BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Report to the Congress on the Profitability of Credit 

Card Operations of Depository Institutions

Submitted to the Congress pursuant to section 8 of the Fair Credit and Charge Card Disclosure Act 

of 1988

June 2009
Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988 directs the Federal 

Reserve Board to transmit annually to the Congress a report about the profitability of credit card 

operations of depository institutions.1 This is the nineteenth report. The analysis here is based to 

a great extent on information from the Consolidated Reports of Condition and Income (Call 

Report) and two Federal Reserve surveys, the Quarterly Report of Credit Card Interest Rates and 

the Survey of Terms of Credit Card Plans.

Call Report Data

Every insured commercial bank files a Call Report each quarter with its federal 

supervisory agency. The Call Report provides a comprehensive balance sheet and income 

statement for each bank; however, it does not allocate all expenses or attribute all revenues to 

specific product lines, such as credit cards. Nevertheless, the data may be used to assess the 

profitability of credit card activities by analyzing the earnings of those banks established 

primarily to issue and service credit card accounts. These specialized or mono-lined banks are 

referred to here as "credit card banks." 

For purposes of this report, credit card banks are defined by two criteria: (1) the bulk of 

their assets are loans to individuals (consumer lending), and (2) 90 percent or more of their 

consumer lending involves credit cards or related plans. Given this definition, it can reasonably 

be assumed that the profitability of these banks primarily reflects returns from their credit card 

operations.

The first credit card banks were chartered in the early 1980s; few were in operation prior 

to the mid-1980s. To provide a more reliable picture of the year-to-year changes in the 

profitability of the credit card operations of card issuers, this report limits its focus to credit card 

banks having at least $200 million in assets. Most of these institutions have been in continuous 

operation for several years, particularly those with assets exceeding $1 billion, and are well 

beyond the initial phase of their operations. 

As of December 31, 2008, 18 banks with assets exceeding $200 million met the 

definition of a credit card bank. At that time, these banks accounted for approximately 77 percent 

of outstanding credit card balances on the books of commercial banks or in pools underlying 

securities backed by credit card balances. 

 1.

P.L. 100-583, 102 Stat. 2960 (1988). The 2000 report covering 1999 data was not prepared as a 

consequence of the Federal Reports Elimination and Sunset Act. The report was subsequently reinstated by 

law.
In 2008, credit card banks with assets in excess of $200 million reported net earnings 

before taxes of 1.43 percent of outstanding balances adjusted for credit card-backed 

securitization.2 As Table 1 shows, returns for large credit card banks fell 132 basis points or 

nearly 48 percent from 2007. The 2008 rate of return is very low by historic standards; well 

below the average rate of return of 3.03 percent since 1986. Much of the decline in net earnings 

can be traced to deterioration in credit quality; credit card delinquencies rose sharply in 2008 and 

along with them provisions for loan losses and chargeoffs.

3

 

Although large credit card banks as a group experienced positive returns for 2008 taken 

as a whole, issuers experienced losses in the fourth quarter of the year as credit quality problems 

grew. Despite an increase in outstanding balances, year-to-date income fell about 4 percent from

the end of September to the end of December 2008.

 2.

Calculations are adjusted for credit card backed securitizations because earnings as reported on the Call 

Report reflect revenues and expenses from outstandings both on the books of the institutions and in offbalance-sheet pools backing securities.

3.

For example, credit card delinquencies rose from 4.54 percent of outstanding balances as of the end of 

2007 to 5.56 percent at the end of 2008. Refer to www.federalreserve.gov/releases/chargeoff/delallsa.htm.

Table 1. Return on assets, large U.S. credit card banks, 1986–2008

(Percent)

Year Return Year Return

1986 3.45 1997 2.13

1987 3.33 1998 2.87

1988 2.78 1999 3.34

1989 2.83 2000 3.14

1990 3.10 2001 3.24

1991 2.57 2002 3.28

1992 3.13 2003 3.66

1993 4.06 2004 3.55

1994 3.98 2005 2.85

1995 2.71 2006 3.34

1996 2.14 2007 2.75

2008 1.43

NOTE: Credit card banks are commercial banks with average managed assets (loans to 

individuals including securitizations) greater than or equal to 200 million dollars with 

minimum 50 percent of assets in consumer lending and 90 percent of consumer lending 

in the form of revolving credit. Profitability of credit card banks is measured as net pretax income as a percentage of average quarterly outstanding balances.

SOURCE: Reports of Condition and Income, 1986-2008.
Although profitability for the large credit card banks has risen and fallen over the years, 

credit card earnings have been consistently higher than returns on all commercial bank 

activities.4 For example, for all commercial banks, the average return on all assets, before taxes 

and extraordinary items, was .04 percent in 2008, down about 137 basis points or 97 percent 

from the 2007 level.5

One difficulty that arises in assessing changes in profitability over time is that the sample 

of credit card banks changes somewhat from one year to the next primarily because of mergers 

and acquisitions. Thus, overall changes in profit rates from year to year reflect both real changes 

in activity and changes in the sample. To evaluate the effects of sample changes, the profitability 

of the specific banks included in the sample each year was also examined for the prior year. For 

2008 the level of reported profitability for the constant panel of banks is the same as that shown 

in Table 1. 

Changes from 2007 in overall returns to credit card operations can be better understood 

by reviewing how individual expense and revenue items changed relative to assets among the 

credit card banks in the 2008 panel.6

 4.

This report focuses on the profitability of large credit card banks, although many other banks engage in 

credit card lending without specializing in this activity. Reliable information on the profitability of the 

credit card activities of these other banks is not available. The cost structures, pricing behavior, and 

consequently the profitability of these diversified institutions may differ from that of the large, specialized 

issuers. The relatively high returns of credit card banks are not surprising, since one would expect that 

monoline institutions or those focused heavily on only one activity, such as credit card banks, would need 

to earn higher returns to compensate for the greater risks of holding an undiversified (by credit line) 

portfolio.

Both interest income and interest expense fell over 2007

levels with net interest income increasing 66 basis points or 15 percent because interest expenses 

fell more sharply than interest income. Both noninterest income and noninterest expenses also 

fell over 2007 levels; on net, noninterest income declined 27 basis points or 19 percent from 

2007 levels. Much of the fall in average returns for credit card banks from 2007 to 2008 resulted 

 In earlier annual reports on credit card profitability, information from the Federal Reserve=s Functional 

Cost Analysis (FCA) Program was used to measure the profitability of the credit card activities of smaller 

credit card issuers. These data tended to show credit card activities were less profitable for smaller issuers 

than for larger ones. The FCA program was discontinued in the year 2000. For further discussion, see 

Glenn B. Canner and Charles A. Luckett, ADevelopments in the Pricing of Credit Card Services,@ Federal 

Reserve Bulletin, vol. 78, no. 9 (September 1992), pp. 652-666.

5.

Refer to Morten L. Bech and Tara Rice (forthcoming), "Profits and Balance Sheet Developments at U.S. 

Commercial Banks in 2008," Federal Reserve Bulletin, www.federalreserve.gov/pubs/bulletin/default.htm.

6.

For another assessment of changes in credit card revenues and expenses, see Jeffrey Green, (May 2009) 

AC&P’s 2009 Bank Card Profitability Study and Annual Report,@ Cards and Payments, vol. 22, no. 5, pp. 

22-24. The authors also report the profitability of credit card activities declined from 2007 to 2008 but not 

to the same extent as found in this report.
from increased provisions for loan losses and chargeoffs. Provisions for loan losses increased 

165 basis points or 84 percent from 2007 levels. Net chargeoffs increased 106 basis points or 53 

percent over the 2007 level. 

General Discussion

Thousands of firms offer bank cards to consumers and consumers use their cards 

extensively.

7 The Federal Reserve’s G. 19 Consumer Credit report indicates that consumers 

carried a total of about $960 billion in outstanding balances on their revolving accounts as of the 

end of 2008.

8 Credit card outstandings have grown over the years as consumers have chosen to 

use such products both for purposes of borrowing and because they serve as a convenient 

payment device and standby line of credit for unforeseen expenses. As such, a portion of the 

outstandings reflects primarily convenience use that consumers intend to repay within the 

standard interest-rate grace period offered by most card issuers. As a source of credit, one reason 

for the growth in credit card outstandings over time is that credit card loans have substituted for 

borrowing using other loan products such as closed-end installment loans and personal lines of 

credit

Prior to the early 1990s, card issuers competed primarily by waiving annual fees and 

providing credit card program enhancements such as airline mileage programs. Since then, 

however, interest-rate competition has played a much more prominent role. Many credit card 

issuers, including nearly all of the largest issuers, have lowered interest rates on many of their 

accounts below the 18 to 19 percent levels commonly maintained through most of the 1980s and 

early 1990s. Moreover, credit card interest rates in general have become more responsive to 

issuers' costs of funds in recent years as more issuers have tied the interest rates on their plans 

directly to one of several indexes that move with market rates. 

Today issuers segment their cardholder bases according to risk characteristics, offering 

reduced rates to existing customers who have good payment records while imposing relatively 

high rates on higher-risk or late-paying cardholders. Card issuers also closely monitor payment 

and charge volumes and adjust credit limits accordingly both to allow increased borrowing 

capacity as warranted and to limit credit risk. Many issuers have attempted to gain or maintain 

market share by offering very low, temporary rates on balances rolled over from competing firms

or to select current customers and by offering a wide variety of enhancements. Trends in credit 

card pricing are discussed in more detail below. 

 7.

Currently, over 6,000 depository institutions issue VISA and MasterCard credit cards and independently 

set the terms and conditions on their plans. Close to 10,000 other institutions act as agents for card-issuing 

institutions. In addition to the firms issuing cards through the VISA and MasterCard networks, two large 

nonbank firms, American Express Co. and Discover Financial Services, issue independent general purpose 

credit cards to the public.

8.

Refer to www.federalreserve.gov/releases/g19/Current/
Over the past several years, competition has led to substantial shifts in market shares 

among the industry's largest firms. Most of the larger issuers have grown by acquiring credit card 

portfolios from smaller issuers or by merging with other firms including, in some cases, larger 

competitors. In addition, several of the more rapidly growing firms in recent years appear to have 

attracted market share by offering comparatively low-rate cards and attractive balance transfer 

programs. Others have gained market share through co-branding and associated rebates

combined with waivers of annual fees.9

The U.S. the general purpose credit card market is dominated by VISA and MasterCard 

labeled cards that combined accounted for an estimated 565 million cards in 2008 down about 6 

percent from 2007.

10 In addition, American Express and Discover provided another 111 million 

general purpose cards to consumers in 2008 up slightly from 2007. 

Direct mail solicitations continue to be the primary channel used for new account 

acquisition and account retention. After reaching an all-time high in 2005 of 6.05 billion direct 

mail solicitations, direct mailings fell off in 2006 to 5.8 billion, fell further to 5.2 billion in 2007

and to 3.8 billion in 2008.

11 The sharp decline in mailings from 2007 to 2008 likely reflects the 

effects of the weaker economic environment, rising unemployment and increased credit risk 

among current and prospective card holders. Part of the decline in activity may also reflect the 

effects of funding issues as problems in the market for credit card-backed securitizations 

emerged in 2008 and may have reduced the ability of card issuers to fund outstandings at 

attractive rates.

Recent Trends in Credit Card Pricing

Aside from questions about the profitability of credit card operations, considerable 

attention has been focused on credit card pricing and how it has changed in recent years. Analysis 

of the trends in credit card pricing in this report focuses on credit card interest rates because they 

are the most important component of the pricing of credit card services. Credit card pricing, 

however, involves other elements, including annual fees, fees for cash advances, rebates, 

minimum finance charges, over-the-limit fees, and late payment charges.12

 9.

Under co-branding programs, the credit card bears the name of and is marketed to consumers of the cobranded product(s). Through use of the card, consumers typically accumulate Apoints@ good for rebates on 

purchases of the co-branded product(s). One popular type of co-branding is with airline companies; in this 

case, Afrequent-flier miles@ are earned through credit card purchases.

 In addition, the 

10.

Source: The Nilson Report, April 2009, Issue 924.

11.

Source: Synovate Mail Monitor, “US credit card mail volume declined to 3.8 billion in 2008 Other 

projections don’t accurately reflect extent of cut back” January 9, 2008, refer to 

http://mailmonitor.synovate.com/news.asp.

12.

In June 1996, the Supreme Court ruled that states may not regulate the fees charged by out-of-state 

credit card issuers. States have not been permitted to regulate the interest rates out-of-state banks charge. In 
length of the "interest-free" grace period, if any, can have an important influence on the amount 

of interest consumers pay when they use credit cards to generate revolving credit.

Over the past several years, pricing practices in the credit card market have changed 

significantly. Many card issuers, that in the past offered programs with a single interest rate, 

currently offer a broad range of card plans with differing rates depending on credit risk and 

consumer usage patterns. Moreover, as noted, many issuers have moved to variable-rate pricing 

that ties movements in their interest rates to a specified index such as the prime rate. 

As noted, risk-based pricing has become a central element of most credit card plan 

pricing regimes. In most plans, an issuer establishes a rate of interest, if the consumer borrows 

and pays within the terms of the plan that rate applies. If the borrower fails to meet the plan 

requirements, for example, the borrower pays late or goes over their credit limit, the issuer may

reprice the account, including any outstanding balances, reflecting the higher credit risk revealed 

by the new behavior. Some issuers also apply “universal default” to reprice accounts, although 

some large issuers have discontinued this practice in the past year.

13 

In recent months, many issuers have responded to rising delinquencies and higher 

chargeoffs on their credit card plans by both repricng accounts and reducing credit limits. In 

some cases the repricing and credit limit changes have affected account holders that were in good 

standing, not just those that had failed to make payments as scheduled. Recently adopted 

regulations will limit the ability of card issuers to reprice outstanding balances but will continue 

to provide issuers with considerable pricing flexibility regarding new balances (see discussion 

below, the new rules take effect in July 2010).

At present, the Federal Reserve collects information on credit card pricing through two 

surveys of credit card issuers. Because of the significant changes in the pricing of credit card 

services, the Federal Reserve initiated the Quarterly Report of Credit Card Interest Rates 

(FR 2835a) at the end of 1994. This survey collects information from a sample of credit card 

issuers on (1) the average nominal interest rate and (2) the average computed interest rate. The 

former is the simple average interest rate posted across all accounts; the latter is the average 

interest rate paid by those card users that incur finance charges. These two measures can differ 

because some cardholders are convenience users who pay off their balances during the 

 

making its decision, the Court supported the position previously adopted by the Comptroller of the 

Currency that a wide variety of bank charges, such as late fees, membership fees, and over-the-limit fees, 

are to be considered interest payments for this purpose. This ruling will likely ensure that banks will 

continue to price credit cards in multidimensional ways rather than pricing exclusively through interest 

rates. Source: Valerie Block, ASupreme Court Upholds Nationwide Card Charges,@ American Banker, 

June 4, 1996.

13.

 Universal default is the practice of repricing an account based on a wide variety of factors, some not 

directly related to the credit card account subject to the repricing. For example, paying late on other credit 

accounts, or a change in a consumer’s credit score. 
interest-free grace period and therefore do not typically incur finance charges. Together, these 

two interest rate series provide a measure of credit card pricing. The data are made available to 

the public each quarter in the Federal Reserve Statistical Release G.19 Consumer Credit. The 

Federal Reserve also collects detailed information on the pricing features of the largest credit 

card plan of a sample of issuers through the Survey of Terms of Credit Card Plans (FR 2572).14

Because information from the FR 2835a survey does not have an extended historical 

interest rate series for comparison purposes, this report on credit card profitability also presents 

data from the survey that preceded and was replaced by the FR 2835a, the Federal Reserve's 

Quarterly Report of Interest Rates on Selected Direct Consumer Installment Loans (FR 2835). 

Data from the FR 2835 indicate that credit card interest rates fell sharply from mid-1991 through 

early 1994 after being relatively stable for most of the previous twenty years, and fell again over 

the 1998-2003 period (Table 2).15 Since early 1998, credit card interest rates have fluctuated 

between 12.78 and 15.85 percent. 

It is important to note that while average rates paid by consumers have moved in a 

relatively narrow band over the past several years, interest rates charged vary considerably across 

credit card plans and borrowers reflecting the various features of the plans and the risk profile of 

the card holders served. For 2008, credit card interest rates averaged 13.57 percent for those 

incurring finance charges, down about 110 basis points from the 2007 average.

16 It should be 

noted that although, on average, credit card interest rates fell for those paying interest, data from 

FR 2835 for the first quarter of 2009 show an increase in rates likely reflecting repricing in 

response to rising delinquencies and chargeoffs (data not shown in table 2).

Additional evidence on changes in credit card interest rates comes from the FR 2572. 

Although not precisely comparable from period-to-period because of changes in the sample of 

reporters, this statistical series reveals a general decline in credit card interest rates in recent 

years. For example, only 11 percent of the respondents reported interest rates below 16 percent 

on their largest credit card plan as of September 1991, but 85 percent did so as of January 2009

(the most recent report available). In addition, the proportion of card issuers reporting that they 

utilize variable-rate pricing has also increased substantially since September 1991. As of 

September 1991, 23 percent of issuers used variable-rate pricing; as of January 2009, the 

 14.

The information in the FR 2572 survey is published twice a year by the Federal Reserve. Historically, 

the data were made available in a statistical release, the E.5 AReport of the Terms of Credit Card Plans.@ 

Beginning in 1995, the E.5 statistical release was discontinued and data are now available exclusively on 

the Board=s web site at http://www.federalreserve.gov/pubs/shop/survey.htm.

15.

For a comprehensive discussion of the factors that account for the levels and changes in credit card 

interest rates see, Glenn B. Canner and Charles A. Luckett, ADevelopments in the Pricing of Credit Card 

Services@; also U.S. General Accountability Office, U.S. Credit Card Industry (GAO/GGD-94-23, 1994).

16.

It should be emphasized that the interest rates reported after August 1994 are based on the new survey 

and are not strictly comparable to the interest rates reported on the older survey.
proportion was 61 percent. The widespread use of variable-rate pricing suggests credit card rates 

are likely to respond relatively quickly to changes in market interest rates. 

Recent Regulatory Actions

On December 18, 2008 the Federal Reserve Board approved regulatory changes to protect 

credit card users by prohibiting certain unfair acts or practices and improving the disclosures 

consumers receive in connection with credit card accounts and other revolving credit plans.17

The rules prohibiting certain credit card practices were adopted under the Federal Trade 

Commission Act, and were issued concurrently with substantially similar final rules by the Office 

of Thrift Supervision and the National Credit Union Administration. The most substantive rule 

changes will:

1. Protect consumers from unexpected interest charges, including increases in the rate 

during the first year after account opening and increases in the rate charged on pre-existing credit 

card balances. 

2. Forbid banks from imposing interest charges using the "two-cycle" billing method. 

3. Require that consumers receive a reasonable amount of time to make their credit card 

payments. 

4. Prohibit the use of payment allocation methods that unfairly maximize interest charges 

and make it more difficult for borrowers to benefit in full from low rate balance transfer 

programs and other similar promotions. 

5. Address subprime credit cards by limiting the fees that reduce the amount of available 

credit. 

The Federal Reserve Board also adopted rules to revise the disclosures consumers receive 

in connection with credit card accounts and other revolving credit plans to ensure that 

information is provided in a timely manner and in a form that is readily understandable. These 

rules amend Regulation Z (Truth in Lending). The final rules under Regulation Z require 

changes to the format, timing, and content requirements for credit card applications and 

solicitations and for the disclosures that consumers receive throughout the life of an open-end 

account.

The new rules for disclosures are intended to increase the transparency and fairness in 

how credit card (and deposit) accounts operate, thereby enhancing competition and empowering 

consumers to better manage their accounts and avoid unnecessary costs. The new rules are 

currently scheduled to take effect on July 1, 2010. Recent legislation (noted below) will alter 

implementation of some portions of these rules. 

 17.

Refer to www.federalreserve.gov/newsevents/press/bcreg/20081218a.htm
Recent Congressional Actions

On May 22, 2009 the “Credit Card Accountability Responsibility and Disclosure Act of 

2009” was enacted to establish new protections for credit card users by prohibiting or limiting 

certain acts or practices and improving the disclosures consumers receive in connection with 

credit card accounts and other revolving credit plans. The legislation mirrors in many respects the 

Federal Reserve’s recent changes to credit card rules but goes further in a number of areas 

including, rules regarding repricing of outstanding balances; allocation of payments above the 

minimum to balances that are assessed the highest interest rate first, imposition of certain fees, 

including over the limit charges and some types of fees on gift cards; disclosure of the 

consequences of only making required payments; limitations on extending credit cards to those 

under the age of 21; a requirement that issuers must consider the consumers ability to make the 

required payments under the terms of a credit card plan before issuing a card or increasing a 

credit limit; and restricting fees on subprime credit cards.
Table 2. Average most common interest rate on credit card plans, 1974–August 1994, and 

the interest rate assessed on accounts incurring interest charges, November 1994–2008

(Percent)

Year Interest rate Year Quarter Interest rate

1974 17.20 1998 February 15.33

1975 17.16 May 15.62

1976 17.05 August 15.85

1977 16.88 November 15.72

1978 17.03

1979 17.03 1999 February 14.73

1980 17.31 May 14.94

1981 17.78 August 14.79

1982 18.51 November 14.77

1983 18.78

1984 18.77 2000 February 14.32

1985 18.69 May 14.74

1986 18.26 August 15.35

1987 17.92 November 15.23

1988 17.78

1989 18.02 2001 February 14.61

1990 18.17 May 14.63

1991 18.23 August 14.64

1992 17.78 November 13.88

1993 16.83

1994 15.77 2002 February 12.98

1995 15.79 May 13.34

1996 15.50 August 13.26

1997 15.57 November 12.78

1998 15.59

1999 14.81 2003 February 12.85

2000 14.91 May 12.82

2001 14.44 August 13.11

2002 13.09 November 12.91

2003 12.92

2004 13.21 2004 February 12.41

2005 14.54 May 12.93

2006 14.73 August 13.60

2007 14.68 November 13.92

2008 13.57

2005 February 14.13

May 14.81

August 14.75

November 14.48

2006 February 14.38

May 14.77

August 14.67

2007

November

February

May

August

November 

15.09

14.64

14.47

15.24

14.35

2008 February

May

August

November

13.77

13.51

13.64

13.36

Note: Prior to November 1994 interest rates were those reported in the Quarterly Report of Interest Rates on Selected 

Direct Installment Loans. Beginning in November 1994 interest rates are those reported on the Quarterly Report of 

Credit Card Interest Rates for those credit card holders incurring interest charges.

Source: Board of Governors of the Federal Reserve System.