penalty Interest and Fees 

Are Limited 

Determining the extent to which penalty interest and fee charges are 

contributing to card issuer revenues and profits is difficult because limited 

information is available from publicly disclosed financial information. 

Credit card-issuing banks are subject to various regulations that require 

them to publicly disclose information about their revenues and expenses. 

As insured commercial banks, these institutions must file reports of their 

financial condition, known as call reports, each quarter with their 

respective federal regulatory agency. In call reports, the banks provide 
Page 68 GAO-06-929 Credit Cards

comprehensive balance sheets and income statements disclosing their 

earnings, including those from their credit card operations. Although the 

call reports include separate lines for interest income earned, this amount 

is not further segregated to show, for example, income from the application 

of penalty interest rates. Similarly, banks report their fee income on the call 

reports, but this amount includes income from all types of fees, including 

those related to fiduciary activities, and trading assets and liabilities and is 

not further segregated to show how much a particular bank has earned 

from credit card late fees, over-limit fees, or insufficient payment fees. 

Another limitation of using call reports to assess the effect of penalty 

charges on bank revenues is that these reports do not include detailed 

information on credit card balances that a bank may have sold to other 

investors through a securitization. As a way of raising additional funds to 

lend to cardholders, many issuers combine the balances owed on large 

groups of their accounts and sell these receivables as part of pools of 

securitized assets to investors. In their call reports, the banks do not report 

revenue received from cardholders whose balances have been sold into 

credit card interest and fee income categories.74 The banks report any gains 

or losses incurred from the sale of these pooled credit card balances on 

their call reports as part of noninterest income. Credit card issuing banks 

generally securitize more than 50 percent of their credit card balances. 

Although many card issuers, including most of the top 10 banks, are public 

companies that must file various publicly available financial disclosures on 

an ongoing basis with securities regulators, these filings also do not 

disclose detailed information about penalty interest and fees. We reviewed 

the public filings by the top five issuers and found that none of the financial 

statements disaggregated interest income into standard interest and 

penalty interest charges. In addition, we found that the five banks’ public 

financial statements also had not disaggregated their fee income into 

penalty fees, service fees, and interchange fees. Instead, most of these card 

issuers disaggregated their sources of revenue into two broad categories—

interest and noninterest income. 

74In accordance with generally accepted accounting principles (Standards of Financial 

Accounting Statement 140), when card issuers sell any of their credit card receivables as 

part of a securitization, they subtract the amount of these receivables from the assets shown 

on their balance sheets. 
Page 69 GAO-06-929 Credit Cards

Majority of Card Issuer 

Revenues Came from 

Interest Charges 

Although limited information is publicly disclosed, the majority of credit 

card revenue appears to have come from interest charges. According to 

regulators, information collected by firms that analyze the credit card 

industry, and data reported to us by the five of the six largest issuers, the 

proportion of net interest revenues to card issuers’ total revenues is as 

much as 71 percent. For example, five of the six largest issuers that 

provided data to us reported that the proportion of their total U.S. card 

operations income derived from interest charges ranged from 69 to 71 

percent between 2003 and 2005.75

75One of the top six largest issuers, Discover, Inc., operates its own transaction processing 

network; the other issuers process card transactions through the networks operated by Visa 

International or Mastercard. Because this difference could have reduced the comparability 

of the data we obtained from these issuers, the information on revenue and profitability 

aggregated by the third party in response to our data request excludes Discover, Inc.
Page 70 GAO-06-929 Credit Cards

Figure 17: Example of a Typical Bank’s Income Statement 

We could not precisely determine the extent to which penalty interest 

charges contribute to this revenue, although the amount of penalty interest 

that issuers have been assessing has increased. In response to our request, 

the six largest issuers reported the proportions of their total cardholder 

accounts that were assessed various rates of interest for 2003 to 2005. On 

the basis of our analysis of the popular cards issued by these largest 

issuers, all were charging, on average, default interest rates of around 27 

percent. According to the data these issuers provided, the majority of 

cardholders paid interest rates below 20 percent, but the proportion of 

their cardholders that paid interest rates at or above 25 percent—which 

likely represent default rates—has risen from 5 percent in 2003 to 11 

percent in 2005. As shown in Figure 18, the proportion of cardholders 

paying between 15 and 20 percent has also increased, but an issuer 

representative told us that this likely was due to variable interest rates on 

+ Noninterest income

- Credit losses

Net interest income

Total revenue from operations

Net risk-adjusted revenue

Noninterest expense + fraud losses

Net income

Interest charges ($)/yield (%)

- Cost of funds

Received from loans to corporate and consumer borrowers, 

credit card holders carrying balances, etc.

Paid on deposits or borrowings from other banks

- Noninterest expenses

+ Pre-tax income

- Taxes

- Fraud losses

From the writeoff of amounts of loans or card balances

that will not be paid by borrowers who have defaulted

Operating expenses such as postage, utilities, etc., for staff 

and other noninterest expenses

From fees or other charges for services

paid by borrowers or other customers

Revenue/expense category Description

Source: GAO analysis of data reported by the six largest credit card issuers.

Credit card bank revenue sources

The sources of revenues for credit card banks

are different than those of nonfinancial 

businesses. For example, the profits of a

manufacturing business are determined by 

subtracting its production costs and the other 

expenses it incurs from the revenues it earns

from selling the goods it produces. In 

contrast, banks’ profits are generally derived 

by subtracting the interest expenses they 

incur on the sources of funds—such as

savings deposits—that they use to make 

loans from the interest revenues they earn on 

those loans. The difference between banks’

interest revenues and their interest expenses

represents their net interest income. To 

determine the total net income from a bank’s

operations, any revenues from noninterest 

sources, such as fees, are added to its net 

interest income, and then all other expenses, 

including amounts owed on loans that now 

appear uncollectible—loan losses—and the 

expenses of operating the bank, including 

staff salaries and marketing expenses, are 

subtracted. Figure 17 shows a simplified 

example of a typical bank’s income 

statement. 
Page 71 GAO-06-929 Credit Cards

cards rising as a result of increases in U.S. market interest rates over the 

last 3 years. 

Figure 18: Proportion of Active Accounts of the Six Largest Card Issuers with 

Various Interest Rates for Purchases, 2003 to 2005

Although we could not determine the amounts of penalty interest the card 

issuers received, the increasing proportion of accounts assessed rates of 25 

percent suggests a significant increase in interest revenues. For example, a 

cardholder carrying a stable balance of $1,000 and paying 10 percent 

interest would pay approximately $100 annually, while a cardholder 

carrying the same stable balance but paying 25 percent would pay $250 to 

the card issuer annually. Although we did not obtain any information on the 

0

20

40

60

80

100

2003 2004 2005

Percentage 

Year 

25.0% or more

20.0% to 24.9%

15.0% to 19.9%

10.0 to 14.9%

5.0 to 9.9 %

0.0 to 4.9%

Source: GAO analysis of data reported by the six largest credit card issuers.

Annual percentage rate 

7 7 6 

21 16 12 

43

41

25

14

20

37

10

8 9

5%

10% 11%
Page 72 GAO-06-929 Credit Cards

size of balances owed by the cardholders of the largest issuers, the 

proportion of the revenues these issuers received from cardholders paying 

penalty interest rates may also be greater than 11 percent because such 

cardholders may have balances larger than the $2,500 average for 2005 that 

the issuers reported to us. 

Fees Represented the 

Remainder of Issuer 

Revenues 

The remaining card issuer revenues largely come from noninterest sources, 

including merchant and consumer fees. Among these are penalty fees and 

other consumer fees, as well as fees that issuers receive as part of 

processing card transactions for merchants.

Penalty Fees Had Increased Although no comprehensive data exist publicly, various sources we 

identified indicated that penalty fees represent around 10 percent of 

issuers’ total revenues and had generally increased. We identified various 

sources that gave estimates of penalty fee income as a percentage of card 

issuers’ total revenues that ranged from 9 to 13 percent:

• Analysis of the data the top six issuers provided to us indicated that 

each of these issuers assessed an average of about $1.2 billion in penalty 

fees for cardholders that made late payments or exceeded their credit 

limit in 2005. In total, these six issuers reported assessing $7.4 billion for 

these two penalty fees that year, about 12 percent of the $60.3 billion in 

total interest and consumer fees (penalty fees and fees for other 

cardholder services).76

• According to a private firm that assists credit card banks with buying 

and selling portfolios of credit card balance receivables, penalty fees 

likely represented about 13 percent of total card issuer revenues. 

According to an official with this firm, it calculated this estimate by 

using information from 15 of the top 20 issuers, as well as many smaller 

banks, that together represent up to 80 percent of the total credit card 

industry.77 

76We were not provided information on the portion of revenues these issuers earned from 

these penalty fees and consumer fees. 

77Although we were not able to completely assess the reliability of this organization’s data 

and its methods for making its estimates of industry revenue components, we present this 

information because it appeared to be similar to the proportions reported by the top six 

issuers that provided us data. 
Page 73 GAO-06-929 Credit Cards

• An estimate from an industry research firm that publishes data on credit 

card issuer activities indicated that penalty fees represented about 9 

percent of issuer total revenues.

Issuers Also Collect Revenues 

from Processing Merchant Card 

Transactions 

When a consumer makes a purchase with a credit card, the merchant 

selling the goods does not receive the full purchase price. When the 

cardholder presents the credit card to make a purchase, the merchant 

transmits the cardholder’s account number and the amount of the 

transaction to the merchant’s bank.78 The merchant’s bank forwards this 

information to the card association, such as Visa or Mastercard, requesting 

authorization for the transaction. The card association forwards the 

authorization request to the bank that issued the card to the cardholder. 

The issuing bank then responds with its authorization or denial to the 

merchant’s bank and then to the merchant. After the transaction is 

approved, the issuing bank will send the purchase amount, less an 

interchange fee, to the merchant’s bank. The interchange fee is established 

by the card association. Before crediting the merchant’s account, the 

merchant’s bank will subtract a servicing fee. These transaction fees—

called interchange fees—are commonly about 2 percent of the total 

purchase price. As shown in figure 19, the issuing banks generally earn 

about $2.00 for every $100 purchased as interchange fee revenue. In 

addition, the card association receives a transaction processing fee. The 

card associations, such as Visa or Mastercard, assess the amount of these 

fees and also conduct other important activities, including imposing rules 

for issuing cards, authorizing, clearing and settling transactions, 

advertising and promoting the network brand, and allocating revenues 

among the merchants, merchant’s bank, and card issuer.

78The bank that a merchant uses to process its credit card transactions is known as the 

acquiring bank.
Page 74 GAO-06-929 Credit Cards

Figure 19: Example of a Typical Credit Card Purchase Transaction Showing How Interchange Fees Paid by Merchants Are 

Allocated 

In addition to penalty fees and interchange fees, the remaining noninterest 

revenues for card issuers include other consumer fees or other fees. Card 

issuers collect annual fees, cash advance fees, balance transfer fees, and 

other fees from their cardholders. In addition, card issuers collect other 

$2.00

$ .50

Consumer Merchant

Card

issuer

$100.00

Sources: GAO (analysis); Art Explosion (images). 

5555-5555-5555-5555

CreditCard

$97.50

$98.00

Card issuer clears payment

Acquiring

bank

Card

association

(e.g., Visa,

MasterCard, etc.)

Transaction

information

Monthly

statement

Interchange

fee collected Processing

fee collected

Merchant

sells $100

worth of goods

but receives $97.50

after interchange

and processing

fees are

collected

Credit card transaction for $100

Card association clears authorization request
Page 75 GAO-06-929 Credit Cards

revenues, such as from credit insurance. According to estimates by 

industry analyst firms, such revenues likely represented about 8 to 9 

percent of total issuer revenues.

Large Credit Card Issuer 

Profitability Has Been 

Stable 

The profits of credit card-issuing banks, which are generally the most 

profitable group of lenders, have been stable over the last 7 years. A 

commonly used indicator of profitability is the return on assets ratio 

(ROA). This ratio, which is calculated by dividing a company's income by 

its total assets, shows how effectively a business uses its assets to generate 

profits. In annual reports to Congress, the Federal Reserve provides data 

on the profitability of larger credit card issuers—which included 17 banks 

in 2004.79 Figure 20 shows the average ROA using pretax income for these 

large credit card issuers compared with pretax ROA of all commercial 

banks during the period 1986 to 2004. In general, the large credit card 

issuers earned an average return of 3.12 percent over this period, which 

was more than twice as much as the 1.49 percent average returns earned by 

all commercial banks. 

79See Federal Reserve System, Profitability of Credit Card Operations, June 2005. The data 

included in these reports are for all commercial banks with at least $200 million in yearly 

average assets (loans to individuals plus securitizations) and at least 50 percent of assets in 

consumer lending, of which 90 percent must be in the form of revolving credit. 
Page 76 GAO-06-929 Credit Cards

Figure 20: Average Pretax Return on Assets for Large Credit Card Banks and All Commercial Banks, 1986 to 2004

As shown in the figure above, the ROA for larger credit card banks, 

although fluctuating more widely during the 1990s, has generally been 

stable since 1999, with returns in the 3.0 to 3.5 percent range. The return on 

assets for the large card issuers peaked in 1993 at 4.1 percent and has 

declined to 3.55 percent in 2004. In contrast, the profitability of all 

commercial banks has been generally increasing over this period, rising 

more than 140 percent between 1986 and 2004. Similar to the data for all 

larger credit card issuers, data that five of the six largest issuers provided 

to us indicated that their profitability also has been stable in the 3 years 

between 2003 and 2005. These five issuers reported that the return on their 

pretax earnings over their credit card balances over this 3-year period 

ranged from about 3.6 percent to 4.1 percent. 

Because of the high interest rates that issuers charge and variable rate 

pricing, credit card lending generally is the most profitable type of 

consumer lending, despite the higher rate of loan losses that issuers incur 

on cards. Rates charged on credit cards generally are the highest of any 

consumer lending category because they are extensions of credit that are 

not secured by any collateral from the borrower. In contrast, other 

0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percentage

Source: Federal Reserve Board.

Year Credit card banks

All commercial banks
Page 77 GAO-06-929 Credit Cards

common types of consumer lending, such as automobile loans or home 

mortgages, involve the extension of a fixed amount of credit under fixed 

terms of repayment that are secured by the underlying asset—the car or the 

house—which the lender can repossess in the event of nonpayment by the 

borrower. Collateral and fixed repayment terms reduce the risk of loss to 

the lender, enabling them to charge lower interest rates on such loans. In 

contrast, credit card loans, which are unsecured, available to large and 

heterogeneous populations, and repayable on flexible terms at the 

cardholders’ convenience, present greater risks and have commensurately 

higher interest rates. For example, according to Federal Reserve statistics, 

the interest rate charged on cards by lenders generally has averaged above 

16 percent since 1980, while the average rate charged on car loans since 

then has averaged around 10 percent. Borrowers may be more likely to 

cease making payments on their credit cards if they become financially 

distressed than they would on other loans that are secured by an asset they 

could lose. For example, the percentage of credit card loans that banks 

have had to charge off averaged above 4 percent between 2003 and 2005; in 

contrast, charge-offs for other types of consumer loans average about 2 

percent, with charge-offs for mortgage loans averaging less than 1 percent, 

during those 3 years. (App. III provides additional detail about the factors 

that affect the profitability of credit card issuers.) 

Conclusions Credit cards provide various benefits to their cardholders, including 

serving as a convenient way to pay for goods and services and providing 

additional funds at rates of interest generally lower than those consumers 

would have paid to borrow on cards in the past. However, the penalties for 

late payments or other behaviors involving card use have risen significantly 

in recent years. Card issuers note that their use of risk-based pricing 

structures with multiple interest rates and fees has allowed them to offer 

credit cards to cardholders at costs that are commensurate with the risks 

presented by different types of customers, including those who previously 

might not have been able to obtain credit cards. On the whole, a large 

number of cardholders experience greater benefits—either by using their 

cards for transactions without incurring any direct expense or by enjoying 

generally lower costs for borrowing than prevailed in the past—from using 

credit cards than was previously possible, but the habits or financial 

circumstances of other cardholders also could result in these consumers 

facing greater costs than they did in the past. 

The expansion and increased complexity of card rates, fees, and issuer 

practices has heightened the need for consumers to receive clear 
Page 78 GAO-06-929 Credit Cards

disclosures that allow them to more easily understand the costs of using 

cards. In the absence of any regulatory or legal limits on the interest or fees 

that cards can impose, providing consumers with adequate information on 

credit card costs and practices is critical to ensuring that vigorous 

competition among card issuers produces a market that provides the best 

possible rates and terms for U.S. consumers. Our work indicates that the 

disclosure materials that the largest card issuers typically provided under 

the existing regulations governing credit cards had many serious 

weaknesses that reduced their usefulness to the consumers they are 

intended to help. Although these regulations likely were adequate when 

card rates and terms were less complex, the disclosure materials they 

produce for cards today, which have a multitude of terms and conditions 

that can affect cardholders’ costs, have proven difficult for consumers to 

use in finding and understanding important information about their cards. 

Although providing some key information, current disclosures also give 

prominence to terms, such as minimum finance charge or balance 

computation method, that are less significant to consumers’ costs and do 

not adequately emphasize terms such as those cardholder actions that 

could cause their card issuer to raise their interest rate to a high default 

rate. Because part of the reason that current disclosure materials may be 

less effective is that they were designed in an era when card rates and 

terms were less complex, the Federal Reserve also faces the challenge of 

creating disclosure requirements that are more flexible to allow them to be 

adjusted more quickly as new card features are introduced and others 

become less common. 

The Federal Reserve, which has adopted these regulations, has recognized 

these problems, and its current review of the open-end credit rules of 

Regulation Z presents an opportunity to improve the disclosures applicable 

to credit cards. Based on our work, we believe that disclosures that are 

simpler, better organized, and use designs and formats that comply with 

best practices and industry standards for readability and usability would be 

more effective. Our work and the experiences of other regulators also 

confirmed that involving experts in readability and testing documents with 

actual consumers can further improve any resulting disclosures. The 

Federal Reserve has indicated that it has begun to involve consumers in the 

design of new model disclosures, but it has not completed these efforts to 

date, and new model disclosures are not expected to be issued until 2007 or 

2008. Federal Reserve staff noted that they recognize the challenge of how 

best to incorporate the variety of information that consumers may need to 

understand the costs of their cards in clear and concise disclosure 

materials. Until such efforts are complete, consumers will continue to face 
Page 79 GAO-06-929 Credit Cards

difficulties in using disclosure materials to better understand and compare 

costs of credit cards. In addition, until more understandable disclosures are 

issued, the ability of well-informed consumers to spur additional 

competition among issuers in credit card pricing is hampered. 

Definitively determining the extent to which credit card penalty interest 

and fees contribute to personal bankruptcies and the profits and revenues 

of card issuers is difficult given the lack of comprehensive, publicly 

available data. Penalty interest and fees can contribute to the total debt 

owed by cardholders and decrease the funds that a cardholder could have 

used to reduce debt and possibly avoid bankruptcy. However, many 

consumers file for bankruptcy as the result of significant negative life 

events, such as divorces, job losses, or health problems, and the role that 

credit cards play in avoiding or accelerating such filings is not known. 

Similarly, the limited available information on card issuer operations 

indicates that penalty fees and interest are a small but growing part of such 

firms’ revenues. With the profitability of the largest card issuers generally 

being stable over recent years, the increased revenues gained from penalty 

interest and fees may be offsetting the generally lower amounts of interest 

that card issuers collect from the majority of their cardholders. These 

results appear to indicate that while most cardholders likely are better off, 

a smaller number of cardholders paying penalty interest and fees are 

accounting for more of issuer revenues than they did in the past. This 

further emphasizes the importance of taking steps to ensure that all 

cardholders receive disclosures that help them clearly understand their 

card costs and how their own behavior can affect those costs. 

Recommendation for 

Executive Action

As part of its effort to increase the effectiveness of disclosure materials 

used to inform consumers of rates, fees, and other terms that affect the 

costs of using credit cards, the Chairman, Federal Reserve should ensure 

that such disclosures, including model forms and formatting requirements, 

more clearly emphasize those terms that can significantly affect cardholder 

costs, such as the actions that can cause default or other penalty pricing 

rates to be imposed. 

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Federal Reserve, OCC, FDIC, the 

Federal Trade Commission, the National Credit Union Administration, and 

the Office of Thrift Supervision for their review and comment. In a letter 

from the Federal Reserve, the Director of the Division of Consumer and 
Page 80 GAO-06-929 Credit Cards

Community Affairs agreed with the findings of our report that credit card 

pricing has become more complex and that the disclosures required under 

Regulation Z could be improved with the input of consumers. To this end, 

the Director stated that the Board is conducting extensive consumer 

testing to identify the most important information to consumers and how 

disclosures can be simplified to reduce current complexity. Using this 

information, the Director said that the Board would develop new model 

disclosure forms with the assistance of design consultants. If appropriate, 

the Director said the Board may develop suggestions for statutory changes 

for congressional consideration.

We also received technical comments from the Federal Reserve and OCC, 

which we have incorporated in this report as appropriate. FDIC, the 

Federal Trade Commission, the National Credit Union Administration, and 

the Office of Thrift Supervision did not provide comments.

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after the 

date of this report. At that time, we will send copies of this report to the 

Chairman, Permanent Subcommittee on Investigations, Senate Committee 

on Homeland Security and Governmental Affairs; the Chairman, FDIC; the 

Chairman, Federal Reserve; the Chairman, Federal Trade Commission; the 

Chairman, National Credit Union Administration; the Comptroller of the 

Currency; and the Director, Office of Thrift Supervision and to interested 

congressional committees. We will also make copies available to others 

upon request. The report will be available at no charge on the GAO Web site 

at http://www.gao.gov.

If you or your staff have any questions regarding this report, please contact 

me at (202) 512-8678 or woodd@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Key contributors to this report are listed in appendix IV.

Sincerely yours, 

David G. Wood

Director, Financial Markets 

and Community Investment
Page 81 GAO-06-929 Credit Cards

Appendix I

Objectives, Scope and Methodology AAppenednxidexiIs

Our objectives were to determine (1) how the interest, fees, and other 

practices that affect the pricing structure of cards from the largest U.S. 

issuers have evolved, and cardholders’ experiences under these pricing 

structures in recent years; (2) how effectively the issuers disclose the 

pricing structures of cards to their cardholders; (3) whether credit card 

debt and penalty interest and fees contribute to cardholder bankruptcies; 

and (4) the extent to which penalty interest and fees contribute to the 

revenues and profitability of issuers’ credit card operations.

Methodology for Identifying 

the Evolution of Pricing 

Structures 

To identify how the pricing structure of cards from the largest U.S. issuers 

has evolved, we analyzed disclosure documents from 2003 to 2005 for 28 

popular cards that were issued by the six largest U.S. card issuers, as 

measured by total outstanding receivables as of December 31, 2004 

(see fig. 2 in the body of this report). These issuers were Bank of America; 

Capital One Bank; Chase Bank USA, N.A.; Citibank (South Dakota), N.A.; 

Discover Financial Services; and MBNA America Bank, N.A. 

Representatives for these six issuers identified up to five of their most 

popular cards and provided us actual disclosure materials, including 

cardmember agreements and direct mail applications and solicitations 

used for opening an account for each card. We calculated descriptive 

statistics for various interest rates and fees and the frequency with which 

cards featured other practices, such as methods for calculating finance 

charges. We determined that these cards likely represented the pricing and 

terms that applied to the majority of U.S. cardholders because the top six 

issuers held almost 80 percent of consumer credit card debt and as much as 

61 percent of total U.S. credit card accounts. 

We did not include in our analysis of popular cards any cards offered by 

credit card issuers that engage primarily in subprime lending. Subprime 

lending generally refers to extending credit to borrowers who exhibit 

characteristics indicating a significantly higher risk of default than 

traditional bank lending customers. Such issuers could have pricing 

structures and other terms significantly different to those of the popular 

cards offered by the top issuers. As a result, our analysis may 

underestimate the range of interest rate and fee levels charged on the entire 

universe of cards. To identify historical rate and fee levels, we primarily 

evaluated the Federal Reserve Board’s G.19 Consumer Credit statistical 

release for 1972 to 2005 and a paper written by a Federal Reserve Bank 
Appendix I

Objectives, Scope and Methodology

Page 82 GAO-06-929 Credit Cards

staff, which included more than 150 cardmember agreements from 15 of 

the largest U.S. issuers in 1997 to 2002.1

To evaluate cardholders’ experiences with credit card pricing structures in 

recent years, we obtained proprietary data on the extent to which issuers 

assessed various interest rate levels and fees for active accounts from the 

six largest U.S. issuers listed above for 2003, 2004, and 2005. We obtained 

data directly from issuers because no comprehensive sources existed to 

show the extent to which U.S. cardholders were paying penalty interest 

rates. Combined, these issuers reported more than 180 million active 

accounts, or about 60 percent of total active accounts reported by 

CardWeb.com, Inc. These accounts also represented almost $900 billion in 

credit card purchases in 2005, according to these issuers. To preserve the 

anonymity of the data, these issuers engaged legal counsel at the law firm 

Latham & Watkins, LLP, to which they provided their data on interest rate 

and fee assessments, which then engaged Argus Information and Advisory 

Services, LLC, a third-party analytics firm, to aggregate the data, and then 

supplied it to us. Although we originally provided a more comprehensive 

data request to these issuers, we agreed to a more limited request with 

issuer representatives as a result of these firms’ data availability and 

processing limitations. We discussed steps that were taken to attempt to 

ensure that the data provided to us were complete and accurate with 

representatives of these issuers and the third party analytics firm. We also 

shared a draft of this report with the supervisory agencies of these issuers. 

However, we did not have access to the issuers’ data systems to fully assess 

the reliability of the data or the systems that housed them. Therefore, we 

present these data in our report only as representations made to us by the 

six largest issuers. 

Methodology for Assessing 

Effectiveness of Disclosures 

To determine how effectively card issuers disclose to cardholders the rates, 

fees, and other terms related to their credit cards, we contracted with 

UserWorks, Inc., a private usability consulting firm, which conducted three 

separate evaluations of a sample of disclosure materials. We provided the 

usability consultant with a cardmember agreement and solicitation letter 

for one card from four representative credit card issuers—a total of four 

cards and eight disclosure documents. The first evaluation, a readability 

assessment, used computer-facilitated formulas to predict the grade level 

1

M. Furletti, “Credit Card Pricing Developments and Their Disclosure,” Federal Reserve 

Bank of Philadelphia’s Payment Cards Center, January 2003.
Appendix I

Objectives, Scope and Methodology

Page 83 GAO-06-929 Credit Cards

required to understand the materials. Readability formulas measure the 

elements of writing that can be subjected to mathematical calculation, such 

as average number of syllables in words or numbers of words in sentences 

in the text. The consultant applied the following industry-standard 

formulas to the documents: Flesch Grade Level, Frequency of 

Gobbledygook (FOG), and the Simplified Measure of Gobbledygook 

(SMOG). Using these formulas, the consultant measured the grade levels at 

which the disclosure documents were written overall, as well as for 

selected sections. Secondly, the usability consultant conducted an heuristic 

evaluation that assessed how well these card disclosure documents 

adhered to a recognized set of principles or industry best practices. In the 

absence of best practices specifically applicable to credit card disclosures, 

the consultant used guidelines from the U.S. Securities and Exchange 

Commission’s 1998 guidebook Plain English Handbook: How to Create 

Clear SEC Disclosure Documents. 

Finally, the usability consultant tested how well actual consumers were 

able to use the documents to identify and understand information about 

card fees and other practices and used the results to identify problem 

areas. The consultant conducted these tests with 12 consumers.2

 To ensure 

sample diversity, the participants were selected to represent the 

demographics of the U.S. adult population in terms of education, income, 

and age. While the materials used for the readability and usability 

assessments appeared to be typical of the large issuers’ disclosures, the 

results cannot be generalized to materials that were not reviewed.

To obtain additional information on consumers’ level of awareness and 

understanding of their key credit card terms, we also conducted in-depth, 

structured interviews in December 2005 with a total of 112 adult 

cardholders in three locations: Boston, Chicago, and San Francisco.3

 We 

contracted with OneWorld Communications, Inc., a market research 

organization, to recruit a sample of cardholders that generally resembled 

the demographic makeup of the U.S. population in terms of age, education 

levels, and income. However, the cardholders recruited for the interviews 

did not form a random, statistically representative sample of the U.S. 

2

According to the consultant, testing with small numbers of individuals can generally 

identify many of the problems that can affect the readability and usability of materials.

3

We conducted these interviews when preparing our report on the feasibility and usefulness 

of requiring additional disclosures to cardholders on the consequences of making only the 

minimum payment on their cards.
Appendix I

Objectives, Scope and Methodology

Page 84 GAO-06-929 Credit Cards

population and therefore cannot be generalized to the population of all U.S. 

cardholders. Cardholders had to speak English, have owned at least one 

general-purpose credit card for a minimum of 12 months, and have not 

participated in more than one focus group or similar in-person study in the 

12 months prior to the interview. We gathered information about the 

cardholders’ knowledge of credit card terms and conditions, and assessed 

cardholders’ use of card disclosure materials by asking them a number of 

open- and closed-ended questions. 

Methodology for 

Determining How Penalty 

Charges Contribute to 

Bankruptcy 

To determine whether credit card debt and penalty interest and fees 

contribute to cardholder bankruptcies, we interviewed Department of 

Justice staff responsible for overseeing bankruptcy courts and trustees 

about the availability of data on credit card penalty charges in materials 

submitted by consumers or issuers as part of bankruptcy filings or 

collections cases. We also interviewed two attorneys that assist consumers 

with bankruptcy filings. In addition, we reviewed studies that analyzed 

credit card and bankruptcy issues published by various academic 

researchers, the Congressional Research Service, and the Congressional 

Budget Office. We did not attempt to assess the reliability of all of these 

studies to the same, full extent. However, because of the prominence of 

some of these data sources, and frequency of use of this data by other 

researchers, as well as the fact that much of the evidence is corroborated 

by other evidence, we determined that citing these studies was appropriate. 

We also analyzed aggregated card account data provided by the six largest 

issuers (as previously discussed) to measure the amount of credit card 

interest charges and fees owed at the time these accounts were charged off 

as a result of becoming subject to bankruptcy filing. We also spoke with 

representatives of the largest U.S. credit card issuers, as well as 

representatives of consumer groups and industry associations, and with 

academic researchers that conduct analysis on the credit card industry. 

Methodology for 

Determining How Penalty 

Charges Contribute to 

Issuer Revenues 

To determine the extent to which penalty interest and fees contributed to 

the revenues and profitability of issuers’ credit card operations, we 

reviewed the extent to which penalty charges are disclosed in bank 

regulatory reports—the call reports—and in public disclosures—such as 

annual reports (10-Ks) and quarterly reports (10-Qs) made by publicly 

traded card issuers. We analyzed data reported by the Federal Reserve on 

the profitability of commercial bank card issuers with at least $200 million 

in yearly average assets (loans to individuals plus securitizations) and at 
Appendix I

Objectives, Scope and Methodology

Page 85 GAO-06-929 Credit Cards

least 50 percent of assets in consumer lending, of which 90 percent must be 

in the form of revolving credit. In 2004, the Federal Reserve reported that 

17 banks had card operations with at least this level of activity in 2004. We 

also analyzed information from the Federal Deposit Insurance Corporation, 

which analyzes data for all federally insured banks and savings institutions 

and publishes aggregated data on those with various lending activity 

concentrations, including a group of 33 banks that, as of December 2005, 

had credit card operations that exceeded 50 percent of their total assets 

and securitized receivables. 

We also analyzed data reported to us by the six largest card issuers on their 

revenues and profitability of their credit card operations for 2003, 2004, and 

2005. We also reviewed data on revenues compiled by industry analysis 

firms, including Card Industry Directory published by Sourcemedia, and 

R.K. Hammer. Because of the proprietary nature of their data, 

representatives for Sourcemedia and R.K. Hammer were not able to 

provide us with information sufficient for us to assess the reliability of their 

data. However, we analyzed and presented some information from these 

sources because we were able to corroborate their information with each 

other and with data from sources of known reliability, such as regulatory 

data, and we attribute their data to them. 

We also interviewed broker-dealer financial analysts who monitor activities 

by credit card issuers to identify the extent to which various sources of 

income contribute to card issuers’ revenues and profitability. We attempted 

to obtain the latest in a series of studies of card issuer profitability that 

Visa, Inc. traditionally has compiled. However, staff from this organization 

said that this report is no longer being made publicly available. 

We discussed issues relevant to this report with various organizations, 

including representatives of 13 U.S. credit card issuers and card networks, 

2 trade associations, 4 academics, 4 federal bank agencies, 4 national 

consumer interest groups, 2 broker dealer analysts that study credit card 

issuers for large investors, and a commercial credit-rating agency. We also 

obtained technical comments on a draft of this report from representatives 

of the issuers that supplied data for this study. 
Page 86 GAO-06-929 Credit Cards

Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt ApendxiI

Consumer bankruptcies have increased significantly over the past 25 years. 

As shown in figure 21 below, consumer bankruptcy filings rose from about 

287,000 in 1980 to more than 2 million as of December 31, 2005, about a 609 

percent increase over the last 25 years.1

 

Figure 21: U.S. Consumer Bankruptcy Filings, 1980-2005 

Debt Levels Have Also Risen The expansion of consumers’ overall indebtedness is one of the 

explanations cited for the significant increase in bankruptcy filings. As 

shown in figure 22, consumers’ use of debt has expanded over the last 25 

years, increasing more than 720 percent from about $1.4 trillion in 1980 to 

about $11.5 trillion in 2005. 

1

Of the filings in 2005, approximately 80 percent were Chapter 7 cases and the other 20 

percent were Chapter 13 cases. 

0 

.5 

1.0 

1.5 

2.0 

2.5 

1998 1999 2000 2001 2002 2003 2004 2005 

Consumer filings (in millions) 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 

Source: GAO analysis of Congressional Research Service report and Administrative Office of the United States Courts data.

Year
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 87 GAO-06-929 Credit Cards

Figure 22: U.S. Household Debt, 1980-2005 

Some researchers have been commenting on the rise in overall 

indebtedness as a contributor to the rise in bankruptcies for some time. For 

example, in a 1997 congressional testimony, a Congressional Budget Office 

official noted that the increase in consumer bankruptcy filings and the 

increase in household indebtedness appeared to be correlated.2

 Also, an 

academic paper that summarized existing literature on bankruptcy found 

that some consumer bankruptcies were either directly or indirectly caused 

by heavy consumer indebtedness, specifically pointing to the high 

correlation between consumer bankruptcies and consumer debt-to-income 

ratios.3

 

0

2

4

6

8

10

12

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Dollars in trillions

Quarterly data by year

Source: Board of Governors of the Federal Reserve System.

2

Kim Kowalewski, “Consumer Debt and Bankruptcy,” Congressional Budget Office 

testimony before the United States Senate Subcommittee on Administrative Oversight and 

the Courts, Committee on the Judiciary, 105th Congress, 1st sess., Apr. 11, 1997. 

3

Todd J. Zywicki, “An Economic Analysis of the Consumer Bankruptcy Crisis,” 

Northwestern University Law Review, 99, no.4, (2005).
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 88 GAO-06-929 Credit Cards

Beyond total debt, some researchers and others argue that the rise in 

bankruptcies also was related to the rise in credit debt, in particular. As 

shown in figure 23, the amount of credit card debt reported also has risen 

from $237 billion to about $802 billion—a 238 percent increase between 

1990 and 2005.4

 

4

In addition to capturing amounts outstanding on credit cards, the number reported in the 

Federal Reserve’s survey of consumer debt for revolving debt also includes other types of 

revolving debt. However, Congressional Research Service staff familiar with the survey’s 

results indicated that the vast majority of the amount reported as revolving debt is from 

credit cards. 
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 89 GAO-06-929 Credit Cards

Figure 23: Credit Card and Other Revolving and Nonrevolving Debt Outstanding, 

1990 to 2005

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

1990 $808 237

570

806 278

528

866 310

556

997 366

632

1,141 

444

698

1,243 500

743

1,320 537

783

1,416 577

839

1,528 605

924

1,705 676

1,029

1,836 713

1,122

1,922 733

1,189

2,010 753

1,257

2,097 781

1,316

798 264

534

2,159 802

1,356

Year 

2005 

Consumer credit 

Total Revolving Nonrevolving

Source: GAO analysis of Congressional Research Service report data.
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 90 GAO-06-929 Credit Cards

Increased Access to Credit 

Cards by Lower-income 

Households Raised 

Concerns

Rather than total credit card debt alone, some researchers argued that 

growth in credit card use and indebtedness by lower-income households 

has contributed to the rise in bankruptcies. In the survey of consumer 

finances conducted every 3 years, the Federal Reserve reports on the use 

and indebtedness on credit cards by households overall and also by income 

percentiles. As shown in figure 24 below, the latest Federal Reserve survey 

results indicated the greatest increase of families reporting credit card debt 

occurred among those in the lowest 20 percent of household income 

between 1998 and 2001. 

Figure 24: Percent of Households Holding Credit Card Debt by Household Income, 

1998, 2001, and 2004

In the last 15 years, credit card companies have greatly expanded the 

marketing of credit cards, including to households with lower incomes 

than previously had been offered cards. An effort by credit card issuers to 

expand its customer base in an increasingly competitive market 

dramatically increased credit card solicitations. According to one study, 

more than half of credit cards held by consumers are the result of receiving 

Percentile 

of income 1998 2001 2004 

Less than 20 

20-39.9 

40-59.9 

60-79.9 

80-89.9 

90-100 

All 

24.5 

40.9 

50.1 

57.4 

53.1 

42.1 

44.1 

30.3 

44.5 

52.8 

52.6 

50.3 

33.1 

44.4 

28.8 

42.9 

55.1 

56.0 

57.6 

38.5 

46.2

Source: Federal Reserve Board’s Survey of Consumer Finances.
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 91 GAO-06-929 Credit Cards

mail solicitations.5 According to another academic research paper, credit 

card issuers have increased the number of mail solicitations they send to 

consumers by more than five times since 1990, from 1.1 billion to 5.23 

billion in 2004, or a little over 47 solicitations per household. The research 

paper also found that wealthier families receive the highest number of 

solicitations but that low-income families were more likely to open them.6

 

As shown in figure 25 above, the Federal Reserve’s survey results indicated 

that the number of lower income households with credit cards has also 

grown the most during 1998 to 2001, reflecting issuers’ willingness to grant 

greater access to credit cards to such households than in the past. 

Levels of Financial Distress 

Have Remained Stable 

among Households 

The ability of households to make the payments on their debt appeared to 

be keeping pace with their incomes as their total household debt burden 

levels—which measure their payments required on their debts as 

percentage of household incomes—have remained relatively constant 

since the 1980s. As shown below in figure 25, Federal Reserve statistics 

show that the aggregate debt burden ratio for U.S. households has 

generally fluctuated between 10.77 percent to 13.89 percent between 1990 

to 2005, which are similar to the levels for this ratio that were observed 

during the 1980s. Also shown in figure 25 are the Federal Reserve’s 

statistics on the household financial obligations ratio, which compares the 

total payments that a household must make for mortgages, consumer debt, 

auto leases, rent, homeowners insurance, and real estate taxes to its aftertax income. Although this ratio has risen from around 16 percent in 1980 to 

over 18 percent in 2005—representing an approximately 13 percent 

increase—Federal Reserve staff researchers indicated that it does not 

necessarily indicate an increase in household financial stress because 

5

Vertis, “Financial Direct Mail Readers Interested in Credit Card Offers,” (Jan. 25, 2005), 

cited in the Consumer Federation of America testimony before the Committee on Banking, 

Housing, and Urban Affairs of the United States Senate, “Examining the Current Legal and 

Regulatory Requirements and Industry Practices for Credit Card Issuers with Respect to 

Consumer Disclosures and Marketing Efforts,” 109th Congress, 2nd sess., May, 17, 2005. 

6

Amdetsion Kidane and Sandip Mukerji, “Characteristics of Consumers Targeted and 

Neglected by Credit Card Companies,” Financial Services Review, 13, no. 3, (2004), cited in 

the Consumer Federation of America testimony before the Committee on Banking, Housing, 

and Urban Affairs of the United States Senate, “Examining the Current Legal and 

Regulatory Requirements and Industry Practices for Credit Card Issuers with Respect to 

Consumer Disclosures and Marketing Efforts,” 109th Congress, 2nd sess., May 17, 2005. 
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 92 GAO-06-929 Credit Cards

much of this increase appeared to be the result of increased use of credit 

cards for transactions and more households with cards.7

Figure 25: U.S. Household Debt Burden and Financial Obligations Ratios, 1980 to 2005

In addition, credit card debt remains a small portion of overall household 

debt, including those with the lowest income levels. As shown in table 2, 

credit card balances as a percentage of total household debt actually have 

been declining since the 1990s. 

7

Board of Governors of the Federal Reserve System, Report to the Congress on Practices of 

the Consumer Credit Industry in Soliciting and Extending Credit and their Effects on 

Consumer Debt and Insolvency (Washington, D.C.: June 2006). 

0

5

10

15

20

Financial obligations ratio (debt service ratio plus automobile lease, rental on tenant-occupied property, 

homeowners insurance, and property tax payments)

Debt service ratio (ratio of debt payments to disposable personal income)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ratio

Year

Source: Federal Reserve.
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 93 GAO-06-929 Credit Cards

Table 2: Portion of Credit Card Debt Held by Households

Source: Federal Reserve.

Also, as shown in table 3, median credit card balances for the lowestincome households has remained stable from 1998 through 2004.

Table 3: Credit Card Debt Balances Held by Household Income8

Source: Federal Reserve.

As shown in figure 26 below, the number of households in the twentieth 

percentile of income or less that reportedly were in financial distress has 

remained relatively stable. 

Type of debt 1995 1998 2001 2004

Amount of debt of all families, distributed by type of debt

Secured home loan 80.7 78.9 81.4 83.7

Lines of credit not secured by residential 

property 0.6 0.3 0.5 0.7

Installment loans 12.0 13.1 12.3 11.0

Credit card balances 3.9 3.9 3.4 3.0

Other 2.9 3.7 2.3 1.6

Total 100 100 100 100

1998 2001 2004

Median value of holdings for families holding credit card debt

All families $1,900 $2,000 $2,200

Percentile of income

Less than 20 $1,000 $1,100 $1,000

20-39.9 $1,300 $1,300 $1,900

40-59.9 $2,100 $2,100 $2,200

60-79.9 $2,400 $2,400 $3,000

80-89.9 $2,200 $4,000 $2,700

90-100 $3,300 $3,000 $4,000

8

The 1998 median credit card balance in 2001 dollars; 2001 and 2004 median credit card 

balances in 2004 dollars.
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 94 GAO-06-929 Credit Cards

Figure 26: Households Reporting Financial Distress by Household Income, 1995 through 2004

As shown in figure 26 above, more lower-income households generally 

reported being in financial distress than did other households in most of 

the other higher-income groups. In addition, the lowest-income households 

in the aggregate generally did not exhibit greater levels of distress over the 

last 20 years, as the proportion of households that reported distress was 

higher in the 1990s than in 2004. 

Some Researchers Find 

Other Factors May Trigger 

Consumer Bankruptcies and 

that Credit Cards Role 

Varied 

Some academics, consumer advocacy groups, and others have indicated 

that the rise in consumer bankruptcy filings has occurred because the 

normal life events that reduce incomes or increase expenses for 

households have more serious effects today. Events that can reduce 

household incomes include job losses, pay cuts, or conversion of full-time 

positions to part-time work. Medical emergencies can result in increased 

household expenses and debts. Divorces can both reduce income and 

increase expenses. One researcher explained that, while households have 

faced the same kinds of risks for generations, the likelihood of these types 

of life events occurring has increased. This researcher’s studies noted that 

the likelihood of job loss or financial distress arising from medical 

problems and the risk of divorce have all increased. Furthermore, more 

households send all adults into the workforce, and, while this increases 

their income, it also doubles their total risk exposure, which increases their 

likelihood of having to file for bankruptcy. According to this researcher, 

Percentile 

of income 1995 1998 2001 

Less than 20 

20-39.9 

40-59.9 

60-79.9 

80-89.9 

90-100 

All 11.7 

27.5 

18.0 

9.9 

7.7 

4.7 

2.3 

13.6 

29.9 

18.3 

15.8 

9.8 

3.5 

2.8 

11.8 

29.3 

16.6 

12.3 

6.5 

3.5 

2.0 

2004 

12.2 

27.0 

18.6 

13.7 

7.10 

2.4 

1.8 

Source: Federal Reserve Survey of Consumer Finances.
Appendix II

Consumer Bankruptcies Have Risen Along 

with Debt

Page 95 GAO-06-929 Credit Cards

about 94 percent of families who filed for bankruptcy would qualify as 

middle class.9

Although many of the people who file for bankruptcy have considerable 

credit card debt, those researchers that asserted that life events were the 

primary explanation for filings noted that the role played by credit cards 

varied. According to one of these researchers, individuals who have filed 

for bankruptcy with outstanding credit card debt could be classified into 

three groups:

• Those who had built up household debts, including substantial credit 

card balances, but filed for bankruptcy after experiencing a life event 

that adversely affected their expenses or incomes such that they could 

not meet their obligations.

• Those who experienced a life event that adversely affected their 

expenses or incomes, and increased their usage of credit cards to avoid 

falling behind on other secured debt payments (such as mortgage debt), 

but who ultimately failed to recover and filed for bankruptcy. 

• Those with very little credit card debt who filed for bankruptcy when 

they could no longer make payments on their secured debt. This 

represented the smallest category of people filing for bankruptcy.

9

Elizabeth Warren, Leo Gottlieb Professor of Law, Harvard Law School, “The Growing 

Threat to Middle Class Families,” Brooklyn Law Review, (April 2003).
Page 96 GAO-06-929 Credit Cards

Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers ApendxiI

Various factors help to explain why banks that focus on credit card lending 

generally have higher profitability than other lenders. The major source of 

income for credit card issuers comes from interest they earn from their 

cardholders who carry balances—that is, do not payoff the entire 

outstanding balance when due. One factor that contributes to the high 

profitability of credit card operations is that the average interest rates 

charged on credit cards are generally higher than rates charged on other 

types of lending. Rates charged on credit cards are generally the highest 

because they are extensions of credit that are not secured by any collateral 

from the borrower. Unlike credit cards, most other types of consumer 

lending involve the extension of a fixed amount of credit under fixed terms 

of repayment (i.e., the borrower must repay an established amount of 

principal, plus interest each month) and are collateralized—such as loans 

for cars, under which the lender can repossess the car in the event the 

borrower does not make the scheduled loan payments. Similarly, mortgage 

loans that allow borrowers to purchase homes are secured by the 

underlying house. Loans with collateral and fixed repayment terms pose 

less risk of loss, and thus lenders can charge less interest on such loans. In 

contrast, credit card loans, which are unsecured, available to large and 

heterogeneous populations, and can be repaid on flexible terms at the 

cardholders’ convenience, present greater risks and have commensurately 

higher interest rates. 

As shown in figure 27, data from the Federal Reserve shows that average 

interest rates charged on credit cards were generally higher than interest 

rates charged on car loans and personal loans. Similarly, average interest 

rates charged on corporate loans are also generally lower than credit cards, 

with the best business customers often paying the prime rate, which 

averaged 6.19 percent during 2005. 
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 97 GAO-06-929 Credit Cards

Figure 27: Average Credit Card, Car Loans and Personal Loan Interest Rates 

Moreover, many card issuers have increasingly begun setting the interest 

rates they charge their cardholders using variable rates that change as a 

specified market index rate, such as the prime rate, changes. This allows 

credit card issuers’ interest revenues to rise as their cost of funding rises 

during times when market interest rates are increasing. Of the most 

popular cards issued by the largest card issuers between 2004 and 2005 that 

we analyzed, more than 90 percent had variable rates that changed 

according to an index rate. For example, the rate that the cardholder would 

pay on these large issuer cards was determined by adding between 6 and 8 

percent to the current prime rate, with a new rate being calculated monthly. 

As a result of the higher interest charges assessed on cards and variable 

rate pricing, banks that focus on credit card lending had the highest net 

interest margin compared with other types of lenders. The net interest 

income of a bank is the difference between what it has earned on its 

interest-bearing assets, including the balances on credit cards it has issued 

0 

5 

10 

15 

20 

Personal loan

New car loan

Credit card loan

199

1999

2000

2001

2002

2003

2004

2005

2006

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

1988

1987

1986

1985

1984

1983

1982

1981

1980197

1979

8

1976

1977

Interest rate (percentage) 

Year

Source: Federal Reserve.
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 98 GAO-06-929 Credit Cards

and the amounts loaned out as part of any other lending activities, and its 

interest expenses. To compare across banks, analysts calculate net interest 

margins, which express each banks’ net interest income as a percentage of 

interest-bearing assets. The Federal Deposit Insurance Corporation (FDIC) 

aggregates data for a group of all federally insured banks that focus on 

credit card lending, which it defines as those with more than 50 percent of 

managed assets engaged in credit card operations; in 2005, FDIC identified 

33 banks with at least this much credit card lending activity. As shown in 

figure 28, the net interest margin of all credit card banks, which averaged 

more than 8 percent, was about two to three times as high as other 

consumer and mortgage lending activities in 2005. Five of the six largest 

issuers reported to us that their average net interest margin in 2005 was 

even higher, at 9 percent.

Figure 28: Net Interest Margin for Credit Card Issuers and Other Consumer Lenders 

in 2005

Credit Card Operations Also 

Have Higher Rates of Loan 

Losses and Operating 

Expenses 

Although profitable, credit card operations generally experience higher 

charge-off rates and operating expenses than those of other types of 

lending. Because these loans are generally unsecured, meaning the 

borrower will not generally immediately lose an asset—such as a car or 

house—if payments are not made, borrowers may be more likely to cease 

making payments on their credit cards if they become financially distressed 

Percentage 

Source: GAO analysis of public financial statements of the five largest credit card issuers. 

0 2 4 6 8 10 

Mortgage

lenders

Consumer

lenders

Credit card

lenders

Top 5 card

issuers 9.2

8.7

4.6

2.8
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 99 GAO-06-929 Credit Cards

than they would for other types of credit. As a result, the rate of losses that 

credit card issuers experience on credit cards is higher than that incurred 

on other types of credit. Under bank regulatory accounting practices, 

banks must write off the principal balance outstanding on any loan when it 

is determined that the bank is unlikely to collect on the debt. For credit 

cards, this means that banks must deduct, as a loan loss from their income, 

the amount of balance outstanding on any credit card accounts for which 

either no payments have been made within the last 180 days or the bank 

has received notice that the cardholder has filed for bankruptcy. This 

procedure is called charging the debt off. Card issuers have much higher 

charge-off rates compared to other consumer lending businesses as shown 

in figure 29. 

Figure 29: Charge-off Rates for Credit Card and Other Consumer Lenders, 2004 to 

2005

0 

1 

2 

3 

4 

5 

6 

2005 

2004 

2003 

Credit card Consumer Mortgage 

Charge-off rate 

Lender 

Source: FDIC.
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 100 GAO-06-929 Credit Cards

The largest credit card issuers also reported similarly high charge-off rates 

for their credit card operations. As shown in figure 30, five of the top six 

credit card issuers that we obtained data from reported that their average 

charge-off rate was higher than 5.5 percent between 2003 and 2005, well 

above other consumer lenders’ average net charge-off rate of 1.44 percent. 

Figure 30: Charge-off Rates for the Top 5 Credit Card Issuers, 2003 to 2005

Credit card issuers also incur higher operating expenses compared with 

other consumer lenders. Operating expense is another one of the largest 

cost items for card issuers and, according to a credit card industry research 

firm, accounts for approximately 37 percent of total expenses in 2005. The 

operating expenses of a credit card issuer include staffing and the 

information technology costs that are incurred to maintain cardholders’ 

accounts. Operating expense as a proportion of total assets for credit card 

lending is higher because offering credit cards often involves various 

activities that other lending activities do not. For example, issuers often 

incur significant expenses in postage and other marketing costs as part of 

soliciting new customers. In addition, some credit cards now provide 

rewards and loyalty programs that allow cardholders to earn rewards such 

as free airline tickets, discounts on merchandise, or cash back on their 

accounts, which are not generally expenses associated with other types of 

lending. Credit card operating expense burden also may be higher because 

issuers must service a large number of relatively small accounts. For 

example, the six large card issuers that we surveyed reported that they 

each had an average of 30 million credit card accounts, the average 

outstanding balance on these accounts was about $2,500, and 48 percent of 

accounts did not revolve balances in 2005. 

5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 

2005 

2004 

2003 

Charge-off rate 

Source: GAO analysis of public financial statements of the five largest credit card issuers.
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 101 GAO-06-929 Credit Cards

As a result, the average operating expense, as a percentage of total assets 

for banks, that focus on credit card lending averaged over 9 percent in 

2005, as shown in figure 31, which was well above the 3.44 percent average 

for other consumer lenders. The largest issuers operating expenses may 

not be as high as all banks that focus on credit card lending because their 

larger operations give them some cost advantages from economies of scale. 

For example, they may be able to pay lower postage rates by being able to 

segregate the mailings of account statements to their cardholders by zip 

code, thus qualifying for bulk-rate discounts. 

Figure 31: Operating Expense as Percentage of Total Assets for Various Types of 

Lenders in 2005

Another reason that the banks that issue credit cards are more profitable 

than other types of lenders is that they earn greater percentage of revenues 

from noninterest sources, including fees, than lenders that focus more on 

other types of consumer lending. As shown in figure 32, FDIC data 

indicates that the ratio of noninterest revenues to assets—an indicator of 

noninterest income generated from outstanding credit loans—is about 10 

percent for the banks that focus on credit card lending, compared with less 

than 2.8 percent for other lenders. 

Percentage

Source: FDIC.

0 2 4 6 8 10

Mortgage

lenders

Consumer

lenders

Credit card

lenders
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 102 GAO-06-929 Credit Cards

Figure 32: Non-Interest Revenue as Percentage of Their Assets for Card Lenders 

and Other Consumer Lenders

Effect of Penalty Interest 

and Fees on Credit Card 

Issuer Profitability 

Although penalty interest and fees apparently have increased, their effect 

on issuer profitability may not be as great as other factors. For example, 

while more cardholders appeared to be paying default rates of interest on 

their cards, issuers have not been experiencing greater profitability from 

interest revenues. According to our analysis of FDIC Quarterly Banking 

Profile data, the revenues that credit card issuers earn from interest 

generally have been stable over the last 18 years.1

 As shown in figure 33, net 

interest margin for all banks that focused on credit card lending has ranged 

between 7.4 percent and 9.6 percent since 1987. Similarly, according to the 

data that five of the top six issuers provided to us, their net interest margins 

have been relatively stable between 2003 and 2005, ranging from 9.2 

percent to 9.6 percent during this period. 

0

2

4

6

8

10

Credit Mortgage Consumer

card

Percentage 

Source: GAO analysis of FDIC data.

Type of lender 

1

The Quarterly Banking Profile is issued by the FDIC and provides a comprehensive 

summary of financial results for all FDIC-insured institutions. This report card on industry 

status and performance includes written analyses, graphs, and statistical tables. 
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 103 GAO-06-929 Credit Cards

Figure 33: Net Interest Margin for All Banks Focusing on Credit Card Lending, 1987-2005

These data suggest that increases in penalty interest assessments could be 

offsetting decreases in interest revenues from other cardholders. During 

the last few years, card issuers have competed vigorously for market share. 

In doing so, they frequently have offered cards to new cardholders that 

feature low interest rates—including zero percent for temporary 

introductory periods, usually 8 months—either for purchases or sometimes 

for balances transferred from other cards. The extent to which cardholders 

now are paying such rates is not known, but the six largest issuers reported 

to us that the proportion of their cardholders paying interest rates below 5 

percent—which could be cardholders enjoying temporarily low 

introductory rates—represented about 7 percent of their cardholders 

between 2003 and 2005. To the extent that card issuers have been receiving 

lower interest as the result of these marketing efforts, such declines could 

be masking the effect of increasing amounts of penalty interest on their 

overall interest revenues. 

Although revenues from penalty fees have grown, their effect on overall 

issuer profitability is less than the effect of income from interest or other 

factors. For example, we obtained information from a Federal Reserve 

Net interest margin (percentage) 

Year 

Source: FDIC.

0 

2 

4 

6 

8

10 

12 

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 104 GAO-06-929 Credit Cards

Bank researcher with data from one of the credit card industry surveys that 

illustrated that the issuers’ cost of funds may be a more significant factor 

for their profitability lately. Banks generally obtain the funds they use to 

lend to others through their operations from various sources, such as 

checking or savings deposits, income on other investments, or borrowing 

from other banks or creditors. The average rate of interest they pay on 

these funding sources represents their cost of funds. As shown in table 4 

below, the total cost of funds (for $100 in credit card balances outstanding) 

for the credit card banks included in this survey declined from $8.98 in 1990 

to a low of $2.00 in 2004—a decrease of 78 percent. Because card issuers’ 

net interest income generally represents a much higher percentage of 

revenues than does income from penalty fees, its impact on issuers’ overall 

profitability is greater; thus the reduction in the cost of funds likely 

contributed significantly to the general rise in credit card banks’ 

profitability over this time. 

Table 4: Revenues and Profits of Credit Card Issuers in Card Industry Directory per 

$100 of Credit Card Assets 

Source: GAO Analysis of Card Industry Directory data.

Although card issuer revenues from penalty fees have been increasing 

since the 1980s, they remain a small portion of overall revenues. As shown 

in table 4 above, our analysis of the card issuer data obtained from the 

Federal Reserve indicated that the amount of revenues that issuers 

collected from penalty fees for every $100 in credit card balances 

outstanding climbed from 69 cents to $1.40 between 1990 and 2004—an 

Revenues and profits 1990 2004

Percent 

change

Interest revenues $16.42 $12.45 -24%

Cost of funds 8.98 2.00 -78

 Net interest income 7.44 10.45 40

Interchange fee revenues 2.15 2.87 33

Penalty fee revenues 0.69 1.40 103

Annual fee revenues 1.25 0.42 -66

Other revenues 0.18 0.87 383

 Total revenue from operations 11.71 16.01 37

Other expenses 8.17 10.41 27

Taxes 1.23 1.99 62

Net income 2.30 3.61 57
Appendix III

Factors Contributing to the Profitability of 

Credit Card Issuers

Page 105 GAO-06-929 Credit Cards

increase of 103 percent. During this same period, net interest income 

collected per $100 in card balances outstanding grew from $7.44 to 

$10.45—an increase of about 41 percent. However, the relative size of each 

of these two sources of income indicates that interest income is between 7 

to 8 times more important to issuer revenues than penalty fee income is in 

2004. Furthermore, during this same time, collections of annual fees from 

cardholders declined from $1.25 to 42 cents per every $100 in card 

balances—which means that the total of annual and penalty fees in 2004 is 

about the same as in 1990 and that this decline may also be offsetting the 

increased revenues from penalty fees.
Page 106 GAO-06-929 Credit Cards

Appendix IV

Comments from the Federal Reserve Board ApendxiIV
Appendix IV

Comments from the Federal Reserve Board

Page 107 GAO-06-929 Credit Cards
Page 108 GAO-06-929 Credit Cards

Appendix V

GAO Contact and Staff Acknowledgments ApendxiV

GAO Contact Dave Wood (202) 512-8678

Staff 

Acknowledgments

In addition to those named above, Cody Goebel, Assistant Director; Jon 

Altshul; Rachel DeMarcus; Kate Magdelena Gonzalez; Christine Houle; 

Christine Kuduk; Marc Molino; Akiko Ohnuma; Carl Ramirez; Omyra 

Ramsingh; Barbara Roesmann; Kathryn Supinski; Richard Vagnoni; Anita 

Visser; and Monica Wolford made key contributions to this report.

(250248)
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