Credit Cards: Customized Minimum Payment Disclosures Would Provide More Information to Consumers, but Impact Could Vary
Published: 2006-04-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires that credit card issuers (issuers) include in all cardholder billing statements a generic warning, or "disclosure," about the potential financial consequences of consistently making only the minimum payment due on a credit card. However, some have urged that consumers should instead receive "customized" disclosures in their billing statements that use cardholders' actual balances and the applicable interest rates on their accounts to show the consequences of making only minimum payments, such as estimates of the time required to repay balances and the total interest amount resulting from continual minimum payments. In response to a congressional request, this report assesses the (1) feasibility and cost of requiring issuers to provide cardholders with customized minimum payment information, (2) usefulness of providing customized information to cardholders, and (3) options for providing cardholders with customized or other information about the financial consequences of making minimum payments.
section_title: What GAO Found
paragraphs: Representatives of credit card issuers and processors that handle billing and other operations for issuers said they have the technological capability to provide cardholders with customized minimum payment information. The calculations that would be included in such disclosures require various assumptions, including that no more charges are made on the account, and decisions on how to address other issues, such as balances subject to multiple interest rates, that would affect the estimates' precision. Issuers and processors estimated that the most significant costs of providing customized disclosures would be for additional postage, computer programming, and customer service. Although uncertain about exactly what calculations would be required, the estimates that issuers provided for total implementation costs ranged from $9 million to $57 million. In GAO's interviews with 112 cardholders, most who typically carry credit card balances (revolvers) found customized disclosures very useful and would prefer to receive them in their billing statements. These consumers liked that customized disclosures would be specific to their accounts, would change based on their transactions, and would provide more information than generic disclosures. However, cardholders who pay their balances in full each month were generally satisfied with receiving generic disclosures or none at all. Consumer groups, financial educators, and others indicated that customized disclosures could reduce cardholders' tendency to make minimum payments; conversely, issuers foresaw limited impact because few cardholders make minimum payments and not all can afford to pay more. Alternatives for providing customized disclosures include providing them only to revolvers, providing them less frequently, or in a location other than the first page of billing statements. While such alternatives could lower issuer costs, they could also decrease the customized disclosures' potential impact.

section_title: Letter
paragraphs: Making only the minimum payment due on a credit card can greatly  increase the time required to pay off the entire balance and increase the  total amount of interest paid by a consumer. With more than 292 million  credit cards in use in the United States and a growth in personal  bankruptcies, many financial educators see an increasing need for  consumers to become more educated about the cost of using credit cards.  As one way of achieving this, Section 1301 of the Bankruptcy Abuse  Prevention and Consumer Protection Act of 2005 (Bankruptcy Act), passed  in April 2005, amends the Truth in Lending Act (TILA) to require that a  generic warning, or “disclosure,” be printed on all cardholders’ billing  statements about the potential financial consequences of making only the  minimum payment due.
The provision also requires that cardholders’ billing statements provide a  toll-free telephone number for obtaining individualized information about  how making minimum payments would affect their accounts. However,  some lawmakers and others believe that these requirements are not  extensive enough to educate consumers about the effects of making only  minimum payments on credit cards. They argue that the generic  disclosures required by the law will not adequately inform cardholders of  their situation in today’s credit environment, in which interest rates on  credit card debt can exceed 30 percent. Instead, they believe that a  “customized disclosure”—that is, one that uses cardholders’ actual  balances and the applicable interest rates on their accounts to calculate  how long a given balance would take to pay off if only minimum payments  are made—would allow cardholders to make more informed credit  decisions.
This report responds to your April 25, 2005, request that we study the  feasibility of requiring credit card issuers (issuers) to provide customized  information to cardholders about the consequences of making minimum  payments, as well as the usefulness of this information to cardholders.  Specifically, our objectives were to (1) determine the feasibility and cost of  requiring issuers to provide cardholders with customized minimum  payment information, (2) assess the usefulness of providing customized  information to cardholders, and (3) identify options for providing  cardholders with customized or other information about the financial  consequences of making minimum payments.
To determine the feasibility and cost of requiring issuers to provide  customized information to cardholders on billing statements, we met with  staff members of six major credit card issuers and one mid-size issuer. We  determined that these issuers account for about 67 percent of actively used  credit card accounts as of year-end 2005. We asked each of the issuers  about how they could implement the requirement and their estimates of the  costs they would incur in doing so. We also obtained cost estimates for  three other large issuers from court documents that were associated with a  California lawsuit challenging a state statute that required issuers to  include minimum payment disclosures on billing statements sent to  California cardholders. In addition, we discussed the feasibility and cost of  additional requirements with the staff of two external credit card  processors (processors) that produce billing statements for thousands of  large and small issuers, and a representation of industry, legal, academic,  government, and consumer entities. To assess the usefulness of customized  disclosures, we interviewed 112 cardholders in Boston, Chicago, and San  Francisco to gather data on their preferences for and opinions on the utility  of statements about making minimum payments. This sample of  cardholders was not designed to be statistically representative of all  cardholders, and thus our results cannot be generalized to the population  of all U.S. cardholders. Our efforts to identify options for increasing  consumer awareness of minimum payment issues involved interviews with  representatives of credit card issuers and processors, consumer interest  groups, a credit counseling agency, as well as federal financial regulators  and the Director of the federal Financial Literacy and Education  Commission. We also reviewed comment letters provided to the Board of  Governors of the Federal Reserve System (Federal Reserve) in connection  with the Federal Reserve’s recent advance notices of proposed rulemaking  regarding its open-end (revolving) credit rules of Regulation Z, which  implements TILA. A more detailed description of our methodology is  presented in appendix I. Additionally, a copy of the survey instrument we  used to interview cardholders, along with summarized results, can be  found in GAO-06-611sp. We conducted our study between June 2005 and  April 2006 in Boston, Chicago, San Francisco, and Washington, D.C., in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The credit card industry is composed of issuers, processors, and card  networks. Typically banks, thrifts, and credit unions are the organizations  that issue credit cards and underwrite the credit that is provided to  consumers. The issuance of credit cards is highly concentrated, with the  eight largest issuers representing 88 percent of all outstanding consumer  credit card balances reported by CardWeb.com, Inc., as of year-end 2005.  Processors provide a wide range of services for thousands of issuers,  including card production, transaction processing, and production and  mailing of billing statements. The level of services provided by processors  can differ depending on a specific issuer’s needs. For example, some  issuers handle all billing calculations and maintain all related data within  the organization and rely on processors solely for printing and mailing  billing statements. Other issuers, including many of the smaller issuers, use  processors to perform all necessary services related to their credit cards.  Finally, credit card networks facilitate payment transactions between  cardholders and merchants by transferring information and funds between  a merchant and a cardholder.
Credit card users can be characterized into two groups—those who use  their cards for purchases but consistently pay their outstanding balance in  full every month (convenience users) and those who carry a balance on  their cards (revolvers). Different data sources report that in 2004 revolvers  represented between approximately 46 and 55 percent of cardholders.  Various data sources indicate that the proportion of cardholders that pay  only the minimum payment or slightly more than the minimum payment at  any given time ranged from about 7 and 40 percent between 1999 and 2005,  while issuers indicated that a small percentage of their cardholders (from  less than 1 percent and up to 10 percent) make multiple consecutive  minimum payments. According to a survey conducted by the Federal  Reserve in 2004, the median balance for U.S. families that carried balances  on bank-type credit cards was $2,200, and the average balance was $5,100.
Each issuer determines the minimum payments that cardholders must pay  each billing cycle to keep an account in good standing. Issuers calculate  minimum payment amounts in a variety of ways, including as a set  percentage of a cardholder's outstanding balance, or the sum of all interest  and fees to be paid as well as some portion of the principal balance, among  other ways. For example, some issuers calculate minimum payments as 1  percent of the outstanding balance plus any finance charges and fees (such  as late fees or over-the-limit fees) incurred for that billing period.
Historically, required minimum payments generally averaged about 5  percent of the outstanding balance, but these amounts declined to about 2  percent in the last decade. The decrease in minimum payment rates  lowered a cardholder’s monthly payment obligation, but also further  delayed a cardholder’s repayment of principal. In some cases, the amount  required for the minimum payment was not sufficient to cover all incurred  interest or other transaction charges, which increased the outstanding  balance. Concerns about such increases—known as negative  amortization—as well as other practices compelled four federal banking  regulators to issue guidance in January 2003 that stated that issuers should  require minimum repayment amounts so that cardholders’ current balances would be paid off—amortize—over a reasonable period of time.  The guidance was designed to discourage minimum payment formulas that  result in prolonged negative amortization of accounts, a practice viewed by  regulators as raising safety and soundness concerns. However, it is possible  that a bank could satisfy a regulator’s expectations by requiring minimum  payment amounts that represent less than the 5 percent of outstanding  principal that previously was customary in the industry. According to a  representative of the Office of the Comptroller of the Currency, by year-end  2005, nearly all the issuers that it oversees (which includes the largest  issuers in the United States) had controls in place to address concerns  regarding negative amortization of credit card accounts.
As part of the Bankruptcy Act, issuers will be required to provide  cardholders with information about the consequences of making minimum  payments on outstanding credit card balances. More specifically, the act  requires creditors to print on the billing statements of revolving credit  products (of which credit cards are a form) a generic disclosure that  “making only the minimum payment will increase the interest you pay and  the time it takes to repay your balance.” In addition to the generic  disclosure, the law requires creditors to choose from two options for  providing additional information to cardholders: (1) providing a toll-free  telephone number that cardholders could use to obtain the actual number  of months that it would take to repay their outstanding balance if they  made only minimum payments or (2) providing an example of the length of  time required to pay off a sample balance at an interest rate of 17 percent  and a toll-free telephone number cardholders could call to get an estimate  of the time required to repay their balances. These requirements are  intended to increase consumer awareness of the consequences of these  types of payments. The Federal Reserve is currently establishing  regulations to implement the new law, which it expects to complete in  2007. The minimum payment disclosure requirements will take effect 12  months after the final regulations are published.
While the Bankruptcy Act mandated that generic disclosures be made to  consumers on their billing statements, some lawmakers had sought to  require additional and more customized disclosures that would have  provided each cardholder with customized information about the costs and  time involved in paying off credit card balances resulting from habitually  making only minimum payments. Amendments that would have mandated  these customized disclosures failed to pass prior to the passage of the  Bankruptcy Act. While the details vary, five bills were pending in Congress  as of March 2006 that would mandate that issuers provide customized  disclosures to consumers.
Table 1 illustrates the differences between the disclosure options that  issuers will be required to implement as a result of the Bankruptcy Act and  an example of the type of customized disclosures that have been  envisioned as part of various legislative proposals. “Making only the minimum  payment will increase the  interest you pay and the  time it takes to repay your  balance.” “Minimum Payment Warning:  Making  only the minimum payment will  increase the interest you pay and the  time it takes to repay your balance.” “Minimum Payment Warning: Making only  the minimum payment will increase the  amount of interest paid and the length of  time to repay the outstanding balance.” “For more information, call  this toll-free number:  ____________.” “For example, making only the typical  2% minimum monthly payment on a  balance of $1,000 at an interest rate  of 17% would take 88 months to repay  the balance in full.” “For example, your balance of  will take   months to pay off…”
The information required  to be provided is the actual  number of months that it  will take the cardholder to  repay his/or her  outstanding balance. “For an estimate of the time it would  take to repay your balance, making  only the minimum payments, call this  toll-free number: _______________. “…at a total cost of  in principal and   in interest if only the minimum monthly  payments were made.” “To pay off your balance in 3 years, you  would need to pay  monthly.”
An attempt to mandate customized disclosures on the consequences of  making minimum payments also was made at the state level. In 2001,  California enacted a law that required issuers to provide the state’s  cardholders with more detailed information about making minimum  payments. Issuers were required to provide one of two disclosure options.  Both options required the issuer to provide a minimum payment warning.  In addition to the minimum payment warning, one option required issuers  to print an example of the length of time required to pay off a sample  balance amount using a sample interest rate. Further, issuers were required  to provide cardholders, via a toll-free telephone number, with information  about both the length of time required and total cost of paying an  outstanding balance if only minimum payments were made.  The second  option, which was mandated if a cardholder did not pay more than the  minimum payment for 6 consecutive months, required issuers to print on  the billing statement individualized information indicating an estimate of  the number of years and months and the approximate total cost to pay off  the total balance due, based on the terms of the credit agreement, if the  holder were to make only the minimum payment. The disclosure also  included a toll-free telephone number to a credit counseling referral  service. In December 2002, the U.S. District Court for the Eastern District  of California held that the state statute was preempted by federal law and  determined that the law was inapplicable to all federally chartered banks,  savings associations and credit unions. According to a staff attorney for  the California Attorney General’s office involved in the case, the judge  effectively invalidated the law for all issuers because federally chartered  issuers held more than 95 percent of credit card debt in the state at the  time, thereby compelling the state for fairness reasons to relieve all issuers  from compliance with the law.
section_title: Providing Cardholders with Customized Information Seen as Feasible but Doing So Would Increase Costs for Issuers
paragraphs: According to credit card issuers and others we interviewed, providing  customized estimates to cardholders would be feasible. However, the  precision of these estimates would depend upon the assumptions  incorporated in the calculations needed to produce this information, which  can vary based on decisions about how various factors are included.  Issuers also said providing such information could expose them to legal  liability and suggested a variety of regulatory actions to address these  concerns. Although uncertainty about format and content prevented  issuers and processors from providing precise cost estimates, they told us  the largest individual cost components for large and small issuers appeared  to be ongoing postage and call center operations, as well as one-time  programming costs. Total projected costs to implement customized  disclosures varied widely. However, issuers already are going to bear some  of these costs to implement Bankruptcy Act disclosures; and, according to  an industry analyst, the costs appear very small when compared with large  issuers’ net income.
subsections: section_title: Issuers and Others Stated That Providing Customized Estimates Is Feasible but Could Increase Issuers’ Legal Liability
paragraphs: Issuers and others familiar with the proposed minimum payment  disclosure indicated to us that providing cardholders with estimates of  various consequences of making minimum payments would be possible.  Representatives for all six large credit card issuers whom we interviewed  acknowledged that their computer systems could be programmed to use  individual cardholder account information to calculate estimates of the  information envisioned to be disclosed. These calculations would include  the amount of time required to pay off a cardholder’s specific balance if  only the minimum payment were made, the total amount of interest  incurred over that time, and the amount a cardholder would be required to  pay each billing cycle to pay off an outstanding balance over a given period.  Some credit card issuers and processors already had successfully  developed the capability to produce tailored estimates for their  cardholders as a result of customized minimum payment disclosures that  had been required in California in 2002. One of these issuers developed this  capability internally, while another used a third-party processor that  developed this functionality for all its issuer clients to use.
Besides noting that they could produce customized disclosures, some  issuers said they would prefer to provide customized rather than generic  information to cardholders. For example, representatives for one large  issuer told us they would prefer the Bankruptcy Act option that would  require them to produce actual repayment times for cardholders,  obtainable by calling a toll-free telephone number provided in billing  statements. In a comment letter responding to the Federal Reserve’s  advance notice of proposed rulemaking, a representative for another large  issuer said that existing disclosure provisions should be implemented in  such a way as to encourage issuers to provide customized information to  cardholders. These two large issuers said they supported providing  customized information to their cardholders because they believe  cardholders would find it more relevant than generic information. A  representative for one of these issuers also said the issuer would benefit  because providing customized information over the telephone would  require the shortest statement to be printed on a billing statement of the  two options under the Bankruptcy Act and could be printed anywhere on a  billing statement, which could be easier to implement.
Although generally having fewer resources than larger issuers, small banks  that issue credit cards also could likely implement customized disclosures,  but such a requirement could represent a larger burden for those that do  not use third-party processors. A representative of a trade association  representing community banks told us customized estimates would be  feasible for small institutions because the work to implement such a  requirement would be done largely by the third-party processors already  used to manage cardholder data and process billing statements.   According to staff of the National Credit Union Administration and the  Federal Deposit Insurance Corporation who were familiar with the  operations of smaller financial institutions offering credit cards, most small  issuers use third-party processors to assist with card operations because  the small issuers lack the resources to provide such a product themselves.  For example, small issuers typically assign only one or two people to  manage their credit card programs that, according to representatives of a  third-party processor, would not be adequate for managing the technical,  legal, and compliance issues that would be required to provide the  proposed customized disclosure. However, small institutions benefit from  economies of scale by working through third-party processors. For  example, a representative for a third-party processor with thousands of  small-bank clients told us that the processor requires all small institutions  to use the same billing statement format or template. Therefore, changes  made by the third-party processor to the billing statement template would  apply to all clients using that template. In this case, the processor’s costs to  modify the template would be spread across its client base. A  representative from a federal banking regulator told us that if issuers  discontinue a credit card program upon the implementation of new  disclosure requirements, it would likely be because the program had been  marginally profitable or unprofitable even before the requirements took  effect.
subsections: section_title: Assumptions and Calculation Methods Can Affect the Precision of Customized Estimates
paragraphs: Issuers and others told us the calculations needed to produce customized  information require the incorporation of certain assumptions, and their  precision can vary depending on various choices that can be made as part  of these calculations. The calculations needed to produce customized  information require assumptions about future cardholder behavior or  changes in account terms. For example, an estimate of the time required to  pay off a cardholder’s current balance would assume that the cardholder  does not make more purchases with the card. Any subsequent increase to a  cardholder’s outstanding balance would lengthen the repayment period and  also likely increase the total amount of interest to be paid for a cardholder  making minimum payments. Additionally, the estimates produced would  assume that a consumer continuously paid exactly the minimum payment  and that payments would be made by the due date. Other assumptions  would address potential changes in account terms. For example,  calculations would assume that the interest rate applied to the cardholder’s  balance remained constant. However, changes in future interest rates are  likely, and such changes could affect the time required to fully repay a  given balance. Similarly, the estimates produced would assume that the  formulas issuers use to allocate payments to the various balances subject  to different interest rates, among other things, also would stay the same.
In addition to these assumptions, the choices that lawmakers, regulators or  issuers make about calculation methods also affect the precision of the  customized estimates. These choices include how issuers compute  minimum payment amounts or finance charges, among other things. For  example:   Minimum payment formulas vary among issuers and each issuer could  have as many as six different methods for determining the minimum  payment on a single account. Some card issuers calculate minimum  payment amounts as a set percentage of a cardholder’s outstanding  balance, while others include all interest and fees to be paid as well as  some amount of the principal balance. Further, issuers differ in their  absolute minimum payment amounts (e.g., $10, $15, $20). Estimates  based on each firm’s actual formula for calculating minimum payments  therefore would differ from estimates calculated using a standard  formula for all issuers.
Many issuers have credit cards that charge different rates for different  types of transactions, such as purchases, cash advances, or balance  transfers from other credit cards. Estimates that require issuers to  incorporate the various interest rates that apply to their cardholders’  outstanding balances would differ from those based on formulas that  assume a single interest rate, including ones using a composite rate.
As a result, if lawmakers or regulators mandated use of a standardized  calculation to prepare customized minimum payment estimates,  cardholders could receive less precise estimates. In contrast, requiring  issuers to calculate estimates using actual interest rates—including cases  in which multiple interest rates apply to different portions of a total  balance—and include other information that specifically reflects each  issuer’s own terms and practices likely would lead to more precise  estimates.
Because some issuers saw the assumptions that must be incorporated into  the calculations for customized minimum payment disclosures as  unrealistic, they and others questioned whether such disclosures provided  useful information. For example, some issuer representatives noted that  the customized disclosures presented estimates that would be accurate  only as long as cardholders did not make further purchases and the interest  rate on the card remained constant. However, issuers said that such  situations were not representative of most cardholders’ behavior or today’s  credit environment. Some issuers mentioned that, for these reasons, the  Bankruptcy Act disclosure options were a good compromise between  Congress and the industry. As a result, issuers and others stated that these  disclosures deserve a chance to work before further, more detailed  disclosures are required.
section_title: Issuers See Shelter from Legal Liability as Important for Providing Customized Disclosures
paragraphs: According to some issuers and a third-party processor, providing  customized estimates to cardholders could expose card issuers to  increased legal risk. Because of the imprecise nature of customized  minimum payment estimates, some issuers expressed concerns about  facing lawsuits. For example, some issuer representatives told us that  issuers were concerned about being held responsible for adverse  consequences experienced by cardholders who misinterpreted the  estimates, which incorporate certain assumptions and calculation choices  that affect their precision. Issuers and others said litigation (e.g., class  action lawsuits) could arise out of such misinterpretations and subject  issuers to significant legal costs, even if they took reasonable actions under  the guidance to provide cardholders with customized information. A  representative of a trade association for community banks told us the  threat of legal liability would be more onerous for small issuers.
The extent to which requiring customized disclosures would increase  issuers’ legal risk is not certain because cardholders’ ability to sue can vary.  For example, under TILA provisions, class action lawsuits are not available  to cardholders with grievances under the minimum payment disclosure requirement added by the Bankruptcy Act. However, TILA provides  cardholders with a private right of action against issuers, which could  make issuers that failed to comply with the minimum payment disclosure  requirements liable for actual losses incurred by cardholders. In addition,  an Office of the Comptroller of the Currency official told us that the  possibility exists that a cardholder may have a private right of action  against an issuer for erroneous disclosures under a state’s consumer  protection law.
Although various “safe harbor” provisions in TILA already protect issuers  from unintentional errors resulting from good-faith efforts to comply with  rules and regulations, organizations we interviewed suggested a variety of  additional legal protections if disclosure requirements were to change. For  example, a representative for an issuer suggested that issuers could use  calculation methods previously deemed acceptable to the Federal Reserve.  Issuers that performed calculations according to the approved methods  would be considered in compliance with the disclosure requirements. Also,  issuer representatives and a representative of a consumer interest group  said that the estimates that issuers calculate could be subject to a tolerance  test, which would give issuers a margin of error (e.g., a few months) within  which the estimates could be deemed accurate. Another legal protection  could involve determining whether issuers followed required steps— according to defined assumptions and calculation methodologies—to  calculate the customized information. For example, regulation could  establish parameters for the calculations, such as how to treat accounts  with multiple interest rates. However, a representative of a consumer  interest group and credit card processor cautioned that while a higher level  of standardization of the calculations could help protect issuers from  lawsuits because expectations would be clearer, standardized calculations  might not be sufficient to reflect variation in the terms and conditions of  various credit card products.
section_title: Issuers Identified Three Significant Costs to Implement Customized Disclosures, but Estimates of Total Costs Varied Widely
paragraphs: Although not certain about the form and content of a customized minimum  payment disclosure, issuer and processor representatives were able to  identify the implementation components that likely would be the most  costly, including postage, computer programming, and call center  operations. However, the estimates of the total implementation costs  varied widely. Further, issuers already would incur some portion of the  costs to provide customized disclosures in providing the Bankruptcy Act  disclosures; thus, not all of the cost estimates we obtained represent the  cost of customized disclosures exclusively.
Credit card issuers and processors—the entities with the best data about  the cost to implement customized disclosures—were unable to provide  precise cost estimates for a variety of reasons. First, factors affecting  actual paper and postage costs cannot be determined until a law requiring a  customized disclosure is enacted and implementing regulations issued.  Such factors could include how customized disclosures would be  formatted (e.g., font size, spacing) and where such disclosures would be  required to be placed in the billing statement (e.g., front page, leaflet).  Second, decisions about calculation methods and the treatment of  variables could affect estimates for programming computers. For example,  representatives for two large issuers told us that if issuers had to make  complex calculations, actual programming costs could be as much as four  to five times higher than if simpler calculations were required.  Third, some  issuers were uncertain of the costs that would be incurred outside their  own organizations, for example, by third-party processors. Accordingly,  some issuers generated estimates based on previous experiences (such as  implementing similar requirements) or by making assumptions about  implementation requirements, such as the required location and length of a  disclosure.
subsections: section_title: Increased Postage Represents One of the Largest Cost Components
paragraphs: Two large issuers and two third-party processors provided us with  estimates of postage costs, which they said would be potentially the  highest cost item to implement a customized disclosure. Postage cost  increases could occur if adding the disclosure also added an additional  page to the monthly statement. This added weight could move the  statement into a higher postage category. Adding a page to billing  statements could increase postage costs because, as one large issuer  explained, issuers generally manage the amount of information they  include in their mailings to meet a 1-ounce limit, which according to a  representative of a third-party processor costs on average $0.30 per  statement to mail. The incremental cost of moving from a 1-ounce bulk  postage rate to a 2-ounce rate would be on average about $0.23, or almost  an 80 percent increase, according to representatives for two third-party  processors. However, requiring that additional information be included in a  billing statement would not necessarily push all billing statements into a  higher postage category because issuers add and remove information (such  as advertising) from statements to meet weight limits, according to  representatives for some issuers. According to representatives of a third- party processor, postage rates for small issuers that mail statements  through third-party processors would be relatively the same as for large  issuers. A representative of another third-party processor told us small  issuers get the same bulk postage rates as large issuers because their  mailings are combined. Postage rates decline as more statements make up  a mailing. However, postage costs for small issuers that mail statements at  retail rates would be higher. We were unable to determine the proportion of  small issuers that use retail postage rates.
According to issuers and processors, additional postage arising from  implementing customized minimum payment disclosures for a large issuer  could be as high as about $14 million annually. We obtained postage cost  estimates from representatives for two large issuers that mail up to 50  million statements each month.
According to one of these issuers, annual postage costs could increase  up to about $5 million if all cardholders were required to receive the  customized information envisioned in a proposed disclosure on the first  page of every billing statement. We estimated this to be an increase of  about 5 percent to annual postage costs for mailing billing statements.
Representatives for the other issuer told us their postage costs could  increase by as much as about $14 million annually to implement  customized disclosures on the first page of billing statements. We  estimated this to represent about an 8 percent increase to the issuer’s  annual postage costs to mail billing statements. The representatives  estimated these disclosures to be twice the length of a generic  disclosure, thereby forcing more than 20 percent of statements to  require an additional page.
Differences in these estimates are attributable to the number of billing  statements that the issuers estimated would require additional postage,  which differs across issuers depending on the format of their statements  and the assumptions they made about formatting for the proposed  disclosure.
Although estimated postage cost increases appear to constitute the largest  component of projected implementation costs, issuers usually incur much  higher postage costs for other purposes. For example, a credit card  industry analyst told us postage costs for mailing statements are  insignificant when compared with the expense per issuer of mailing about  4-5 billion solicitations each year, a typical amount for the largest card  issuers. In contrast—based on our analysis of CardWeb.com, Inc., data— we estimate that even the largest issuers mail less than 1 billion statements  per year. Also, postage costs could decline as the number of cardholders  receiving billing statements in electronic formats increases.  Representatives for some issuers told us that the proportion of cardholders  receiving statements in an electronic format is small, but growing.  According to representatives of one large issuer, between 2002 and 2004,  electronic statement use among their cardholders increased about 85  percent, and 6 to 12 percent received statements electronically.  Representatives for a smaller issuer told us that about 10 percent of its  cardholders used the issuer’s Web site to get information about their card  accounts.
section_title: Programming Modifications Are Also Likely to Be a Major Implementation Cost Component
paragraphs: According to issuers and others, expenses related to programming  computer systems to develop tailored estimates would be another major  cost of implementing customized disclosures. Programming costs are one- time costs for designing, testing, and implementing computer code. Once in  place, the new or revised programs would use cardholder account data to  provide estimates of the repayment period, total interest costs, and  monthly payment amount to pay off a balance if only minimum payments  were to be made. Issuers’ programming costs would arise from the time  their own information technology staff spend making systems  modifications or from the increased expenses from the use of third-party  processors, which maintain information systems that store issuers’  cardholder account data as well as develop, print, and mail billing  statements.
Estimates for programming generally were $1 million or less and depended  on the complexity of the required calculations and issuers’ information  systems. For example, representatives of a large issuer and a card  processor representing over one thousand large and small issuers told us  the up-front costs to develop and program computer code for a customized  disclosure would cost about $500,000 but could cost as much as $1 million  for more complex calculations. In providing us with estimates, we asked  issuers and third-party processors to assume that calculations would  reflect issuers’ actual account terms and practices at the time the  information was produced, including interest rates, account balances, and  methods for calculating finance charges and minimum payments. However,  representatives for the same large issuer told us programming costs could  be as much as $5 million for the most complex calculations—for example,  a calculation that would require issuers to factor in such situations as  temporary zero percent promotional interest rates. We obtained estimates  from others for programming under the Bankruptcy Act provisions, which  only require one calculation to estimate a cardholder’s repayment period.  These estimates were generally less than $500,000. For example, one lender  stated in a comment letter to the Federal Reserve that such programming  would cost about $412,500.
Estimated programming costs for smaller issuers that use third-party  processors were lower than for large issuers. We obtained estimates for  programming the customized provisions under the Bankruptcy Act from a  processor and a medium-sized issuer. A representative of the processor  estimated it would cost about $300,000 to modify information systems to  accommodate the Bankruptcy Act disclosure option requiring issuers to  provide an estimate of the repayment time. According to the  representative, this cost would be spread across the processor’s small- and  medium-size issuer client base of about 5,000 issuers. In addition,  representatives for a medium-sized issuer told us it would cost the issuer  $5,000 to $10,000 to have its third-party processor modify its information  systems to accommodate customized provisions contained in the  Bankruptcy Act. They further noted that it would cost about $150 per hour  to hire a processor to program the other two messages that are envisioned  to be included in customized disclosures.
Costs for programming would vary depending on the level of precision that  would be required and the complexity of an issuer’s account practices.  Some issuers have more complex pricing schemes that could increase the  programming required to develop estimates that more closely reflect a  cardholder’s situation. For example, as noted above, many large issuers  engage in transaction-based pricing, in which different rates of interest  apply to balances originating from different transactions (such as  purchases, cash advances, or balance transfers). Programming a  calculation that accounts for a variety of balances at different interest  rates, while more precise, is more complex than a calculation that uses one  balance and one interest rate. Adding further to the complexity, with  multiple balances and interest rates, decisions would need to be made  about the order in which to allocate cardholder payments to the  outstanding balances.
A smaller portion of the programming estimates we received was for  reformatting billing statements to accommodate the text of the disclosure.  Issuers use various formats or templates to present cardholders with  information about their accounts, including transactions, payment due  dates, and rewards program information. Issuers may also use different  templates for different card programs, such as cards with rewards (e.g.,  cash-back or travel benefits) or private-label cards associated with major  retailers. The issuers use an average of three statement templates, with the  smallest issuers using just one and the largest issuers using as many as 100  templates, according to representatives of third-party processors serving  large and small issuers. One representative estimated one-time costs of  about $13,500 per issuer, assuming three templates required revision.  Programming costs for small issuers would generally be the same on a per- unit (statement template) basis. However, a representative of another third- party processor told us reformatting costs would be substantially lower for  small issuers because the processor requires all small issuers to use the  same statement template, thereby spreading reformatting costs across the  thousands of institutions using that statement.
section_title: Need for Expanded Customer Service Resources Would Also Increase Issuer Costs
paragraphs: Issuers estimated that call-center costs would increase following the  implementation of customized disclosures because the centers would  receive more and longer telephone calls from customers. One large issuer  told us its costs could increase by about $3 million in the first few months  following implementation of customized disclosures. However, this issuer  said these calls likely would taper off after cardholders became familiar  with the customized information. In addition, an issuer in a comment letter  to the Federal Reserve noted that the Bankruptcy Act requirements would  increase call volume and duration, which could increase its expense for  servicing customer calls by about $900,000 monthly.  As part of preparing  to implement the California disclosure requirements, six large issuers  estimated incurring expenses averaging about $680,000 monthly to operate  a telephone bank upon implementing minimum payment disclosures in  California.
section_title: Estimates of Total Implementation Cost Varied Widely
paragraphs: Perhaps reflecting the uncertainties and range of assumptions noted above,  the estimates that we obtained of total first-year costs ranged from $9  million to $57 million for large issuers. For example, representatives of one  issuer estimated that postage, programming, and customer service costs  could total approximately $9 million, but also noted that the issuer could  incur additional costs, such as training staff and retaining legal services to  keep abreast of regulatory changes and court decisions that could affect  compliance.
Not all issuers from whom we obtained data were able to provide total  estimates based on individual implementation cost components. Instead,  these issuers provided us with only aggregated estimates based on their  experiences in implementing California’s minimum payment disclosure  requirements; and these estimates generally were higher than those  provided by another issuer and two processors that estimated individual  component costs. For example, representatives of one large issuer  estimated the company would have spent a total of $57 million in the first  year following implementation had it implemented the California  requirements, which roughly resembled portions of the customized  disclosure we studied. The issuer separated this estimate into two  categories of one-time, start-up costs and ongoing costs. The one-time  costs would be about $30 million, which would include programming  computer systems and modifications to customer service systems, among  other things. Ongoing costs would be about $27 million annually, including  postage and handling a higher number of calls from cardholders, among  other things. In documents filed with a federal district court, three large  issuers estimated it would cost them about $41 million each in the first year  to implement California’s customized disclosure requirements. Of this  amount, about $18 million would pay for one-time, start-up costs with the  remaining $23 million for ongoing costs.
section_title: Issuers Already Slated to Incur Some of These Costs, Which Are Small Relative to Net Income
paragraphs: As noted above, impending minimum payment disclosure requirements  under the Bankruptcy Act could soon require issuers to make programming  and billing statement changes that could consequently reduce estimated  costs to implement any additional customized disclosures. For example,  one Bankruptcy Act option would require issuers to produce actual  information about a cardholder’s repayment period if only minimum  payments were made and make this information available to cardholders  over the telephone. Programming expenses made up front to meet that  requirement could reduce the programming costs for implementing  customized disclosures. Also, estimated increases to postage costs  associated with a new customized disclosure requirement may be  overstated in that they do not account for increased postage costs issuers  will already have incurred for implementing the Bankruptcy Act  requirements.
Because the cost estimates we obtained were not comprehensive, it is not  possible to ascertain how additional customized minimum payment  disclosure requirements would affect issuers’ overall profitability.  However, the costs of implementing customized disclosures do not appear  to be significant in terms of large issuers’ net income. According to a credit  card industry analyst, estimates for implementing the customized minimum  payment disclosures are insignificant to issuers and easily would be  absorbed. The analyst noted that estimates for start-up and ongoing costs  in the first year would be so small that they would be the equivalent of a  rounding error in terms of net income.
Comparing these estimated implementation costs with issuers’ operating  expenses also indicated that such costs might not significantly increase  their operating expenses.  To determine how estimates of the costs to  implement customized disclosures—which ranged from $9 million to $57  million—would affect the operating expense of the issuers that provided us  with these estimates, we identified operating expenses and amounts in  outstanding credit card loans from financial reports and data the issuers  provided to us. By adding the estimates of total implementation costs to  the amount each issuer reported in operating expenses, we found that the  ratio of their operating expenses to their outstanding credit card loans—a  metric commonly used by industry analysts—would stay the same or  increase slightly. For example, we found that the issuer that provided us  with a $9 million estimate for total implementation costs for the first year  would experience no change to its operating expense ratio. The issuer that  provided us with a $57 million estimate would experience an increase in  current ratio from approximately 3.3 percent to about 3.5 percent.  According to CardWeb.com, Inc., monthly operating expense ratios for the  150 issuers that it monitors generally averaged between 4.2 and  approximately 6.0 percent from January 2001 to December 2005.
section_title: Customized Disclosure Was Seen as Useful, but Its Impact on Cardholders May Vary
paragraphs: Most of the revolver cardholders—those that carry a balance on their credit  cards—who we interviewed preferred to receive a customized disclosure  on minimum payment consequences.  Although some convenience users  also preferred a customized disclosure, most saw generic disclosures or no  disclosure at all as sufficient for their needs. Those preferring the  customized disclosure did so because it would be cardholder-specific,  change each month based on account transactions, and provide more  information than the two Bankruptcy Act options. However, opinions as to  how the customized disclosure would influence cardholder behavior  varied, with some believing that such a disclosure would have a great  impact and others believing that it would have little impact.
subsections: section_title: Revolvers Preferred Customized Disclosures
paragraphs: To assess the usefulness of providing a customized disclosure to  cardholders, we interviewed 112 adult cardholders and asked for their  preferences for three disclosure statements—the two generic disclosure  options from the Bankruptcy Act and an example of a proposed customized  disclosure—or no disclosure at all. We categorized the cardholders into  two groups, of 38 convenience users and 74 revolvers, based on their  responses to questions about their credit card payment behaviors. The  cardholders recruited for the interviews did not form a random,  statistically representative sample of the U.S. population. As described in  table 1 (in the background section), the two generic disclosure options  shown to cardholders include one that contains a minimum payment  warning statement only, and another that contains a minimum payment  warning statement and an example of the amount of time needed to pay off  a sample balance. Table 1 also includes an example of a customized  disclosure, similar to the one that cardholders were shown.
Revolvers generally preferred to receive a customized disclosure about the  consequences of making minimum payments. Specifically, more than half  of the revolvers (42 out of 74) choose to receive the customized disclosure  over the two Bankruptcy Act disclosure options or no disclosure at all (see  fig. 1).
As figure 1 shows, the revolvers—including some for whom the customized  disclosure was not the preferred option—also generally found the  information contained in the customized disclosure to be useful. Sixty- eight percent (50 out of 74) of the revolvers found the customized  disclosure either extremely or very useful, while 23 percent (17 out of 74)  found the customized disclosure slightly useful or not useful at all.
section_title: Although Several Convenience Users Also Preferred a Customized Disclosure, Most Did Not Believe They Needed to Receive Such Information
paragraphs: Although more convenience users preferred the customized disclosure to  either of the generic ones, the majority (60 percent) were satisfied with  receiving a generic disclosure or no disclosure at all. The number of  convenience users preferring the customized disclosure (15 out of 38) was  equal to the total number who preferred the generic disclosures.
As shown in figure 2, while 37 percent (14 out of 38) of convenience users  found the customized disclosures extremely or very useful, 55 percent (21  out of 38) found it slightly useful or not useful at all.
section_title: Revolvers and Convenience Users Cited Similar Reasons for Preferring the Customized Disclosure, but Not All Cardholders Wanted This Information
paragraphs: The reasons given by both revolvers and convenience users for preferring  the customized disclosure generally were similar. Many of the cardholders  who preferred the customized disclosure or thought that it was more useful  than a generic disclosure said they did so because the information provided  would be specific to their account and change each month, based on their  transactions. For example, if issuers were providing a customized  disclosure, the information on the monthly billing statements would take  into account any changes in customers’ accounts that occurred since the  previous billing cycle, including new purchases, payments received,  changes in interest rates, and any fees that might have been assessed. The  customized disclosure, therefore, would provide cardholders with a new  “snapshot” of their account each month, as of the date the bill was  calculated. Many of the cardholders noted that, even if the information was  outdated by the time they received it (e.g., if they had made additional  purchases), just having an idea of the payments needed to pay off their  balances would be helpful. One respondent noted that she found the  customized disclosure more useful than the generic example in the  Bankruptcy Act disclosure because, even though her issuer cannot  anticipate future purchases or changes in her interest rate, the customized  disclosure still would be closer to reality. Some respondents also found the  dynamic nature of the disclosure helped them understand the  consequences of making minimum payments more than the generic  examples because they would be better able to see how purchases or  payments made on their account affected their repayment estimates.
Additionally, some respondents noted that because the customized  disclosure would be updated each month they could track their account  and use the information for budgeting or financial planning purposes.  Although issuers and others stated that the information would not be  practical for cardholders because the estimates would assume no activity  on the account, we did not find that the cardholders we interviewed  believed this limited the usefulness of the customized information. In fact,  after we explained to cardholders that the customized disclosure would  represent only a point-in-time estimate and that the information would  change if there were additional activity on their account, 79 percent (89 of  112 cardholders) found the customized disclosure more useful than the  generic example in one of the Bankruptcy Act options.
subsections: section_title: Customized Disclosures Provide Cardholders with Additional Information
paragraphs: Cardholders also preferred a customized disclosure because such a  disclosure provided them with new and additional information. We found  that the majority of cardholders already demonstrated a basic  understanding of the consequences of making only minimum payments.  For example, 68 percent of the cardholders could explain that both the  length of time and amount of interest they would pay would increase if they  made only minimum payments. An additional 29 percent of respondents  could name at least one of these two consequences. Because many  cardholders already understood that making only minimum payments  could be harmful to their financial condition, the information provided by  either of the Bankruptcy Act disclosures would not be new to the  cardholder. One cardholder told us that he preferred the customized  disclosure because he already understood the concept addressed in both  Bankruptcy Act disclosure options; however, the customized disclosure  provided him with personalized details that he found helpful. Another  cardholder mentioned that the customized disclosure gave him a “plan,”  whereas the other two options were “merely warnings” and would not tell  him anything he did not already know.
In addition to providing cardholder-specific information on the length of  repayment, a customized disclosure also could include information on the  total amount of interest a cardholder would pay if only minimum payments  were made, and the monthly payment amount needed to repay the balance  over some time period (e.g., 3 years). During our interviews, several  cardholders told us that seeing such information would be useful to them.  For example, some cardholders told us they found the information on the  monthly amounts needed to repay the balance over a time period to be the  most useful part of the disclosure because it provided them with a plan for  how to pay off their balances.
The majority of cardholders we interviewed (57 percent) indicated that  they were unlikely to take the initiative to call the toll-free telephone  numbers required by the Bankruptcy Act, and many indicated that they had  not calculated the information on their own to obtain individualized  information. Therefore, if the customized disclosure were not provided  directly on their billing statement, they would be unlikely to receive any  individualized information at all. In fact, many cardholders mentioned that  they liked the customized disclosure because it eliminated the need for  them to calculate the information on their own or call a toll-free telephone  number. Additionally, most of the cardholders were not aware of or using  existing tools such as amortization calculators that are available on the  Internet. Only 41 percent of cardholders were aware of these calculators,  and only 33 percent of those who were aware of the tools had used them.  Also, according to financial educators, it is important to provide  customized disclosures because most cardholders are not able to calculate  amortization periods and total interest payments correctly.
section_title: Some Cardholders Saw Limited Need to Receive Customized Disclosures
paragraphs: Not all of the cardholders chose to receive the customized disclosure or  found the information that it contained useful. As shown in figures 1 and 2,  30 percent (22 of 74) of the revolvers and 39 percent (15 of 38) of the  convenience users preferred to receive one of the two Bankruptcy Act  options. Some of these cardholders explained that they thought the generic  disclosures mandated by this act were simpler and easier to understand.  Others indicated that the example provided in one of the Bankruptcy Act  options gave them a good understanding of the consequences of making  minimum payments, without having to see specific estimated numbers  based on personal account information. Other cardholders specifically  stated that they found the customized disclosure confusing, and some  noted that having the option to call the toll-free number if they wanted  additional information was sufficient.
Finally, some cardholders preferred not to receive any disclosure on the  consequences of making minimum payments, primarily because they  already understood the consequences of making minimum payments. Some  cardholders were concerned that issuers would pass on to them the costs  associated with providing customized disclosures. Other cardholders told  us they probably would not pay attention to the disclosure or that they  would not read it because they did not read their credit card statements.
This report does not contain all the results from the interviews. The  interview guide and a more complete tabulation of the results can be  viewed at GAO-06-611sp.
section_title: Customized Disclosures’ Impact on Cardholders May Vary
paragraphs: Opinions varied on how effective customized disclosures would be in  influencing cardholder behavior. Consumer groups, financial educators,  and many of the cardholders we interviewed indicated that considerable  benefits might result from providing cardholders with customized  disclosures. Such benefits could include cardholders making larger  payments or otherwise changing how they use their credit cards.
Customized disclosures might have greater impact because they would be  more noticeable than other disclosures. For example, a consumer group  representative and financial educator told us that cardholders generally are  more likely to notice a customized disclosure over a generic one. They  compared providing the generic Bankruptcy Act disclosures on  cardholders’ billing statements to providing smokers with the Surgeon  General’s Warning on a cigarette pack, and noted that once cardholders  become familiar with a generic minimum payment disclosure, they are  likely to ignore it and not be influenced by the information that it contains.  The risk of a repeated and identical disclosure being ignored appears real,  as some of the cardholders we interviewed said that after seeing the  generic Bankruptcy Act disclosures a few times they probably would stop  reading them. In contrast, cardholders told us that that they would be more  likely to notice customized information each month. Representatives from  some consumer groups and other organizations told us that, because the  example contained in one of the generic Bankruptcy Act disclosures  contains a sample balance and interest rate that is not reflective of most  cardholders’ accounts, cardholders likely would dismiss it entirely because  they would assume it did not apply to them.
Customized disclosures also were seen as having a potentially significant  impact on cardholder behavior because they would provide information  that changes as the cardholder’s situation changes. For example, one  representative of a third-party credit card processor told us that she  believes that if cardholders were shown information that changed each  month according to the actions they took, they then would be more likely  to change their behavior. Many of the cardholders also indicated that a  customized disclosure would be more influential than a generic disclosure  in causing them to consider increasing monthly payments. For example,  one respondent said that during the months when she might not pay her full  balance, seeing the customized disclosure would make her want to “scrape  together more money from savings” to make a larger payment. Additionally,  another respondent noted that the customized disclosure would influence  him to take disposable income and put it toward his credit card balance.  Another said that seeing the amount of interest he was paying would make  him want to pay off the balance sooner. Additionally, two of the  cardholders we interviewed told us that seeing new information every  month would help them make decisions for the future and might change  the way in which they used their credit cards.
However, others, including issuer representatives and industry researchers,  indicated that customized disclosures might not be effective in changing  consumer behavior. They noted that not all cardholders need the  information provided in the customized disclosure. For example, while  customized disclosures could provide convenience users with illustrative  information, the cardholders—by paying their balances in full each  month—already are modeling behavior that customized information was  designed to promote. As a result, these cardholders would appear not to  need this additional disclosure. Many of the convenience users we  interviewed—who preferred not to receive a customized disclosure— explained that they paid their balance in full each month, already  understood the consequences of making only minimum payments, and  therefore did not need the additional reminder. Instead, most of the  convenience users told us that they would rather receive information on  the first page of their billing statement that would be more useful to them,  such as information on a credit card reward program. Additionally, because  a customized disclosure would assume that only the exact minimum  amount would be paid, representatives of some issuers told us that such  disclosures would be of limited use to the large number of cardholders  who, although not fully paying the balance each month, do pay more than  the minimum amount due.
Some organizations also said that customized disclosures might have a  limited impact on cardholder behavior overall because the number of  cardholders that make consecutive minimum payments appears to be  small. According to issuers, minimum payment disclosures, whether  customized or generic, are useful only to the cardholder population that  revolves balances—specifically, the smaller subset of that population that  habitually makes minimum payments. According to six of the issuers we  contacted, the percentage of their customers who make minimum  payments is small. As a result, most issuers questioned the value of  implementing customized disclosures that would benefit such a small  percentage of their customers. Additionally, representatives of one large  issuer told us that their firm had implemented the minimum payment  disclosures required under the California law for 3 months and, while  acknowledging that these disclosures were in place for a brief period,  indicated that they did not notice a difference in the number of cardholders  making minimum payments. As a result of this experience, the  representatives said that they did not expect the proposed customized  disclosure to have much of an impact either.
Customized disclosures also might have little impact on cardholder  behavior because some cardholders are not able to make larger than  minimum payments.  Many of the cardholders we interviewed who made  minimum payments told us that they did so because they could not afford  to pay more. Competing expenses and a lack of additional disposable  income were the primary reasons these cardholders gave for making at  least one minimum payment within the last year. A representative from a  large issuer also told us that cardholders who make minimum payments  lack the ability to regularly pay more.
section_title: Various Options Exist for Providing Information on Consequences of Minimum Payments
paragraphs: Issuers, consumer groups, and others that we interviewed suggested  alternatives for providing cardholders with customized information on the  consequences of making minimum payments. Among the alternatives  mentioned were targeting customized disclosures to only certain  cardholders or not requiring the disclosure to appear on the first page of  cardholders’ billing statements. While these alternatives might make it  easier and less costly for issuers to implement customized disclosures, they  also may reduce the desired impact of the disclosure because fewer  cardholders would receive the information or notice the disclosure. Rather  than providing customized disclosures, some suggested that government  agencies, issuers, financial educators, and consumer groups expand  general financial education efforts on the consequences of making  minimum payments.
subsections: section_title: Suggested Alternatives Included Fewer Recipients, Flexible Formatting, and Online Delivery
paragraphs: Consumer groups, issuers, and others suggested that the population of  cardholders that would receive customized disclosures could be narrowed.  For example, a consumer group representative suggested the information  could be targeted only to cardholders most likely to need it, such as  revolvers. A representative of another consumer group told us that such  information ought to be provided to any cardholders that paid the  minimum amount or close to the minimum amount in any given month.  Some issuer representatives asserted that the population receiving  customized disclosures ought to be even narrower, such as cardholders  who have made minimum payments for several consecutive months.
Limiting the number of cardholders who receive customized disclosures  offers some advantages to issuers and some disadvantages to cardholders.  For example, providing customized information to a more limited number  of cardholders would lower issuer costs, such as paper and postage, by  reducing the number of billing statements that might require an additional  page. However, limiting customized disclosures to cardholders who pay  only the minimum could preclude other cardholders from benefiting from  such information. For example, many of the cardholders we interviewed  identified themselves as paying “a lot more than the minimum payment,”  “almost their entire balance,” or their “entire balance” each month, yet  found the customized disclosure to be either extremely or very useful.  Some of these cardholders noted that even though they do not typically  make minimum payments or close to the minimum payment, the disclosure  still provided them with useful information in case they ever experienced a  time when they would need to make minimum payments. Some of the  convenience users who found the customized disclosure useful explained  that the information served as a good reminder on the consequences of  making minimum payments.
A second alternative that issuers and others identified would be to place  the disclosure in a location other than the first page of the billing  statement. For example, issuers could be allowed to print the customized  disclosure on either the back side of a statement page or on a subsequent  page. One regulatory official noted that issuers could provide text on the  first page that informs cardholders that customized information is available  elsewhere in the statement. Issuers and a card processor told us that space  on the first page of the billing statement is at a premium because it typically  contains a lot of important information, such as messages on the status of  an account (e.g., over-the-limit notices).
Providing the customized minimum payment disclosures to cardholders in  a location other than the first page of the billing statement would offer  issuers some cost advantages, but a disadvantage of such a change could  include less impact on cardholder behavior. Not being required to place the  disclosure on the first page of billing statements could make implementing  the disclosure easier and less costly for issuers because they might not  need to reformat their statement templates. However, according to  consumer groups and others, not placing the information on the first page  of the statement would reduce its prominence and likely its influence on  cardholder behavior. For example, one representative told us that  cardholders might be less likely to notice the disclosure if it was not  prominently positioned on their billing statement. An industry expert  confirmed that the primary tool issuers use to communicate with their  cardholders is the monthly billing statement. Therefore, removing the  customized minimum payment disclosure from the billing statement  entirely could decrease the number of cardholders who read it at all.
A third suggestion that could reduce the cost of customized disclosures  would involve providing the information electronically or online.  According to an issuer and a consumer group we contacted, customized  information could be provided to cardholders in electronic statements sent  by issuers. Cardholders also could access such information directly on  issuers’ Web sites. For example, issuers could provide online calculators in  which cardholders could enter their balances, applicable interest rates, and  payment amounts to obtain repayment and other estimates specific to their  accounts. At a credit card industry symposium held in June 2005,  participants advocated increasing the reliance on technology for delivering  more useful consumer disclosures. One issuer that we interviewed  already has implemented an online calculator to provide its customers with  customized information, while another issuer told us they were currently  developing one.
Making customized disclosures available online, rather than in monthly  statements, could prevent cardholders from receiving outdated  information and allow cardholders to access the information when they  need it, rather than limit them to a monthly statement. Online availability  also presents cardholders with the ability to receive only the information  they prefer. Online disclosures also could give cardholders the flexibility to  obtain the information they deemed most useful to them. For example,  some cardholders found customized disclosures only slightly useful,  because they made more than the minimum payment every month.  Additionally, one cardholder said that he would rather see the calculation  that showed the monthly payment amount that would be required to pay  his balance off in 1 year, rather than some longer period.
However, an exclusively online presentation could also reduce the impact  of the disclosure. Removing the disclosure from the billing statements  could greatly decrease the number of cardholders that see such  information, because not all cardholders have easy access to the Internet.  Some cardholders we interviewed mentioned that although they were  aware of online calculators to help them estimate credit card payoff times,  they had not used them because they did not have easy access to the  Internet.  In addition, even cardholders with the ability to obtain such  information online might not utilize it. For example, only two of the 43  cardholders with whom we spoke that identified themselves as typically  paying “the minimum amount” or “more than the minimum amount, but not  much more than the minimum,” had used an online credit card calculator.  Some of these cardholders were not comfortable with using the Internet for  personal finance. In addition, the consumers we interviewed generally  greatly preferred receiving minimum payment disclosures in their billing  statements. Of the 112 cardholders we interviewed, 73 percent preferred to  receive such information on their monthly billing statement, while about 11  percent preferred receiving the information via the Internet.
A fourth alternative for providing customized information on minimum  payment consequences to cardholders would be to do so less often than  monthly. For example, issuers could provide the information to  cardholders quarterly or annually. Several of the cardholders we  interviewed (about 24 percent) were amenable to receiving the disclosure  less frequently than monthly. This alternative could reduce both postage  and paper costs for issuers because additional pages to print the disclosure  would be needed less frequently.
However, if cardholders received the information less frequently, they  would not be reminded of the consequences of making minimum payments  in the months they did not receive the disclosure. For example, one  cardholder we interviewed who typically made only slightly more than  minimum payments said that she “just doesn’t really think about it when  she makes the payment,” but with a customized disclosure “in front of her,  she would think about it more.” Another noted, “Having it [the customized  disclosure] in front of you with your specific information makes it easier to  keep in the back of your mind that you should be quick to pay your balance  off sooner.”
section_title: Options Besides Customized Disclosures Were also Identified
paragraphs: Consumer groups, federal regulators, and others identified options for  improving the information cardholders receive on the consequences of  making minimum payments that would not entail providing customized  information. For example, one issuer representative advocated expanding  the generic example in one of the Bankruptcy Act options by developing a  wider range of balance amounts and interest rates. With several different  examples available, issuers could provide cardholders with a disclosure  that contained a sample balance and interest rate that would be closer to  those in the cardholder’s actual account, without having to incur the  expense of producing disclosures using the exact amounts. While this  approach would not provide cardholders with estimates as specific to their  situation as a customized disclosure, it likely would provide better  information to cardholders whose balances and interest rates were not  similar to those currently used in the example contained in the Bankruptcy  Act disclosure.
Finally, instead of providing customized disclosures, federal regulators,  educators, and consumer groups mentioned that consumer awareness  could be improved by requiring issuers and others to increase financial  education efforts tailored to minimum payment messages. Issuers could do  this by including information about the consequences of making only  minimum payments in solicitation letters or the introductory packages  consumers receive when they obtain a new credit card. Government  agencies and financial education providers could make additional use of  advertisements in various media to underline messages about the  consequences of making minimum payments.
section_title: Observations
paragraphs: Our work indicates that credit card issuers and processors have the  necessary data and systems capabilities to provide customized minimum  payment disclosures—that is, to include customized information in billing  statements that would show the length of time required to pay off each  cardholder’s actual balance and the additional interest that would be  incurred if only the minimum payment is made each month, as well as the  monthly payment required to pay off an outstanding balance in a given time  period. However, such disclosures are only point-in-time estimates that  would fluctuate as cardholders make additional purchases or increase their  payment amount. Credit card issuers and processors would incur initial  costs, estimated to be from less than $1 million to up to several million  dollars, to revise their systems to make these calculations. They would also  likely incur additional costs resulting from higher postal charges—if  including such disclosures increases the size of cardholder statements— and from increased customer service expenses, as they respond to account  holder questions about these disclosures. While these additional costs  could increase the ongoing expenses of producing and mailing billing  statements, card issuers are already obligated to bear some portion of  these costs as they implement the minimum payment disclosures mandated  by the Bankruptcy Act. While we cannot estimate the incremental costs of  providing customized disclosures, the known estimated costs appear to be  small relative to the income of the largest issuers, which account for the  vast majority of cardholder accounts. Further, the costs to the thousands of  small card issuers would be minimal because of their use of third-party  processors.
While most of the revolver cardholders whom we spoke with found  customized disclosures very useful, the impact that they might have on  cardholder payment behavior could vary. Many of the consumers that we  interviewed told us that customized disclosures provided more useful  information than the generic disclosures mandated by the Bankruptcy Act,  with the majority of revolvers preferring to receive customized disclosures.  However, the majority of convenience users, while finding some value in  the information contained in customized disclosures, were satisfied with  receiving either the generic disclosures or no additional disclosure at all.  While cardholders told us that such disclosures could strongly influence  their decisions about making minimum payments, not all cardholders’  financial circumstances would allow them to increase their payment  amounts. Therefore, the ultimate impact of providing additional  disclosures could vary.
While providing cardholders with additional disclosures about the  consequences of making only minimum payments on their credit cards  would appear to provide them with useful information, such disclosures  would raise issuer costs and whether the impact on consumer behavior  would be large or small is not known. However, various options, which  have both advantages and disadvantages, for providing such information  exist. For example, providing customized information only to those  cardholders who revolve credit card balances or by providing it to all  cardholders but on a less frequent basis or in another location besides the  first page of the monthly billing statement could make it easier and less  costly for issuers to implement customized disclosures. These options,  however, could lessen the potential impact of the customized disclosure  because fewer cardholders would receive, or be likely to notice, the  information.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Federal Deposit Insurance  Corporation, the Federal Reserve, the Federal Trade Commission, the  National Credit Union Administration, the Office of the Comptroller of the  Currency, and the Office of Thrift Supervision for their review and  comment. In a letter from the National Credit Union Administration, the  Chairman notes that the Administration agrees with the findings of our  report, including that customized disclosures for consumers could feasibly  be required of card issuers at a potentially significant but relatively  reasonable cost and such disclosures could be useful and desirable for  some consumers despite the uncertainty of their impact. The Chairman  also notes that, collectively, the potential impact on credit unions of  requiring card issuers to provide customized disclosures to consumers  should be minimal, particularly since many use third-party processors.  However, the Chairman’s letter also notes that the financial impact of  customized disclosure requirements could still be significant for these  small issuers and even more significant for moderate sized financial  institutions servicing their own credit card portfolios, particularly in  institutions where credit card interest margins are already low. The letter  also notes that considering the incremental costs of customized disclosures  is important because such costs will ultimately be passed on to consumers  through increased fees or higher interest rates, which could result in a  negative impact on the same consumers whom the disclosures are meant to  help. As a result, the Chairman indicates that some of the alternatives to  providing customized disclosures that are mentioned in our report could be  more economically efficient than implementing customized disclosures to  increase consumer awareness of the consequences of making minimum  payments.
We also received technical comments from the Federal Reserve, the  Federal Trade Commission, and the Office of the Comptroller of the  Currency, which we incorporated as appropriate. The Federal Deposit  Insurance Corporation and the Office of Thrift Supervision did not provide  any 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, Federal Deposit Insurance Corporation; 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. The results of the interviews will also be available on  the GAO Web site at GAO-06-611sp.
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 III.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) determine the feasibility and cost of requiring  credit card issuers (issuers) to provide cardholders with customized  minimum payment information, (2) assess the usefulness of providing  customized information to cardholders, and (3) identify options for  providing cardholders with customized or other information about the  financial consequences of making minimum payments.
To determine the feasibility and cost of providing cardholders with  customized minimum payment information, we reviewed current and  proposed disclosure requirements, including Title XIII of the Bankruptcy  Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Act),  which amended the Truth in Lending Act (TILA) to require issuers to make  disclosures regarding the consequences of making only the minimum  payment. We also reviewed the advance notices of proposed rulemaking  that the Board of Governor’s of the Federal Reserve System (Federal  Reserve) issued. The proposed rulemaking is associated with the Federal  Reserve’s self-initiated comprehensive review of the open-end (revolving)  credit rules in Regulation Z, which implements TILA, as well as the  implementation of the minimum payment disclosure requirements of the  Bankruptcy Act. We also reviewed California’s Civil Code, section 1748.13,  which had also mandated that consumers receive disclosures regarding  minimum payment consequences. We discussed the feasibility and cost of  providing customized information to cardholders with the staff of six major  issuers and one mid-size issuer. We determined that these issuers account  for about 67 percent of actively used credit card accounts as of year-end  2005. We provided issuers with a list of 16 cost items to facilitate  discussions of the costs to implement customized minimum payment  disclosures.
We also met with the staff of two third-party credit card processors  (processors) that manage card account data and produce billing statements  for thousands of large and small issuers, who provided us with cost  estimates and technical information about implementing customized  disclosures. In addition, we obtained cost estimates for another three large  issuers from court documents associated with a constitutional challenge of  a California statute that required issuers to include minimum payment  disclosures on billing statements sent to California cardholders. We  supplemented our interview data with a review of 17 comment letters that  issuers, processors, and trade associations submitted to the Federal  Reserve that addressed the implementation of minimum payment  disclosure provisions contained in the Bankruptcy Act. We reviewed two  studies about costs of regulatory reforms and used them to shape our  approach with issuers and processors to study the costs to implement  customized minimum payment disclosures.
To better understand how producing customized disclosures could affect  issuer costs, we also discussed issuer operations and profitability with two  broker-dealer research analysts that monitor credit card issuing banks and  industry developments. We also met with representatives of federal  banking regulators—the Federal Reserve, Office of the Comptroller of the  Currency, Federal Deposit Insurance Corporation, Office of Thrift  Supervision, and National Credit Union Administration—that oversee  financial institutions offering credit cards, and met with representatives of  the Federal Trade Commission, which oversees nonbank credit card  issuing entities. We also attended a roundtable hosted by the McDonough  School of Business at Georgetown University where representatives of  credit card issuers, industry trade associations, law firms, federal  regulatory agencies, and a consumer interest group addressed  implementation issues relating to the provision of customized minimum  payment disclosures.
To assess the usefulness of providing customized disclosures to  cardholders, we conducted in-depth interviews with a total of 112 adult  cardholders in three locations:  Boston, Chicago, and San Francisco, in  December 2005. We contracted with OneWorld Communications, Inc., 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. population.  Cardholders had to speak English and meet certain other conditions:   having owned at least one general-purpose credit card for at least the last  12 months prior to the interview, and not have participated in more than  one focus group or similar in-person study in the 12 months prior to the  interview. We selected proportionally more people who typically carried  balances on their credit card (revolvers) rather than those who regularly  paid off their balances (convenience users)—compared with their actual  proportions in the U.S. population—because we judged revolvers as likely  more in need of the information provided in the customized disclosure. See  table 2 for the demographic information on the cardholders we  interviewed.
During these consumer interviews, we obtained cardholders’ opinions to  assess the usefulness of the customized disclosure by asking them a  number of open- and closed-ended questions, and asking them more  tailored follow-up questions as necessary to more fully understand their  answers. All cardholders were asked questions to determine their typical  credit card payment behavior and elicit what they already knew about the  consequences of making only minimum payments.  To determine their  preferences for various disclosures, we showed each participant three  sample disclosure statements. Two of these sample disclosure statements  contained the language and generic example mandated by the Bankruptcy  Act minimum payment disclosure provisions. The other disclosure  presented an example of language incorporating the components of the  proposed customized disclosure we studied. The sample disclosure  statements we showed to cardholders can be found in GAO-06-611sp.
Each of the cardholders we interviewed was asked a series of questions  about each of the three disclosure statements, including how  “understandable,” “influential,” “useful,” and “helpful” each disclosure was  to their understanding of the consequences of making minimum payments.  After seeing the three statements, cardholders also were asked to compare  the statements and choose the statement they would prefer to receive.  Additionally, cardholders were asked how they would prefer to receive  such information, and how frequently they would like to receive it.  Narrative answers to open-ended questions were categorized into various  themes based on the cardholders’ responses. The reliability of the coding  scheme was assessed by comparing the answers of a second, independent  coder with a number of the answers. The interview instrument that was  used to interview cardholders, as well as the results to the closed-ended  questions can be found in GAO-06-611sp.
The data collected through our in-depth cardholder interviews are subject  to certain limitations. For example, the data cannot be generalized to the  entire U.S. population of credit cardholders. In addition, our sample  distribution between convenience users and revolvers was not reflective of  the estimates of the proportion of such cardholders in the overall U.S.  cardholding population because we purposely oversampled revolvers.  Additionally, the self-reported data we obtained from cardholders are  based on their opinions and memories, which may be subject to error and  may not predict their future behavior.
We gathered additional information on the usefulness of providing  customized disclosures to cardholders by reviewing existing academic  research on consumer protection disclosures and applicable public  comment letters on the Federal Reserve’s advance notices of proposed  rulemaking. We also interviewed credit card issuers and processors, and a  variety of industry, academic, government, consumer interest, and financial  education organizations for their opinions on the usefulness of customized  disclosures.
To identify other ways of providing cardholders with customized or other  information about the financial consequences of making minimum  payments, during our interviews we asked issuers and processors, as well  as a variety of academic, government, consumer interest, and financial  education organizations for suggestions and alternative options to  providing customized disclosures. We discussed some suggestions with  issuers and processors to determine their feasibility. We also asked the 112  cardholders for their opinions on other ways to communicate the financial  consequences of minimum payments.
We conducted our study between June 2005 and April 2006 in Boston,  Chicago, San Francisco, and Washington, D.C., in accordance with  generally accepted government auditing standards.
section_title: Comments from the National Credit Union Administration
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Cody Goebel, Assistant Director;  Christine Houle; John C. Martin; Marc Molino; Carl Ramirez; Omyra  Ramsingh; Barbara Roesmann; and Kathryn Supinski made key  contributions to this report.