The more obscure a credit card issuer's pricing and the more aggressive its marketing, the more its losses jumped during the recession, according to a new study from the Center for Responsible Lending.
The report examined 23 marketing and pricing practices that were common during the summer of 2009 among the top 100 credit card issuers as calculated by managed credit card loans. The Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) of 2009 curbed many of these practices and this study examined their impact in the months before the new law took effect.
About 90% of credit card balances were held by the top 10 issuers when the data was collected. Six of the top 10 issuers were in the category with the most unclear pricing and aggressive marketing practices while nine of the top 10 were in the worst two groups.
In 2009, the average loss rate on card balances for the top 10 issuers was 10.1% while the average loss rate for the issuers rated as having the best practices was 5.8%.
The Center for Responsible Lending did not name specific financial institutions in its report. But at Dec. 31, 2009, the bank holding companies with the largest credit card loan portfolios included Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (NYSE:C), Wells Fargo (WFC), U.S. Bancorp (USB) and Capital One Financial (COF).
The study also found that issuers with the best practices had more transparent and straightforward pricing and were less dependent on complicated fee policies. These tended to include regional banks and credit unions.
The study, which was released Tuesday, found that issuers with better practices fared better during the recession. In a hypothetical situation, the report compared an issuer with consumer-friendly practices and one that scored poorly. If both issuers started with a loss rate of 3.2% before the recession, the consumer friendly issuer’s loss rate would increase only to 5% during the economic downturn while the other issuer’s loss rate would increase to 11.3%.
The report also found that if a card issuer engaged in one unfair practice then it tended to use many. Deceptive practices also were a good predictor of the level of complaints the Better Business Bureau received about an issuer, regardless of the institution’s size. Finally, the report found that high-cost penalty fees and interest did not mitigate risk and instead created greater risk for the issuer.