170_Meyer_Credit_Card_CFM

Research Brief

Consumer Debt Stress and Credit Cards ideas grow here

Mark Meyer PO Box 2998 Madison, WI 53701-2998 Phone (608) 231-8550 www.filene.org

Executive Director and CEO Filene Research Institute PUBLICATION #170 (09/08) ISBN 978-1-932795-49-3

Appendix About Us

Deeply embedded in the credit union tradition is an ongoing search for better ways to understand and serve credit union members. Open inquiry, the free flow of ideas, and debate are essential parts of the true democratic process.

The Filene Research Institute is a 501(c)(3) not-for-profit research organization dedicated to scientific and thoughtful analysis about issues affecting the future of consumer finance. Through independent research and innovation programs, the Institute examines issues vital to the future of credit unions.

Ideas grow through thoughtful and scientific analysis of top-priority consumer, public policy, and credit union competitive issues.

Researchers are given considerable latitude in their exploration and studies of these high-priority issues.

Traditionally, the Filene Research Institute focuses on long-term research questions that can take months or years to research and publish. Occasionally Filene also publishes Research or Innovation briefs.

These briefs allow Filene to present important, time-sensitive, notorious, and unbiased topics to the credit union system. Oftentimes these briefs present an opportunity to distribute original research or innovation findings from Filene researchers or Fellows. We hope the “brief ” format meets your need to obtain actionable and objective information in a timely manner.

Copyright © 2008 by Filene Research Institute. All rights reserved.

ISBN 978-1-932795-49-3 Printed in U.S.A.

About the Author

Mark Meyer is the executive director and CEO of the Filene Research Institute. Upon joining in January 2003, he founded Filene i3, a group made up of next-generation credit union leaders focused on identifying and implementing new products, services, and business models that will transform the credit union industry.

He has served as an attorney at a midsized law firm, as vice president and legal counsel at Arizona State Credit Union, and as assistant vice president–Credit Union Enterprise at the CUNA Mutual Group.

He served a three-year term as president of the Phi Class for Western CUNA Management School and received the school’s Charlie M. Clark Award for Inspirational Leadership. Mark also serves as secretary on the board of directors for Great Wisconsin Credit Union.

Mark received his JD law degree from the University of Nebraska and his bachelor of science degree in business administration from Northern Arizona University. He is licensed to practice law in Arizona and Colorado.

Acknowledgments

I would like to thank Randall Olsen, PhD, professor of economics and director of the Center for Human Resource Research at Ohio State University, and the Consumer Finance Monthly Research Group: Lucia Dunn, PhD, professor of economics; Jinkook Lee, PhD, professor of consumer sciences and a Filene Fellow; and Margaret Plahuta, marketing director. I would also like to thank Luis Dopico, PhD, of Macrometrix for his academic review, and Vicki Joyal, president of CVJ Strategic Intelligence, for her considerable editorial contributions.

Preface

Consumer Debt Stress and Credit Cards is the second report in the Filene Research Institute’s series of Consumer Finance Research Briefs based on information derived from Ohio State University’s Consumer Finance Monthly (CFM) survey.

The CFM is generated through a continuous monitoring survey of consumer households and their financial conditions. Since its official launch in February 2005, the Center for Human Resource Research (CHRR) at Ohio State University has been collecting CFM data through a monthly 25-minute telephone survey utilizing random-digit dialing and weighting procedures to ensure a statistically valid, nationally representative sample of U.S. adult consumer households. Data collected since CFM’s inception have grown by an average of 333 completed interviews each month, bringing the total to 10,986 observations as of year-end 2007.

Each research brief includes a high-level marketplace analysis in addition to facts (i.e., survey data derived from the CFM), figures that are easy to read and comprehend, and food for thought (i.e., the Filene Research Institute’s response to “So what?”).

This research brief explores debt-related stress with a focus on credit card debt. The analysis seeks to address the following research questions: • Did levels of consumer debt stress increase in 2007 from 2006 as the subprime mortgage crisis publicly unfolded?

• How do levels of consumer debt stress vary by credit card debt indicators such as total credit card debts, missed payments, accounts sent to collections, and previous bankruptcies?

• How do levels of consumer debt stress vary by demographic variables such as age, annual household income, gender, race/ ethnicity, and marital status?

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Marketplace Analysis Could credit cards cause a financial disaster similar to the subprime mortgage crisis? Some analysts believe it could easily happen given consumers’ ever-increasing reliance on credit cards, current credit card debt levels, increasing defaults, and the fact that investors hold billions of dollars in securitized debt backed by credit card receivables.

According to Tim Westrich and Christian E. Weller, consumers are increasingly relying on credit cards to replace home equity lines of credit that have dried up along with the mortgage loan market.1 In many instances, borrowers are using credit cards to purchase essentials such as groceries and gasoline. What’s more, a USA Today article reported that “a credit bureau analysis of consumer payment data reveals that consumers are acting out of desperation” by using credit cards as a lifeline for everyday living expenses.2 This article further suggests that consumers who cannot make their monthly mortgage payments have given up on trying to pay the mortgage and instead “are focused on using credit cards to squeak by.” If this trend continues, the article predicts that maxed-out consumers could walk away from their credit card debts just like they are doing with their mortgages.

Westrich and Weller describe the sequence of events that could cause this fragile structure to collapse:3 • Growth in mortgages slowed as the subprime crisis unfolded, but credit card debt began to rise.

• Banks tightened access to mortgages. At the same time they continued to aggressively offer credit cards to subprime borrowers.

• High fees, heavy interest rate burdens, and complex terms may lead to increased credit card defaults.

• The share of credit card debt written off by banks has already risen sharply.

• Increased defaults could unravel a market worth $915 billion (B) in securitized debt backed by credit card receivables, just as delinquencies in the housing market unraveled the $900B market in subprime mortgage-backed securities.

Compounding the problem is the consumer impact from large banks that are tightening lending standards in hopes of avoiding a credit card crisis as described by Business Week. According to the 1

Tim Westrich and Christian E. Weller, House of Cards: Consumers Turn to Credit Cards amid the Mortgage Crisis, Delaying Inevitable Defaults, Center for American Progress, February 2008.

2

Kathy Chu, “More Americans Using Credit Cards to Stay Afloat,” USA Today, February 28, 2008, 1.

3

Westrich and Weller, House of Cards.

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article, “the top 10 card issuers, which account for 95% of the market for credit-card securities, are all big, highly rated banks.

By moving quickly to cut off risky card users early, the big banks are hoping to keep the crunch from developing into a crisis.”4 The Federal Reserve Board’s monitoring survey of senior loan officers reported that 32% of domestic banks had tightened their lending standards on credit card loans during the first quarter of 2008.5 As access to credit decreases, consumers may panic and defaults will rise.

Results from the Federal Reserve survey also indicate that domestic banks have reduced the extent to which credit card loans are granted to those who do not meet credit score minimums, reduced credit limits on credit cards, and increased minimum credit score requirements. Recent reports of unexpected and steep rate hikes suggest that banks are tightening standards for existing cardholders in addition to potential new customers. One Bank of America customer said she received notification in January that the rate on her credit card was increasing from 10% to 28% (a 180% increase) even though she had never been late on a payment.6 Other occurrences of rate increases ranging from 47% to 92% are detailed in additional press reports.7 Westrich and Weller see similarities between the root cause of the subprime mortgage debacle and potential credit card defaults. They suggest that if consumers do not fully understand the terms and conditions of their credit cards, defaults will follow. The solution that they advocate is better information and greater transparency about credit card terms and conditions, along with elimination of the most abusive and difficult-to-understand practices.8 At least two pieces of legislation designed to create greater transparency of terms and conditions and to curb abusive credit card practices such as double-cycle billing, universal default, and charging interest on fees are now winding their way through Congress.

One bill is the Credit Cardholders’ Bill of Rights Act (H.R. 5244), introduced by Rep. Carolyn Maloney (D-NY), chair of the House Financial Services subcommittee on financial institutions.

In addition, on May 2, 2008, the National Credit Union Administration (NCUA), the Federal Reserve Board, and the Office of Thrift 4

Matthew Goldstein and David Henry, “Tapped-Out Consumers,” Business Week, January 28, 2008, 22.

5

Board of Governors of the Federal Reserve System, The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices.

6

Kimberly Palmer, “One Debt Begets Another,” U.S. News & World Report, March 10, 2008, 44.

7

McClatchy-Tribune News Service, “Credit Card Rate Hikes Shock Holders,” Pittsburgh Tribune-Review, February 19, 2008; Mara Der Hovanesian, Christopher Palmeri, Nanette Byrnes, and Jessica Silver-Greenberg, “Over the Limit,” Business Week, February 18, 2008, 34.

8

Westrich and Weller, House of Cards.

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Supervision issued a joint proposed rule to prohibit the following seven practices associated with credit card programs:9 • Unfair time constraints for consumers to make payments.

• Unfair allocation of payments among balances with different interest rates.

• Unfair application of increased annual percentage rates to outstanding balances.

• Unfair fees for exceeding the credit limit solely because of a hold placed on an account.

• Unfair balance computation method.

• Unfair financing of security deposits and fees for issuance or availability of credit.

• Deceptive firm offers of credit.

Industry analysts suggest that new regulations would likely eat into credit card company profits, the cost of which would most likely get passed down to borrowers. TowerGroup senior analyst Dennis Moroney predicts that “we are going to see a further tightening of credit [where] the riskiest consumers will be hit the hardest.”10 In addition, the American Bankers Association issued the following statement on the proposed rule:11 The Federal Reserve’s proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings. We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards. In short, everyday consumers will bear the real cost of these proposals.

The Credit Union Market

“Credit unions are largely the collateral damage of a subprime mortgage debacle,” according to a report by CUNA economists. “This has had two effects on credit unions. First, some members with toxic mortgage loans from other lenders are finding it difficult to pay their credit union loans. Second, the broader economic slowdown that is spreading from the subprime mortgage mess is causing other members to have economic difficulty, and therefore to fall behind on their loans.”12

9 National Credit Union Administration, “NCUA to Issue Proposed Unfair or Deceptive Credit Practice Rule,” media release, May 1, 2008.

10 Jessica Silver-Greenberg and Mara Der Hovanesian, “The Brewing Credit Card Storm,” Business Week, May 26, 2008, 34.

11 American Bankers Association, “ABA Statement on Federal Reserve’s Proposed Credit Card Regulations,” media release, May 2, 2008.

12 Bill Hampel, Mike Schenk, and Steve Rick, The U.S. Mortgage Crisis: Causes, Effects and Outlook Including Suggested Credit Union Responses, Credit Union National Association—Policy Analysis Division, January 31, 2008.

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The report goes on to list five outcomes that credit unions will struggle with as a result of falling home prices and the subprime mortgage crisis: • A decline in mortgage loan collateral value.

• Rising delinquencies and charge-offs.

• Less home-equity lending.

• Spillover effects into credit card portfolios.

• A slowing of overall credit demand.

In fact, credit union delinquency rates are already on the rise, increasing from .64% in March 2007 to 1.06% in June 2008.13 Credit union credit card delinquencies and charge-offs are also on the rise. As the statistics in Figure 1 illustrate, credit union credit card delinquencies/loans reached 134 basis points in 2007, up from

Figure 1: Credit Union Credit Card Delinquencies and Net Charge-offs by Year 2.5

Percent of loans outstanding

2.0

1.5

1.0

0.5

0.0 1999

2000

2001

2002

Delinquencies

2003

2004

2005

2006

2007

Charge-offs

Source: CUNA Economics & Statistics’ Asset Quality Trends for U.S. Credit Unions (http://advice.cuna.org/econ/cu_stats.html).

13 CUNA Economics & Statistics, Monthly Credit Union Estimates—June 2008, Credit Union National Association, August 1, 2008.

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105 basis points in 2006. Similarly, credit union credit card net charge-offs/average loans reached 162 basis points in 2007, up from 149 basis points in 2006.

Credit union members are unfortunately not immune from economic changes that affect consumers in general. Members, too, are increasing their reliance on credit cards. Consider that credit union credit card balances increased 13.5% in 2007, up from 11% in 2006.14 Economic uncertainty, high food and energy prices, and less access to credit have caused a dangerous and stressful situation for some consumer households. Many individuals and families that are charging everyday living expenses will eventually run out of credit. Even if they don’t max out their credit cards, minimum monthly payments and the likelihood of default and bankruptcy will increase. Your members are likely to encounter some form of debt stress at some point in their financial lives. If you can find them before it is too late, you might be able to prevent further damage to both their financial and personal health. The following section explores the debt stress experienced by today’s consumer.

CFM Survey Analysis Debt Stress Indicators

The psychological stress caused by debt is a significant area of inquiry within the CFM. The survey instrument includes a series of six questions asking consumer household representatives about the extent to which they are affected by debt-related stress.15 Each question contains five response categories from which respondents may choose, designed to depict levels of stress resulting from the respective topics in question. The CFM’s battery of psychological debt stress items is as follows: 1. Overall, how often do you worry about the total amount you owe in overall debt? Would you say you worry all of the time, most of the time, some of the time, hardly ever, or not at all?

2. How much stress does the total debt you are carrying cause to you? Is it a great deal of stress, quite a bit, some stress, not very much, or no stress at all?

3. Now, thinking ahead over the next five years, how much of a problem, if any, will the total debt you have taken on be for you? Will

14 CUNA Economics & Statistics, U.S. Credit Union Profile, Year-End 2007, Credit Union National Association, February 22, 2008.

15 Although the CFM samples households (rather than individuals), some questions—such as the psychological debt stress battery of items—ask for individual perspectives. It is therefore appropriate to report the survey responses of these individuals in conjunction with their demographic characteristics. Keep in mind, however, that these data do not represent the perspectives of all U.S. consumers.

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it be an extreme problem, a large problem, medium problem, small problem, or no problem at all?

4. How concerned are you that you will never be able to pay off these debts? Are you very much concerned, quite concerned, somewhat concerned, not very concerned, or not at all concerned?

5. How serious are the problems your debt has caused in your family?

Are they extremely serious, very serious, somewhat serious, not very serious, or not serious at all?

6. How seriously has your debt affected your job performance? Has it been affected extremely seriously, very seriously, somewhat seriously, not very seriously, or not seriously at all?

CFM data collected during 2007 reveal that representatives of nearly eight million American households worry “all of the time” about the amount of overall debt they are carrying. While the percentage of responses that fall into the highest level of stress for the six debt-related questions is very low—ranging from just 2% to 7%—the potential impact to individuals and families could still be severe. Survey respondents indicate that they are most stressed by their total amount of overall debt—7% worry “all of the time.” A similar percentage is “very much concerned” that they may never be able to pay off these debts, and 6% report that their total debt causes them “a great deal of stress.”

Fortunately, fewer people (4%) are likely to suffer “extremely serious” family problems as a result of their debt, and not many (3%) are overly concerned about their total debt five years into the future.

Finally, survey respondents are least likely to indicate that their debt has “extremely seriously” affected their job performance. Even so, consumers representing more than two million American households (2%) say that their debt has had an extremely serious effect on their job performance.

Debt-related stress measurements gathered throughout 2007 did not increase substantially over those gathered during 2006. This is somewhat surprising given that the subprime mortgage crisis publicly unfolded during the third and fourth quarters of 2007. Figure 2 illustrates the extent to which debt-related stress levels changed from 2006 to 2007, using a top-box analysis where the two highest stress levels for each of the questions were combined into a single category.

The only 2007 debt stress measure that significantly increased over 2006 is the seriousness of debt-related problems for family life. In 2007, 10% of respondents indicated that debt caused “very serious” or “extremely serious” problems in their families—an increase of three percentage points over 2006.

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Figure 2: Debt Stress Indicators, 2006 vs. 2007 14.7

Worry about total overall debt

16.2 16.9

Stress caused by total debt

16.6 8.5

Total debt will be future problem

8.7 10.8

Concern about paying off debt

11.6 7.1

Debt caused family problems

10.1 4.0

Debt caused job problems

4.5 0

10

20

30

Percent of consumer households in top two (highest) stress categories 2006

2007

Source: Filene Research Institute and the Ohio State University’s 2006 and 2007 Consumer Finance Monthly (CFM).

Credit Card Indicators

Nearly a third of households (32%) surveyed during 2007 owed money on their credit cards after their most recent payment(s). For these households, the average balance remaining on all credit cards increased 19% to $7,451 in 2007, up from $6,267 in 2006.

CFM data reveal that Americans who live in households with larger volumes of credit card debt are more likely to suffer from debt-related stress. For example, the level of stress caused by the total amount of a household’s debt increases as the amount of credit card debt increases. Similarly, the extent to which total debt will be a future problem increases as credit card debt increases.

To allow for additional types of analyses, values were assigned to the response categories associated with each psychological debt stress indicator (where 1 is the lowest level of worry/stress, and 5 is the highest level of worry/stress) to create an ordinal-level scale of overall debt stress by summing the values across each of the six indicators. A correlation analysis was then used to determine whether interval-level variables such as the total amount of credit card debt are correlated with overall debt stress. Using this analysis, we find that a positive correlation exists between overall debt stress and total credit card debt. Similarly, a 1997 study—conducted as

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bankruptcy filings were reaching historic high levels—found that anxiety increased with the ratio of credit card debt to income and with being in default.16 Figure 3 demonstrates that at the very highest levels of overall debt stress, total credit card debt reached an average of $13,365 in 2007.

This compares to an average of just $5,515 for consumer households with the very lowest levels of overall debt stress.

In 2007, nearly 16% of consumer households with at least one credit card had one or more accounts sent to a collection agency during the previous six months. This figure is up three percentage points over the 2006 figure. Not surprisingly, credit stress levels for each of the six indicators are uniformly higher for those households with accounts in collections than for those that are not on collection agency call lists.

Figure 3: Overall Debt Stress by Total Credit Card Debt in 2007 $15,000 Overall average = $7,451

$13,365

Average total credit card debt

$10,528 $10,000

$6,563 $5,594 $5,515 $5,000

$0 Very low (6)

Low (7–10)

Moderate (11–15)

High (16–22)

Very high (23 or more)

Level of overall debt stress Note: “Overall debt stress” is the sum of ordinal responses to the six debt stress indicators.

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM).

16 Patricia Drentea, “Age, Debt and Anxiety,” Journal of Health and Social Behavior 41, no. 4 (2000): 437–50.

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One in ten consumers surveyed during 2007 filed for bankruptcy at some point in their lives. The existence of a prior bankruptcy increases the likelihood that a survey respondent will report high levels of debt-related stress. This suggests that bankruptcy is merely a temporary solution to an ongoing problem.

About 12% of consumer households surveyed in 2007 had missed a credit card payment by 60 days or more within the previous six months. While the incidence of missed credit card payments is on the rise (the 2007 figure increased by two percentage points over 2006), it is surprisingly not associated with higher levels of credit stress. The fact that one or more missed credit card payments is not associated with higher levels of debt stress is cause for concern.

It appears that some borrowers may not realize the consequences of missing a payment. Or perhaps borrowers have minimized the importance of paying credit card bills to the point where it does not cause them to worry about debt.

From this analysis, we conclude that the extent of debt-related stress is definitely affected by credit card debt indicators. Credit stress levels are likely to be higher among the following groups of consumer households: • Those with high volumes of total credit card debt (i.e., $10,000 or more).

• Those with one or more accounts in collections.

• Those who have filed bankruptcy at some point in their lives.

Demographic Characteristics

Consumer debt stress also varies by demographic characteristics.

The results of an analysis to determine the relationship between debt stress and annual household income and between debt stress and respondent age are illustrated in Figure 4. By again utilizing the variable created by summing responses across the six debt stress items, we find that both age and annual household income are negatively correlated with overall debt stress.

For the most part, those with higher overall debt stress levels have lower household incomes than do those with lower debt stress levels. Those with the lowest household incomes are likely to endure the highest levels of debt-related stress, probably because many don’t earn enough money to cover both existing debt and household essentials such as groceries and gasoline. In fact, the average annual household income for respondents with the highest debt stress levels is $44,930, compared to an average of $110,437 for those with the lowest debt stress levels.

Similarly, but to a lesser extent, those with lower overall debt stress levels tend to be older than those with higher debt stress levels. This 11

is in line with another recent study that discovered those aged 60 and older are significantly less worried about credit card debt than are younger age groups.17 However, consumers with the highest debt stress levels are not particularly young. In fact, they might best be described as middle-aged.

Data from the CFM reveal that the average and median ages of people with the highest debt stress levels are 50 and 49, respectively. Over the years, credit union member research studies have reported that those 45 and older save more and borrow less often than do members between the ages of 25 and 44 (i.e., those in the peak borrowing years). Perhaps the range of peak borrowing years is widening, perhaps debt levels have become so high that the burden is shouldered for many years, or perhaps it’s a recognition that annual incomes are not growing as fast as they once did. No matter the reason, we now know that high levels of debt-related stress are

Figure 4: Overall Debt Stress by Household Income and Age 65

$160,000

60

$140,000

50 $100,000

45

$80,000

40

Average age

Average annual household income

55 $120,000

35 $60,000 30 $40,000

25 20

$20,000 Very low (6)

Low (7–10)

Moderate (11–15)

High (16–22)

Very high (23 or more)

Level of overall debt stress Average annual household income

Average age

Note: “Overall debt stress” is the sum of ordinal responses to the six credit stress indicators.

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM).

17 Shayna Lee Thums, Barbara M. Newman, and Jing Jian Xiao, “Credit Card Debt Reduction and Developmental Stages of the Lifespan,” Journal of Personal Finance 6, no. 2/3 (2008): 86–108.

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not found exclusively among young people. Furthermore, a recent AARP research report notes that “age is increasingly associated with financial distress and seeking protection from creditors through the bankruptcy courts,” as “Americans aged 55 or older have experienced the sharpest increase in bankruptcy filings.”18 As it turns out, the relationship between age and debt stress does not vary considerably across the six indicators. The age group with the highest stress incidence for each of the six debt stress indicators is shown in Figure 5. This analysis reveals that each of the indicators has one age group in common: 35- to 44-year-olds.

Gender is also associated with debt stress levels. Female respondents are consistently more likely than males to report high levels of stress for each of the six debt stress indicators. The finding that women are more likely than men to experience debt-related stress was also recently acknowledged in an Associated Press (AP)-AOL Health survey of U.S. adults.19 Respondents who are widowed or have never been married generally report higher levels of debt-related stress than do those who are married or divorced. In particular, people who have never been married are more likely than their counterparts to worry frequently and be highly stressed about total debt, to anticipate significant debt-related problems in the future, and to be highly concerned about their ability to pay off their debt. On the other hand, those who are widowed or divorced are more likely to indicate that debt has caused very or extremely serious problems for their families. Perhaps widowers are struggling to pay off their spouse’s medical expenses. Debt could also be a factor in the decision to divorce. Keep in mind that marital status is likely related to both age and annual household income.

Figure 5: Debt Stress Indicators by Age Group with Highest Incidence of Stress Debt stress indicator

Age group with highest stress incidence

Worried about total debt “most or all of the time”

35–44

“Quite a bit or a great deal” of stress caused by total debt Total debt a “large or extreme problem” in the future

35–44 35–44 and 44–54 (tie)

“Quite or very much concerned” about ability to pay off debt

35–44

Debt caused “very or extremely serious” problems in family

35–44

Debt “very or extremely seriously” affected job performance

35–44 and 20–34 (tie)

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM)

18 Deborah Thorne, Elizabeth Warren, and Teresa A. Sullivan, Generations of Struggle, AARP, June 2008.

19 Associated Press, “Poll: Stress of Debt Takes Physical Toll.” CNN.com, June 9, 2008.

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Finally, black and Hispanic respondents report higher levels of debt-related stress than do white respondents. Like marital status, racial and ethnic differences may in part be by-products of age and annual household income. Consider that both the black and Hispanic populations are younger and have lower annual household incomes than those of whites.

Results of the demographic analysis reveal that the extent of debt-related stress is affected by age, household income, and gender. Credit stress levels are likely to be highest among the following groups of consumers: • Those with lower annual household incomes (i.e., less than $60,000).

• Those aged 35–44.

• Women.

Neither the analysis of credit card debt indicators nor the analysis of demographic characteristics provides predictive results. However, demographic indicators can help identify members who are in financial trouble. And credit card indicators can be added to the list of factors that credit unions consider or discuss when working with members who are overwhelmed by debt.

In summary, an analysis of CFM data reveals that debt stress is related to total credit card debt, and for some consumers, fear and anxiety are extremely high. Credit union executives should be concerned about those members who are so overwhelmed by debt stress that it affects their health,20 their jobs, and their family lives. An additional cause for concern is the possibility that these members will throw in the towel and make poor, long-lasting financial decisions that will negatively affect their financial futures and could also affect the level of service that the credit union is able to provide to other members.

Strategic Implications for Credit Unions The analysis of consumer debt-related stress and credit card debt presented in this research brief supports the following recommendations for credit union executives to consider as they work to help members through this period of economic turmoil and uncertainty: • Continue to take into account the credit card and demographic indicators identified in this report in your ongoing analyses of members’ total credit card debt. Reach out with offers of financial counseling to members most likely to be overly stressed.

20 The AP-AOL Health survey found that people with high debt stress are more likely than their counterparts to have ulcers or digestive tract problems, muscle tension, migraines/headaches, severe anxiety, severe depression, and heart attacks.

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• Practice proactive member counseling by learning to recognize and help reduce debt-related stress. Intervene sooner (e.g., as soon as a payment is five days late) rather than later.

• Help your members avoid pushing the panic button. Target members (those with annual household incomes of less than $60,000, aged 35–44, and women) with information and offers of assistance in dealing with unexpected credit card term and condition changes. Educate members about predatory credit card terms and conditions and the potential adverse impact. Offer credit (as appropriate) to those who have been turned down elsewhere.

• Promote your credit union’s “consumer friendly” credit card terms and conditions and help members learn to select credit cards with the most favorable features.

• Where appropriate, transfer credit card debt from members’ other cards to credit union credit cards or debt-consolidation loans, and assist members with closing other accounts.

• Take advantage of the opportunities presented by banks that are tightening credit standards. Cross sell your credit card and other products/services to members who are frustrated and fed up with their banks.

In addition, CUNA economists suggest that credit unions respond to the fallout from the U.S. mortgage crisis in the following ways:21 • As long as your credit union has more than adequate capital, do not penalize members by establishing higher loan rates, more and higher fees, lower dividend rates, or service cutbacks or layoffs in order to keep net income from falling for a year or two.

• Focus on close monitoring and active collections, rather than tightening credit standards in response to rising delinquency and loan losses.

• Credit unions with strong capital positions and stable balance sheets should consider the opportunities created by the current economic situation: National banks are likely alienating customers by increasing credit card rates.

Consumers who need loans may be faced with higher rates and fees at their banks and may have difficulty getting loans approved.

• Demonstrate that you are planning and controlling any temporary decline in net income by modeling the credit union’s earnings and net worth for the next few years.

21 Bill Hampel, Mike Schenk, and Steve Rick, The U.S. Mortgage Crisis: Causes, Effects and Outlook Including Suggested Credit Union Responses, Credit Union National Association—Policy Analysis Division, January 31, 2008.

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For Further Reading

Drentea, Patricia. 2000. “Age, Debt and Anxiety.” Journal of Health and Social Behavior 41 (4): 437–50.

Lopes, Paula. 2008. “Credit Card Debt and Default over the Life Cycle.” Journal of Money, Credit, and Banking 40 (4): 769.

Scott, Robert H. III. 2007. “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: How the Credit Card Industry’s Perseverance Paid Off.” Journal of Economic Issues 41 (4): 934–52.

Silver-Greenberg, Jessica, and Robert Berner. 2008. “Too Much Debt?

Too Bad.” Business Week, March 17, 38.

Thums, Shayna Lee, Barbara M. Newman, and Jing Jian Xiao. 2008.

“Credit Card Debt Reduction and Developmental Stages of the Lifespan.” Journal of Personal Finance 6 (2/3): 86–108.

United States Government Accountability Office (GAO). 2006. Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers, GAO-06-929, September 12.

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Research Brief

Consumer Debt Stress and Credit Cards ideas grow here

Mark Meyer PO Box 2998 Madison, WI 53701-2998 Phone (608) 231-8550 www.filene.org

Executive Director and CEO Filene Research Institute PUBLICATION #170 (09/08) ISBN 978-1-932795-49-3