Fed says credit card arrears higher for black and low-income cardholders | Business

According to a report by the Bureau of Financial Protection (CFPB), the $ 12 billion credit card default fee in 2020 was disproportionately affected by low- and middle-income cardholders, many of whom are African-American.

As inflation rises and the delay fee is tied to it, cardholders should expect rates to rise, the bureau said.

“Cardholders in regions with most black cards paid more arrears for each card they held from major credit card issuers in 2019 than most white areas,” the report said. “And people in areas with the lowest levels of economic mobility paid almost $ 10 more in arrears than people in areas with the highest levels of economic mobility.”

The CFPB is a federal government agency for controlling consumers of funds created by the Obama administration.

The Credit Card Act (Liability and Disclosure of Cards) of 2009 created several remedies for cardholders, including limiting the amount credit card issuers can charge for the limit and overdue commission, as well as restrictions on raising interest rates.

However, the report says overdue fees continue to negatively affect millions of families.

“Many credit card issuers have made late penalties as a major part of their profit model. Markets work best when companies compete on price and service, rather than relying on back-end fees that hide true value, ”CFPB Director Rohit Chopra said. “Given their current practice, we expect credit card issuers to raise commissions depending on inflation as limits continue to rise.”

During the pandemic, arrears accounted for more than one-tenth of the $ 120 billion that consumers paid interest and credit card fees a year, the report said. The report notes that card issuers are hoping for a commission for late income. But issuers of t cards that serve customers with lower credit scores tend to rely more on arrears.

“Low-income areas, areas with a high proportion of black Americans, and areas with low economic mobility bear more of the burden of arrears. In 2019, credit card bills held by cardholders living in the poorest areas of the United States were paid on average twice as much as in the richest areas, ”the report said.

In 2019, consumers charged an average of $ 26 for a credit card issued by a major financial institution for each overdue payment. But consumers with seven consecutive overdue payments paid an average of $ 34 for each overdue payment.

According to the report, most small banks and credit unions charge a maximum default fee of $ 25 or less. But most major credit card issuers charge the maximum overdue fee that regulation allows. But the report says a small but growing percentage of financial institutions do not charge arrears or offer more flexible payment options.

According to the report, 99% of fines and more than half of all consumer fees on credit cards are overdue.

Cedric Stenbergs, director of development for Clarifi’s nonprofit financial advisory group in Philadelphia, said the fee could be a problem for families with financial difficulties.

“Many Clarifi customers, who have predominantly low and middle incomes, often have no emergency savings and have to rely on credit cards to manage unexpected expenses such as car repairs or medical bills,” Stanbergs said. “These higher fees increase the cost of borrowing for these already economically disadvantaged families, further undermining their financial stability and putting them at greater risk of homelessness.”

In 2020 and 2021, arrears fell as federal incentive checks began to cover families, especially for households with lower credit scores, the report said. The CFPB said this is further evidence that stimulus dollars have helped improve household cash flow. The fact that overdue fees for credit card issuers fell during this period, the report said, suggests that overdue fees are a penalty for households living from paycheck to paycheck, rather than an incentive to make timely payments.

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