Credit Card Borrowing, Delinquency, and Personal Bankruptcy - Statistical Data Included

New England Economic Review, July-August, 2000 by Joanna Stavins

Besides the annual percentage rate of interest (APR), the data used in this study measure other attributes of credit card plans, such as annual fee, minimum finance charge, late fee, and over-the-limit fee. Our findings partly support the adverse selection hypothesis: Banks that offer inferior terms on credit card plans have higher delinquency rates. However, we find much weaker effects on charge-off rates.

In this part of the study we use data from a survey on the Terms of Credit Card Plans (TCCP), collected semiannually by the Federal Reserve Board from approximately 200 of the largest issuers of bank credit cards. The survey was conducted each January and July during the 1990-99 period. Smaller banks are not included in the sample. Although smaller institutions may offer systematically different terms of credit card plans, the sampled banks issue nearly all outstanding credit. (8)

For each credit card plan, the data include APR and fees, as well as indicators showing whether the plan included additional "enhancements," such as automobile insurance, travel discounts, extended warranty, and the like (see Table 4 for a list of attributes and their descriptive statistics). The data set was merged with information from bank financial statements filed with the Federal Deposit Insurance Corporation. These Consolidated Reports of Condition and Income (Call Reports) include each bank's deposits, assets, outstanding credit card loans, income from credit card interest and fees, and credit card delinquency and charge-off rates. The Call Report data are collected quarterly. Data from March Call Reports were merged with the January TCCP data, and data from September Call Reports were merged with the July TCCP data. (9)

We tested how terms of credit card plans affect banks' delinquency and charge-off rates. Delinquent loans are defined as those that are at least 90 days past due, and charge-offs are loans that banks write off as uncollectible. The respective rates are calculated as fractions of total outstanding credit card loans. We begin by estimating the effect of terms of credit card plans on each issuer's delinquency rate. The data provide one credit card plan per bank in any given time period. Bank size is measured as bank assets.

delrate = [[alpha].sub.0] [[alpha].sub.1] asset [[alpha].sub.2] APR [[alpha].sub.3] fee [[alpha].sub.4] grace [[alpha].sub.5] minfin [[alpha].sub.6] cash [[alpha].sub.7] late [[alpha].sub.8] over [[alpha].sub.9] enhance [[alpha].sub.10] time [epsilon] (3)

where:

delrate is the delinquency rate, calculated as the ratio of delinquent loans over total outstanding loans; assets are the bank's assets;

APR is the annual rate of interest the bank charges on its credit card plan;

fee is the annual fee;

grace is the grace period, measured as the number of days after the statement is issued before interest is accrued;

minfin is the minimum finance charge;

cash is the fee for cash advances;

late is the late payment fee;

over is the fee charged if the customer exceeds his credit limit;