M-RCBG Associate Working Paper No. 54
Out of Reach: Regressive Trends in Credit Card Access
Marshall Lux and Robert Greene
Despite the ubiquity of credit cards, it was not until the mid-1990s that a large share of lower-income Americans gained access to these useful financial products, which enable cost-saving consumer purchases, small business financing, and economic inclusion. High credit card debt, of course, can cause individual harm, and on the aggregate, booming household debt levels are a serious policy concern. Yet credit card balances account for just 6 percent of U.S. household debt levels, and as a share of disposable personal income fell from nearly 8 percent in the mid-2000s to 5.3 percent in 2015. We identify regressive trends driving decreased card usage, including that between 2007 and 2015, originations to lower-score accounts (generally lower-income consumers) fell 50 percent, and average credit card lines for these accounts shrunk 31 percent, likely forcing down card utilization. Lower-income Americans increasingly lack credit cards.
Consumer credit demand, however, remains high, particularly among lower-income Americans. Supply-side factors – including (1) a 250 percent rise in credit card regulatory restrictions by financial regulators; (2) bans on risk-based pricing; (3) a rising share of unbanked Americans; and (4) unpredictable Consumer Financial Protection Bureau (CFPB) actions – are likely constraining lower-score Americans’ access to credit cards, revealing a tension between consumer financial protection and financial product access. Yet recent regulatory activity has at best only modestly improved customer experiences with credit cards, likely because Americans have historically used cards quite reasonably and expressed satisfaction with these products. We examine how regressive trends in credit card access will likely force consumers into more expensive credit products, hurt small business financing, and impede economic mobility, while also cautioning against high consumer debt levels. We conclude by recommending that policymakers act to curtail unintended regulatory impacts on credit card access by (1) repealing some unnecessary restrictions on risk-based credit card pricing brought about by the CARD Act; (2) reforming the CFPB to better balance consumer protection with consumer financial product access; and (3) streamlining banking regulations to decrease the number of unbanked Americans.