Credit Cards: Customized Minimum Payment Disclosures Would	 
Provide More Information to Consumers, but Impact Could Vary	 
(21-APR-06, GAO-06-434).					 
                                                                 
The Bankruptcy Abuse Prevention and Consumer Protection Act of	 
2005 requires that credit card issuers (issuers) include in all  
cardholder billing statements a generic warning, or "disclosure,"
about the potential financial consequences of consistently making
only the minimum payment due on a credit card. However, some have
urged that consumers should instead receive "customized"	 
disclosures in their billing statements that use cardholders'	 
actual balances and the applicable interest rates on their	 
accounts to show the consequences of making only minimum	 
payments, such as estimates of the time required to repay	 
balances and the total interest amount resulting from continual  
minimum payments. In response to a congressional request, this	 
report assesses the (1) feasibility and cost of requiring issuers
to provide cardholders with customized minimum payment		 
information, (2) usefulness of providing customized information  
to cardholders, and (3) options for providing cardholders with	 
customized or other information about the financial consequences 
of making minimum payments.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-434 					        
    ACCNO:   A52217						        
  TITLE:     Credit Cards: Customized Minimum Payment Disclosures     
Would Provide More Information to Consumers, but Impact Could	 
Vary								 
     DATE:   04/21/2006 
  SUBJECT:   Credit						 
	     Credit bureaus					 
	     Financial institutions				 
	     Financial records					 
	     Information disclosure				 
	     Lending institutions				 
	     Consumer protection				 

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GAO-06-434

     

     * Report to Congressional Requesters
          * April 2006
     * CREDIT CARDS
          * Customized Minimum Payment Disclosures Would Provide More
            Information to Consumers, but Impact Could Vary
     * Contents
          * Background
          * Results in Brief
          * Providing Cardholders with Customized Information Seen as
            Feasible but Doing So Would Increase Costs for Issuers
               * Issuers and Others Stated That Providing Customized
                 Estimates Is Feasible but Could Increase Issuers' Legal
                 Liability
                    * Assumptions and Calculation Methods Can Affect the
                      Precision of Customized Estimates
                    * Issuers See Shelter from Legal Liability as Important
                      for Providing Customized Disclosures
               * Issuers Identified Three Significant Costs to Implement
                 Customized Disclosures, but Estimates of Total Costs Varied
                 Widely
                    * Increased Postage Represents One of the Largest Cost
                      Components
                    * Programming Modifications Are Also Likely to Be a Major
                      Implementation Cost Component
                    * Need for Expanded Customer Service Resources Would Also
                      Increase Issuer Costs
                    * Estimates of Total Implementation Cost Varied Widely
                    * Issuers Already Slated to Incur Some of These Costs,
                      Which Are Small Relative to Net Income
          * Customized Disclosure Was Seen as Useful, but Its Impact on
            Cardholders May Vary
               * Revolvers Preferred Customized Disclosures
               * Although Several Convenience Users Also Preferred a
                 Customized Disclosure, Most Did Not Believe They Needed to
                 Receive Such Information
               * Revolvers and Convenience Users Cited Similar Reasons for
                 Preferring the Customized Disclosure, but Not All
                 Cardholders Wanted This Information
                    * Customized Disclosures Provide Cardholders with
                      Additional Information
                    * Some Cardholders Saw Limited Need to Receive Customized
                      Disclosures
               * Customized Disclosures' Impact on Cardholders May Vary
          * Various Options Exist for Providing Information on Consequences
            of Minimum Payments
               * Suggested Alternatives Included Fewer Recipients, Flexible
                 Formatting, and Online Delivery
               * Options Besides Customized Disclosures Were also Identified
          * Observations
          * Agency Comments and Our Evaluation
     * Objectives, Scope, and Methodology
     * Comments from the National Credit Union Administration
     * GAO Contact and Staff Acknowledgments

Report to Congressional Requesters

April 2006

CREDIT CARDS

Customized Minimum Payment Disclosures Would Provide More Information to
Consumers, but Impact Could Vary

Contents

Tables

Figures

April 21, 2006Letter

The Honorable Paul S. Sarbanes Ranking Minority Member Committee on
Banking, Housing and Urban Affairs United States Senate

The Honorable Daniel K. Akaka United States Senate

Making only the minimum payment due on a credit card can greatly increase
the time required to pay off the entire balance and increase the total
amount of interest paid by a consumer. With more than 292 million credit
cards in use in the United States and a growth in personal bankruptcies,
many financial educators see an increasing need for consumers to become
more educated about the cost of using credit cards. As one way of
achieving this, Section 1301 of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (Bankruptcy Act), passed in April 2005,
amends the Truth in Lending Act (TILA) to require that a generic warning,
or "disclosure," be printed on all cardholders' billing statements about
the potential financial consequences of making only the minimum payment
due.1

The provision also requires that cardholders' billing statements provide a
toll-free telephone number for obtaining individualized information about
how making minimum payments would affect their accounts. However, some
lawmakers and others believe that these requirements are not extensive
enough to educate consumers about the effects of making only minimum
payments on credit cards. They argue that the generic disclosures required
by the law will not adequately inform cardholders of their situation in
today's credit environment, in which interest rates on credit card debt
can exceed 30 percent. Instead, they believe that a "customized
disclosure"-that is, one that uses cardholders' actual balances and the
applicable interest rates on their accounts to calculate how long a given
balance would take to pay off if only minimum payments are made-would
allow cardholders to make more informed credit decisions.

This report responds to your April 25, 2005, request that we study the
feasibility of requiring credit card issuers (issuers) to provide
customized information to cardholders about the consequences of making
minimum payments, as well as the usefulness of this information to
cardholders. Specifically, our objectives were to (1) determine the
feasibility and cost of requiring issuers to provide cardholders with
customized minimum payment information, (2) assess the usefulness of
providing customized information to cardholders, and (3) identify options
for providing cardholders with customized or other information about the
financial consequences of making minimum payments.

To determine the feasibility and cost of requiring issuers to provide
customized information to cardholders on billing statements, we met with
staff members of six major credit card issuers and one mid-size issuer. We
determined that these issuers account for about 67 percent of actively
used credit card accounts as of year-end 2005.2 We asked each of the
issuers about how they could implement the requirement and their estimates
of the costs they would incur in doing so. We also obtained cost estimates
for three other large issuers from court documents that were associated
with a California lawsuit challenging a state statute that required
issuers to include minimum payment disclosures on billing statements sent
to California cardholders. In addition, we discussed the feasibility and
cost of additional requirements with the staff of two external credit card
processors (processors) that produce billing statements for thousands of
large and small issuers, and a representation of industry, legal,
academic, government, and consumer entities. To assess the usefulness of
customized disclosures, we interviewed 112 cardholders in Boston, Chicago,
and San Francisco to gather data on their preferences for and opinions on
the utility of statements about making minimum payments. This sample of
cardholders was not designed to be statistically representative of all
cardholders, and thus our results cannot be generalized to the population
of all U.S. cardholders. Our efforts to identify options for increasing
consumer awareness of minimum payment issues involved interviews with
representatives of credit card issuers and processors, consumer interest
groups, a credit counseling agency, as well as federal financial
regulators and the Director of the federal Financial Literacy and
Education Commission.3 We also reviewed comment letters provided to the
Board of Governors of the Federal Reserve System (Federal Reserve) in
connection with the Federal Reserve's recent advance notices of proposed
rulemaking regarding its open-end (revolving) credit rules of Regulation
Z, which implements TILA.4 A more detailed description of our methodology
is presented in appendix I. Additionally, a copy of the survey instrument
we used to interview cardholders, along with summarized results, can be
found in GAO-06-611sp . We conducted our study between June 2005 and April
2006 in Boston, Chicago, San Francisco, and Washington, D.C., in
accordance with generally accepted government auditing standards.

Background

The credit card industry is composed of issuers, processors, and card
networks. Typically banks, thrifts, and credit unions are the
organizations that issue credit cards and underwrite the credit that is
provided to consumers. The issuance of credit cards is highly
concentrated, with the eight largest issuers representing 88 percent of
all outstanding consumer credit card balances reported by CardWeb.com,
Inc., as of year-end 2005. Processors provide a wide range of services for
thousands of issuers, including card production, transaction processing,
and production and mailing of billing statements. The level of services
provided by processors can differ depending on a specific issuer's needs.
For example, some issuers handle all billing calculations and maintain all
related data within the organization and rely on processors solely for
printing and mailing billing statements. Other issuers, including many of
the smaller issuers, use processors to perform all necessary services
related to their credit cards. Finally, credit card networks facilitate
payment transactions between cardholders and merchants by transferring
information and funds between a merchant and a cardholder.

Credit card users can be characterized into two groups-those who use their
cards for purchases but consistently pay their outstanding balance in full
every month (convenience users) and those who carry a balance on their
cards (revolvers). Different data sources report that in 2004 revolvers
represented between approximately 46 and 55 percent of cardholders.
Various data sources indicate that the proportion of cardholders that pay
only the minimum payment or slightly more than the minimum payment at any
given time ranged from about 7 and 40 percent between 1999 and 2005, while
issuers indicated that a small percentage of their cardholders (from less
than 1 percent and up to 10 percent) make multiple consecutive minimum
payments. According to a survey conducted by the Federal Reserve in 2004,
the median balance for U.S. families that carried balances on bank-type
credit cards was $2,200, and the average balance was $5,100.5

Each issuer determines the minimum payments that cardholders must pay each
billing cycle to keep an account in good standing. Issuers calculate
minimum payment amounts in a variety of ways, including as a set
percentage of a cardholder's outstanding balance, or the sum of all
interest and fees to be paid as well as some portion of the principal
balance, among other ways. For example, some issuers calculate minimum
payments as 1 percent of the outstanding balance plus any finance charges
and fees (such as late fees or over-the-limit fees) incurred for that
billing period.

Historically, required minimum payments generally averaged about 5 percent
of the outstanding balance, but these amounts declined to about 2 percent
in the last decade. The decrease in minimum payment rates lowered a
cardholder's monthly payment obligation, but also further delayed a
cardholder's repayment of principal. In some cases, the amount required
for the minimum payment was not sufficient to cover all incurred interest
or other transaction charges, which increased the outstanding balance.
Concerns about such increases-known as negative amortization-as well as
other practices compelled four federal banking regulators to issue
guidance in January 2003 that stated that issuers should require minimum
repayment amounts so that cardholders' current

balances would be paid off-amortize-over a reasonable period of time.6 The
guidance was designed to discourage minimum payment formulas that result
in prolonged negative amortization of accounts, a practice viewed by
regulators as raising safety and soundness concerns. However, it is
possible that a bank could satisfy a regulator's expectations by requiring
minimum payment amounts that represent less than the 5 percent of
outstanding principal that previously was customary in the industry.
According to a representative of the Office of the Comptroller of the
Currency, by year-end 2005, nearly all the issuers that it oversees (which
includes the largest issuers in the United States) had controls in place
to address concerns regarding negative amortization of credit card
accounts.

As part of the Bankruptcy Act, issuers will be required to provide
cardholders with information about the consequences of making minimum
payments on outstanding credit card balances. More specifically, the act
requires creditors to print on the billing statements of revolving credit
products (of which credit cards are a form) a generic disclosure that
"making only the minimum payment will increase the interest you pay and
the time it takes to repay your balance."7 In addition to the generic
disclosure, the law requires creditors to choose from two options for
providing additional information to cardholders: (1) providing a toll-free
telephone number that cardholders could use to obtain the actual number of
months that it would take to repay their outstanding balance if they made
only minimum payments or (2) providing an example of the length of time
required to pay off a sample balance at an interest rate of 17 percent and
a toll-free telephone number cardholders could call to get an estimate of
the time required to repay their balances.8 These requirements are
intended to increase consumer awareness of the consequences of these types
of payments. The Federal Reserve is currently establishing regulations to
implement the new law, which it expects to complete in 2007.9 The minimum
payment disclosure requirements will take effect 12 months after the final
regulations are published.10

While the Bankruptcy Act mandated that generic disclosures be made to
consumers on their billing statements, some lawmakers had sought to
require additional and more customized disclosures that would have
provided each cardholder with customized information about the costs and
time involved in paying off credit card balances resulting from habitually
making only minimum payments. Amendments that would have mandated these
customized disclosures failed to pass prior to the passage of the
Bankruptcy Act. While the details vary, five bills were pending in
Congress as of March 2006 that would mandate that issuers provide
customized disclosures to consumers.11

Table 1 illustrates the differences between the disclosure options that
issuers will be required to implement as a result of the Bankruptcy Act
and an example of the type of customized disclosures that have been
envisioned as part of various legislative proposals.

Table 1: Comparison of Disclosures Required under the Bankruptcy Act and a
Potential Customized Disclosure

                   Information                       Information 
                   required to                       that could  
                    appear on                        appear on   
                   cardholder                        cardholder  
                     billing                         billing     
                   statements                        statements  
                    under the                        with a      
                 Bankruptcy Acta                     customized  
                                                     disclosure  
                     Generic                         Customized  
                   disclosures                       disclosure  
Elements of   Minimum Payment Minimum Payment                 
disclosure    Warning         Warning With An                 
                 Statement       Example Option                  
                 Option                                          
Minimum       "Making only    "Minimum Payment                "Minimum     
payment       the minimum     Warning: Making                 Payment      
warning       payment will    only the minimum                Warning:     
                 increase the    payment will                    Making only  
                 interest you    increase the                    the minimum  
                 pay and the     interest you pay                payment will 
                 time it takes   and the time it                 increase the 
                 to repay your   takes to repay your             amount of    
                 balance."       balance."                       interest     
                                                                 paid and the 
                                                                 length of    
                                                                 time to      
                                                                 repay the    
                                                                 outstanding  
                                                                 balance."    
Length of     "For more       "For example,                   "For         
                 information,    making only the                 example,     
repayment     call this       typical 2% minimum              your balance 
                 toll-free       monthly payment on              of [XX]c     
                 number:         a balance of $1,000             will take    
                 ____________."  at an interest rate             [XX] months  
                                 of 17% would take               to pay       
                 The information 88 months to repay              off..."      
                 required to be  the balance in                  
                 provided is the full."                          
                 actual number                                   
                 of months that  "For an estimate of             
                 it will take    the time it would               
                 the cardholder  take to repay your              
                 to repay his/or balance, making                 
                 her outstanding only the minimum                
                 balance.        payments, call this             
                                 toll-free number:               
                                 _______________.b               
Total cost    N/A             N/A                             "...at a     
in principal                                                  total cost   
and interest                                                  of [XX] in   
                                                                 principal    
                                                                 and [XX] in  
                                                                 interest if  
                                                                 only the     
                                                                 minimum      
                                                                 monthly      
                                                                 payments     
                                                                 were made."  
Monthly       N/A             N/A                             "To pay off  
payment                                                       your balance 
amount to                                                     in 3 years,  
pay off                                                       you would    
balance over                                                  need to pay  
a prescribed                                                  [XX]         
period                                                        monthly."    

Sources: Bankruptcy Act and GAO.

aThe Bankruptcy Act allows issuers to provide one of the two options in
cardholder statements.

bThe statutory sample calculations for the repayment period and the
principal balance will vary depending on whether issuers (1) require a
minimum payment of 4 percent or less, (2) require a minimum payment of
more than 4 percent, or, (3) are regulated by the Federal Trade Commission
with respect to compliance with TILA.

cXX would contain a cardholder's actual balance, number of months required
to pay balance in full, and the total cost in principal and interest if
only minimum payments were made. This customized disclosure would also
include the monthly payment amount needed to repay balance in full in 3
years. These figures would be calculated using a cardholder's actual
balance, applicable interest rate(s), and other variables.

An attempt to mandate customized disclosures on the consequences of making
minimum payments also was made at the state level. In 2001, California
enacted a law that required issuers to provide the state's cardholders
with more detailed information about making minimum payments.12 Issuers
were required to provide one of two disclosure options. Both options
required the issuer to provide a minimum payment warning. In addition to
the minimum payment warning, one option required issuers to print an
example of the length of time required to pay off a sample balance amount
using a sample interest rate. Further, issuers were required to provide
cardholders, via a toll-free telephone number, with information about both
the length of time required and total cost of paying an outstanding
balance if only minimum payments were made. The second option, which was
mandated if a cardholder did not pay more than the minimum payment for 6
consecutive months, required issuers to print on the billing statement
individualized information indicating an estimate of the number of years
and months and the approximate total cost to pay off the total balance
due, based on the terms of the credit agreement, if the holder were to
make only the minimum payment. The disclosure also included a toll-free
telephone number to a credit counseling referral service. In December
2002, the U.S. District Court for the Eastern District of California held
that the state statute was preempted by federal law and determined that
the law was inapplicable to all federally chartered banks, savings
associations and credit unions.13 According to a staff attorney for the
California Attorney General's office involved in the case, the judge
effectively invalidated the law for all issuers because federally
chartered issuers held more than 95 percent of credit card debt in the
state at the time, thereby compelling the state for fairness reasons to
relieve all issuers from compliance with the law.

Results in Brief

Credit card issuers and data processors appear capable of providing
cardholders with customized information on the consequences of making only
minimum payments, but adding such disclosures to cardholders' statements
would increase issuers' costs. Representatives of credit card issuers and
processors said they have the technological capability and data in their
information systems to calculate estimates of the time that would be
needed to repay balances and other information that would use cardholders'
actual balances and interest rates. These estimates would incorporate
various assumptions, including that no additional transactions would occur
on a cardholder's account. Calculations necessary for customized
disclosures could also require choices about how to account for other
variables that can affect the precision of the estimates produced, such as
how to address cardholder balances that are subject to multiple interest
rates. Because the calculations would involve these various assumptions
and decisions, issuers said that any requirement to provide such
disclosures should include legal protections against potential lawsuits
about the "precision" of the calculations. The issuers and processors from
which we obtained data were not able to provide precise estimates of costs
for various reasons, including uncertainty about how the calculations
would be required to be made and how the disclosures would be formatted.
However, issuers and processors estimated that the three most significant
costs for producing customized minimum payment disclosures would be the
additional postage for mailing longer billing statements, computer
programming necessary for the calculations, and handling of the increased
number of cardholder telephone calls about such disclosures. Postage
appears to be the largest cost. Estimates of the total first-year costs to
implement customized disclosures varied widely across issuers, with one
large issuer expecting to incur at least $9 million but another issuer
expecting as much as $57 million. Because issuers already are obligated to
bear some of these costs as part of implementing the minimum payment
disclosures required by the Bankruptcy Act, the incremental costs of
providing customized disclosures likely would be less than these
estimates. Further, an industry analyst saw these costs as being very
small in terms of the income and expenses of the largest issuers.

Cardholders and others generally found customized disclosures on the
consequences of making minimum payments useful; however, opinions on the
extent to which the disclosures would influence cardholders' payment
behavior varied. Among the 112 cardholders we interviewed, when offered a
choice of receiving either a customized disclosure, the generic
disclosures of the Bankruptcy Act, or no disclosure at all, 57 percent of
the revolver cardholders-who typically carry balances on their cards and
thus would be most likely to find information on minimum payment
consequences useful-preferred to receive customized disclosures. While
several convenience users-who pay their balances in full each month-also
preferred the customized disclosure, the majority (60 percent) said they
would be satisfied with receiving either generic disclosures or none at
all. Among the reasons that cardholders who preferred customized
disclosures found them useful were that the information would be specific
to their accounts, change based on their transactions, and provide more
information than a generic disclosure. The cardholders who did not prefer
customized disclosures told us that they did not need such information,
for example, because they already understood the consequences of making
minimum payments or because they paid their credit card balances in full
each month. Although generally seen as useful by many of the cardholders,
the impact of customized disclosures on cardholder payment behavior could
vary. Consumer groups, financial educators, and many of the cardholders
with whom we spoke indicated that customized disclosures would influence
cardholders to make larger payments or change how they use their credit
cards because such disclosures would be more noticeable than generic ones.
However, customized disclosures might not affect the behavior of
cardholders who make minimum payments because they may be financially
unable to do otherwise. In addition, issuers' representatives stated that
providing customized disclosures to all cardholders would have limited
impact for various reasons; for example, they saw only a small impact
because the number of cardholders that routinely made only minimum
payments on their accounts is small.

Issuers, consumer groups, and others suggested various alternatives to
providing all cardholders with information on the consequences of making
only minimum payments on each monthly billing statement. Alternatives
included providing customized disclosures only to cardholders who revolve
balances or make minimum or slightly higher payments; in a location other
than the first page of the billing statement; or less frequently (such as
quarterly or annually). Each of the alternatives presents various
advantages and disadvantages for issuers and cardholders. For example,
providing customized disclosures only to cardholders who revolve balances
or make minimum or slightly higher payments could more effectively target
persons who are more likely to need the information and reduce issuers'
postage costs. In addition, providing customized disclosures in a location
other than the first page of the billing statement or providing such
disclosures less frequently could lower programming and other
implementation costs. However, these alternatives also could decrease the
extent to which such disclosures affect cardholders' behavior, because
fewer cardholders would receive the information or could fail to notice it
if the disclosure were removed from the first page of the billing
statement. Other options included not providing customized disclosures but
rather making greater use of generic examples or increasing financial
education efforts. For example, issuers could provide generic examples (of
the time required to pay off a balance and other information) for a range
of balance amounts and present cardholders with the example that most
accurately reflected their account. A final suggestion was to improve
consumer awareness of the consequences of making minimum payments through
greater financial education; for example, by including general information
about the consequences of only making minimum payments in solicitation
letters or the introductory package cardholders receive with credit cards.

We provided a draft of this report to the Federal Deposit Insurance
Corporation, the Federal Reserve, the Federal Trade Commission, the
National Credit Union Administration, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision for comment. The Federal
Reserve, the Federal Trade Commission, and the Office of the Comptroller
of the Currency provided technical comments that we incorporated where
appropriate. The National Credit Union Administration provided written
comments that agreed with our findings. This regulator also noted that
costs of implementing customized disclosures could be significant for some
small institutions and that considering options in how to implement such
disclosures would be important.

Providing Cardholders with Customized Information Seen as Feasible but
Doing So Would Increase Costs for Issuers

According to credit card issuers and others we interviewed, providing
customized estimates to cardholders would be feasible. However, the
precision of these estimates would depend upon the assumptions
incorporated in the calculations needed to produce this information, which
can vary based on decisions about how various factors are included.
Issuers also said providing such information could expose them to legal
liability and suggested a variety of regulatory actions to address these
concerns. Although uncertainty about format and content prevented issuers
and processors from providing precise cost estimates, they told us the
largest individual cost components for large and small issuers appeared to
be ongoing postage and call center operations, as well as one-time
programming costs. Total projected costs to implement customized
disclosures varied widely. However, issuers already are going to bear some
of these costs to implement Bankruptcy Act disclosures; and, according to
an industry analyst, the costs appear very small when compared with large
issuers' net income.

Issuers and Others Stated That Providing Customized Estimates Is Feasible
but Could Increase Issuers' Legal Liability

Issuers and others familiar with the proposed minimum payment disclosure
indicated to us that providing cardholders with estimates of various
consequences of making minimum payments would be possible. Representatives
for all six large credit card issuers whom we interviewed acknowledged
that their computer systems could be programmed to use individual
cardholder account information to calculate estimates of the information
envisioned to be disclosed. These calculations would include the amount of
time required to pay off a cardholder's specific balance if only the
minimum payment were made, the total amount of interest incurred over that
time, and the amount a cardholder would be required to pay each billing
cycle to pay off an outstanding balance over a given period. Some credit
card issuers and processors already had successfully developed the
capability to produce tailored estimates for their cardholders as a result
of customized minimum payment disclosures that had been required in
California in 2002. One of these issuers developed this capability
internally, while another used a third-party processor that developed this
functionality for all its issuer clients to use.

Besides noting that they could produce customized disclosures, some
issuers said they would prefer to provide customized rather than generic
information to cardholders. For example, representatives for one large
issuer told us they would prefer the Bankruptcy Act option that would
require them to produce actual repayment times for cardholders, obtainable
by calling a toll-free telephone number provided in billing statements. In
a comment letter responding to the Federal Reserve's advance notice of
proposed rulemaking, a representative for another large issuer said that
existing disclosure provisions should be implemented in such a way as to
encourage issuers to provide customized information to cardholders. These
two large issuers said they supported providing customized information to
their cardholders because they believe cardholders would find it more
relevant than generic information. A representative for one of these
issuers also said the issuer would benefit because providing customized
information over the telephone would require the shortest statement to be
printed on a billing statement of the two options under the Bankruptcy Act
and could be printed anywhere on a billing statement, which could be
easier to implement.

Although generally having fewer resources than larger issuers, small banks
that issue credit cards also could likely implement customized
disclosures, but such a requirement could represent a larger burden for
those that do not use third-party processors. A representative of a trade
association representing community banks told us customized estimates
would be feasible for small institutions because the work to implement
such a requirement would be done largely by the third-party processors
already used to manage cardholder data and process billing statements.14
According to staff of the National Credit Union Administration and the
Federal Deposit Insurance Corporation who were familiar with the
operations of smaller financial institutions offering credit cards, most
small issuers use third-party processors to assist with card operations
because the small issuers lack the resources to provide such a product
themselves. For example, small issuers typically assign only one or two
people to manage their credit card programs that, according to
representatives of a third-party processor, would not be adequate for
managing the technical, legal, and compliance issues that would be
required to provide the proposed customized disclosure. However, small
institutions benefit from economies of scale by working through
third-party processors. For example, a representative for a third-party
processor with thousands of small-bank clients told us that the processor
requires all small institutions to use the same billing statement format
or template. Therefore, changes made by the third-party processor to the
billing statement template would apply to all clients using that template.
In this case, the processor's costs to modify the template would be spread
across its client base. A representative from a federal banking regulator
told us that if issuers discontinue a credit card program upon the
implementation of new disclosure requirements, it would likely be because
the program had been marginally profitable or unprofitable even before the
requirements took effect.

Assumptions and Calculation Methods Can Affect the Precision of Customized
Estimates

Issuers and others told us the calculations needed to produce customized
information require the incorporation of certain assumptions, and their
precision can vary depending on various choices that can be made as part
of these calculations. The calculations needed to produce customized
information require assumptions about future cardholder behavior or
changes in account terms. For example, an estimate of the time required to
pay off a cardholder's current balance would assume that the cardholder
does not make more purchases with the card. Any subsequent increase to a
cardholder's outstanding balance would lengthen the repayment period and
also likely increase the total amount of interest to be paid for a
cardholder making minimum payments. Additionally, the estimates produced
would assume that a consumer continuously paid exactly the minimum payment
and that payments would be made by the due date. Other assumptions would
address potential changes in account terms. For example, calculations
would assume that the interest rate applied to the cardholder's balance
remained constant. However, changes in future interest rates are likely,
and such changes could affect the time required to fully repay a given
balance. Similarly, the estimates produced would assume that the formulas
issuers use to allocate payments to the various balances subject to
different interest rates, among other things, also would stay the same.

In addition to these assumptions, the choices that lawmakers, regulators
or issuers make about calculation methods also affect the precision of the
customized estimates.15 These choices include how issuers compute minimum
payment amounts or finance charges, among other things. For example:

o Minimum payment formulas vary among issuers and each issuer could have
as many as six different methods for determining the minimum payment on a
single account. Some card issuers calculate minimum payment amounts as a
set percentage of a cardholder's outstanding balance, while others include
all interest and fees to be paid as well as some amount of the principal
balance. Further, issuers differ in their absolute minimum payment amounts
(e.g., $10, $15, $20). Estimates based on each firm's actual formula for
calculating minimum payments therefore would differ from estimates
calculated using a standard formula for all issuers.

o Many issuers have credit cards that charge different rates for different
types of transactions, such as purchases, cash advances, or balance
transfers from other credit cards. Estimates that require issuers to
incorporate the various interest rates that apply to their cardholders'
outstanding balances would differ from those based on formulas that assume
a single interest rate, including ones using a composite rate.

As a result, if lawmakers or regulators mandated use of a standardized
calculation to prepare customized minimum payment estimates, cardholders
could receive less precise estimates. In contrast, requiring issuers to
calculate estimates using actual interest rates-including cases in which
multiple interest rates apply to different portions of a total balance-and
include other information that specifically reflects each issuer's own
terms and practices likely would lead to more precise estimates.

Because some issuers saw the assumptions that must be incorporated into
the calculations for customized minimum payment disclosures as
unrealistic, they and others questioned whether such disclosures provided
useful information. For example, some issuer representatives noted that
the customized disclosures presented estimates that would be accurate only
as long as cardholders did not make further purchases and the interest
rate on the card remained constant. However, issuers said that such
situations were not representative of most cardholders' behavior or
today's credit environment. Some issuers mentioned that, for these
reasons, the Bankruptcy Act disclosure options were a good compromise
between Congress and the industry. As a result, issuers and others stated
that these disclosures deserve a chance to work before further, more
detailed disclosures are required.

Issuers See Shelter from Legal Liability as Important for Providing
Customized Disclosures

According to some issuers and a third-party processor, providing
customized estimates to cardholders could expose card issuers to increased
legal risk. Because of the imprecise nature of customized minimum payment
estimates, some issuers expressed concerns about facing lawsuits. For
example, some issuer representatives told us that issuers were concerned
about being held responsible for adverse consequences experienced by
cardholders who misinterpreted the estimates, which incorporate certain
assumptions and calculation choices that affect their precision. Issuers
and others said litigation (e.g., class action lawsuits) could arise out
of such misinterpretations and subject issuers to significant legal costs,
even if they took reasonable actions under the guidance to provide
cardholders with customized information. A representative of a trade
association for community banks told us the threat of legal liability
would be more onerous for small issuers.

The extent to which requiring customized disclosures would increase
issuers' legal risk is not certain because cardholders' ability to sue can
vary. For example, under TILA provisions, class action lawsuits are not
available to cardholders with grievances under the minimum payment
disclosure

requirement added by the Bankruptcy Act.16 However, TILA provides
cardholders with a private right of action against issuers, which could
make issuers that failed to comply with the minimum payment disclosure
requirements liable for actual losses incurred by cardholders.17 In
addition, an Office of the Comptroller of the Currency official told us
that the possibility exists that a cardholder may have a private right of
action against an issuer for erroneous disclosures under a state's
consumer protection law.

Although various "safe harbor" provisions in TILA already protect issuers
from unintentional errors resulting from good-faith efforts to comply with
rules and regulations, organizations we interviewed suggested a variety of
additional legal protections if disclosure requirements were to change.
For example, a representative for an issuer suggested that issuers could
use calculation methods previously deemed acceptable to the Federal
Reserve. Issuers that performed calculations according to the approved
methods would be considered in compliance with the disclosure
requirements. Also, issuer representatives and a representative of a
consumer interest group said that the estimates that issuers calculate
could be subject to a tolerance test, which would give issuers a margin of
error (e.g., a few months) within which the estimates could be deemed
accurate. Another legal protection could involve determining whether
issuers followed required steps-according to defined assumptions and
calculation methodologies-to calculate the customized information. For
example, regulation could establish parameters for the calculations, such
as how to treat accounts with multiple interest rates. However, a
representative of a consumer interest group and credit card processor
cautioned that while a higher level of standardization of the calculations
could help protect issuers from lawsuits because expectations would be
clearer, standardized calculations might not be sufficient to reflect
variation in the terms and conditions of various credit card products.

Issuers Identified Three Significant Costs to Implement Customized
Disclosures, but Estimates of Total Costs Varied Widely

Although not certain about the form and content of a customized minimum
payment disclosure, issuer and processor representatives were able to
identify the implementation components that likely would be the most
costly, including postage, computer programming, and call center
operations. However, the estimates of the total implementation costs
varied widely. Further, issuers already would incur some portion of the
costs to provide customized disclosures in providing the Bankruptcy Act
disclosures; thus, not all of the cost estimates we obtained represent the
cost of customized disclosures exclusively.

Credit card issuers and processors-the entities with the best data about
the cost to implement customized disclosures-were unable to provide
precise cost estimates for a variety of reasons. First, factors affecting
actual paper and postage costs cannot be determined until a law requiring
a customized disclosure is enacted and implementing regulations issued.
Such factors could include how customized disclosures would be formatted
(e.g., font size, spacing) and where such disclosures would be required to
be placed in the billing statement (e.g., front page, leaflet). Second,
decisions about calculation methods and the treatment of variables could
affect estimates for programming computers. For example, representatives
for two large issuers told us that if issuers had to make complex
calculations, actual programming costs could be as much as four to five
times higher than if simpler calculations were required. Third, some
issuers were uncertain of the costs that would be incurred outside their
own organizations, for example, by third-party processors. Accordingly,
some issuers generated estimates based on previous experiences (such as
implementing similar requirements) or by making assumptions about
implementation requirements, such as the required location and length of a
disclosure.

Increased Postage Represents One of the Largest Cost Components

Two large issuers and two third-party processors provided us with
estimates of postage costs, which they said would be potentially the
highest cost item to implement a customized disclosure. Postage cost
increases could occur if adding the disclosure also added an additional
page to the monthly statement. This added weight could move the statement
into a higher postage category. Adding a page to billing statements could
increase postage costs because, as one large issuer explained, issuers
generally manage the amount of information they include in their mailings
to meet a 1-ounce limit, which according to a representative of a
third-party processor costs on average $0.30 per statement to mail. The
incremental cost of moving from a 1-ounce bulk postage rate to a 2-ounce
rate would be on average about $0.23, or almost an 80 percent increase,
according to representatives for two third-party processors. However,
requiring that additional information be included in a billing statement
would not necessarily push all billing statements into a higher postage
category because issuers add and remove information (such as advertising)
from statements to meet weight limits, according to representatives for
some issuers. According to representatives of a third-party processor,
postage rates for small issuers that mail statements through third-party
processors would be relatively the same as for large issuers. A
representative of another third-party processor told us small issuers get
the same bulk postage rates as large issuers because their mailings are
combined. Postage rates decline as more statements make up a mailing.
However, postage costs for small issuers that mail statements at retail
rates would be higher. We were unable to determine the proportion of small
issuers that use retail postage rates.

According to issuers and processors, additional postage arising from
implementing customized minimum payment disclosures for a large issuer
could be as high as about $14 million annually. We obtained postage cost
estimates from representatives for two large issuers that mail up to 50
million statements each month.

o According to one of these issuers, annual postage costs could increase
up to about $5 million if all cardholders were required to receive the
customized information envisioned in a proposed disclosure on the first
page of every billing statement. We estimated this to be an increase of
about 5 percent to annual postage costs for mailing billing statements.18

o Representatives for the other issuer told us their postage costs could
increase by as much as about $14 million annually to implement customized
disclosures on the first page of billing statements. We estimated this to
represent about an 8 percent increase to the issuer's annual postage costs
to mail billing statements. The representatives estimated these
disclosures to be twice the length of a generic disclosure, thereby
forcing more than 20 percent of statements to require an additional page.

Differences in these estimates are attributable to the number of billing
statements that the issuers estimated would require additional postage,
which differs across issuers depending on the format of their statements
and the assumptions they made about formatting for the proposed
disclosure.

Although estimated postage cost increases appear to constitute the largest
component of projected implementation costs, issuers usually incur much
higher postage costs for other purposes. For example, a credit card
industry analyst told us postage costs for mailing statements are
insignificant when compared with the expense per issuer of mailing about
4-5 billion solicitations each year, a typical amount for the largest card
issuers. In contrast-based on our analysis of CardWeb.com, Inc., data-we
estimate that even the largest issuers mail less than 1 billion statements
per year. Also, postage costs could decline as the number of cardholders
receiving billing statements in electronic formats increases.
Representatives for some issuers told us that the proportion of
cardholders receiving statements in an electronic format is small, but
growing. According to representatives of one large issuer, between 2002
and 2004, electronic statement use among their cardholders increased about
85 percent, and 6 to 12 percent received statements electronically.
Representatives for a smaller issuer told us that about 10 percent of its
cardholders used the issuer's Web site to get information about their card
accounts.

Programming Modifications Are Also Likely to Be a Major Implementation
Cost Component

According to issuers and others, expenses related to programming computer
systems to develop tailored estimates would be another major cost of
implementing customized disclosures. Programming costs are one-time costs
for designing, testing, and implementing computer code. Once in place, the
new or revised programs would use cardholder account data to provide
estimates of the repayment period, total interest costs, and monthly
payment amount to pay off a balance if only minimum payments were to be
made. Issuers' programming costs would arise from the time their own
information technology staff spend making systems modifications or from
the increased expenses from the use of third-party processors, which
maintain information systems that store issuers' cardholder account data
as well as develop, print, and mail billing statements.

Estimates for programming generally were $1 million or less and depended
on the complexity of the required calculations and issuers' information
systems. For example, representatives of a large issuer and a card
processor representing over one thousand large and small issuers told us
the up-front costs to develop and program computer code for a customized
disclosure would cost about $500,000 but could cost as much as $1 million
for more complex calculations. In providing us with estimates, we asked
issuers and third-party processors to assume that calculations would
reflect issuers' actual account terms and practices at the time the
information was produced, including interest rates, account balances, and
methods for calculating finance charges and minimum payments. However,
representatives for the same large issuer told us programming costs could
be as much as $5 million for the most complex calculations-for example, a
calculation that would require issuers to factor in such situations as
temporary zero percent promotional interest rates. We obtained estimates
from others for programming under the Bankruptcy Act provisions, which
only require one calculation to estimate a cardholder's repayment period.
These estimates were generally less than $500,000. For example, one lender
stated in a comment letter to the Federal Reserve that such programming
would cost about $412,500.

Estimated programming costs for smaller issuers that use third-party
processors were lower than for large issuers. We obtained estimates for
programming the customized provisions under the Bankruptcy Act from a
processor and a medium-sized issuer. A representative of the processor
estimated it would cost about $300,000 to modify information systems to
accommodate the Bankruptcy Act disclosure option requiring issuers to
provide an estimate of the repayment time. According to the
representative, this cost would be spread across the processor's small-
and medium-size issuer client base of about 5,000 issuers. In addition,
representatives for a medium-sized issuer told us it would cost the issuer
$5,000 to $10,000 to have its third-party processor modify its information
systems to accommodate customized provisions contained in the Bankruptcy
Act. They further noted that it would cost about $150 per hour to hire a
processor to program the other two messages that are envisioned to be
included in customized disclosures.

Costs for programming would vary depending on the level of precision that
would be required and the complexity of an issuer's account practices.
Some issuers have more complex pricing schemes that could increase the
programming required to develop estimates that more closely reflect a
cardholder's situation. For example, as noted above, many large issuers
engage in transaction-based pricing, in which different rates of interest
apply to balances originating from different transactions (such as
purchases, cash advances, or balance transfers). Programming a calculation
that accounts for a variety of balances at different interest rates, while
more precise, is more complex than a calculation that uses one balance and
one interest rate. Adding further to the complexity, with multiple
balances and interest rates, decisions would need to be made about the
order in which to allocate cardholder payments to the outstanding
balances.

A smaller portion of the programming estimates we received was for
reformatting billing statements to accommodate the text of the disclosure.
Issuers use various formats or templates to present cardholders with
information about their accounts, including transactions, payment due
dates, and rewards program information. Issuers may also use different
templates for different card programs, such as cards with rewards (e.g.,
cash-back or travel benefits) or private-label cards associated with major
retailers. The issuers use an average of three statement templates, with
the smallest issuers using just one and the largest issuers using as many
as 100 templates, according to representatives of third-party processors
serving large and small issuers. One representative estimated one-time
costs of about $13,500 per issuer, assuming three templates required
revision. Programming costs for small issuers would generally be the same
on a per-unit (statement template) basis. However, a representative of
another third-party processor told us reformatting costs would be
substantially lower for small issuers because the processor requires all
small issuers to use the same statement template, thereby spreading
reformatting costs across the thousands of institutions using that
statement.

Need for Expanded Customer Service Resources Would Also Increase Issuer
Costs

Issuers estimated that call-center costs would increase following the
implementation of customized disclosures because the centers would receive
more and longer telephone calls from customers. One large issuer told us
its costs could increase by about $3 million in the first few months
following implementation of customized disclosures. However, this issuer
said these calls likely would taper off after cardholders became familiar
with the customized information. In addition, an issuer in a comment
letter to the Federal Reserve noted that the Bankruptcy Act requirements
would increase call volume and duration, which could increase its expense
for servicing customer calls by about $900,000 monthly. As part of
preparing to implement the California disclosure requirements, six large
issuers estimated incurring expenses averaging about $680,000 monthly to
operate a telephone bank upon implementing minimum payment disclosures in
California.

Estimates of Total Implementation Cost Varied Widely

Perhaps reflecting the uncertainties and range of assumptions noted above,
the estimates that we obtained of total first-year costs ranged from $9
million to $57 million for large issuers. For example, representatives of
one issuer estimated that postage, programming, and customer service costs
could total approximately $9 million, but also noted that the issuer could
incur additional costs, such as training staff and retaining legal
services to keep abreast of regulatory changes and court decisions that
could affect compliance.

Not all issuers from whom we obtained data were able to provide total
estimates based on individual implementation cost components. Instead,
these issuers provided us with only aggregated estimates based on their
experiences in implementing California's minimum payment disclosure
requirements; and these estimates generally were higher than those
provided by another issuer and two processors that estimated individual
component costs. For example, representatives of one large issuer
estimated the company would have spent a total of $57 million in the first
year following implementation had it implemented the California
requirements, which roughly resembled portions of the customized
disclosure we studied. The issuer separated this estimate into two
categories of one-time, start-up costs and ongoing costs. The one-time
costs would be about $30 million, which would include programming computer
systems and modifications to customer service systems, among other things.
Ongoing costs would be about $27 million annually, including postage and
handling a higher number of calls from cardholders, among other things. In
documents filed with a federal district court, three large issuers
estimated it would cost them about $41 million each in the first year to
implement California's customized disclosure requirements.19 Of this
amount, about $18 million would pay for one-time, start-up costs with the
remaining $23 million for ongoing costs.

Issuers Already Slated to Incur Some of These Costs, Which Are Small
Relative to Net Income

As noted above, impending minimum payment disclosure requirements under
the Bankruptcy Act could soon require issuers to make programming and
billing statement changes that could consequently reduce estimated costs
to implement any additional customized disclosures. For example, one
Bankruptcy Act option would require issuers to produce actual information
about a cardholder's repayment period if only minimum payments were made
and make this information available to cardholders over the telephone.
Programming expenses made up front to meet that requirement could reduce
the programming costs for implementing customized disclosures. Also,
estimated increases to postage costs associated with a new customized
disclosure requirement may be overstated in that they do not account for
increased postage costs issuers will already have incurred for
implementing the Bankruptcy Act requirements.

Because the cost estimates we obtained were not comprehensive, it is not
possible to ascertain how additional customized minimum payment disclosure
requirements would affect issuers' overall profitability. However, the
costs of implementing customized disclosures do not appear to be
significant in terms of large issuers' net income. According to a credit
card industry analyst, estimates for implementing the customized minimum
payment disclosures are insignificant to issuers and easily would be
absorbed. The analyst noted that estimates for start-up and ongoing costs
in the first year would be so small that they would be the equivalent of a
rounding error in terms of net income.

Comparing these estimated implementation costs with issuers' operating
expenses also indicated that such costs might not significantly increase
their operating expenses. To determine how estimates of the costs to
implement customized disclosures-which ranged from $9 million to $57
million-would affect the operating expense of the issuers that provided us
with these estimates, we identified operating expenses and amounts in
outstanding credit card loans from financial reports and data the issuers
provided to us.20 By adding the estimates of total implementation costs to
the amount each issuer reported in operating expenses, we found that the
ratio of their operating expenses to their outstanding credit card loans-a
metric commonly used by industry analysts-would stay the same or increase
slightly.21 For example, we found that the issuer that provided us with a
$9 million estimate for total implementation costs for the first year
would experience no change to its operating expense ratio. The issuer that
provided us with a $57 million estimate would experience an increase in
current ratio from approximately 3.3 percent to about 3.5 percent.
According to CardWeb.com, Inc., monthly operating expense ratios for the
150 issuers that it monitors generally averaged between 4.2 and
approximately 6.0 percent from January 2001 to December 2005.22

Customized Disclosure Was Seen as Useful, but Its Impact on Cardholders
May Vary

Most of the revolver cardholders-those that carry a balance on their
credit cards-who we interviewed preferred to receive a customized
disclosure on minimum payment consequences. Although some convenience
users also preferred a customized disclosure, most saw generic disclosures
or no disclosure at all as sufficient for their needs. Those preferring
the customized disclosure did so because it would be cardholder-specific,
change each month based on account transactions, and provide more
information than the two Bankruptcy Act options. However, opinions as to
how the customized disclosure would influence cardholder behavior varied,
with some believing that such a disclosure would have a great impact and
others believing that it would have little impact.

Revolvers Preferred Customized Disclosures

To assess the usefulness of providing a customized disclosure to
cardholders, we interviewed 112 adult cardholders and asked for their
preferences for three disclosure statements-the two generic disclosure
options from the Bankruptcy Act and an example of a proposed customized
disclosure-or no disclosure at all. We categorized the cardholders into
two groups, of 38 convenience users and 74 revolvers, based on their
responses to questions about their credit card payment behaviors.23 The
cardholders recruited for the interviews did not form a random,
statistically representative sample of the U.S. population. As described
in table 1 (in the background section), the two generic disclosure options
shown to cardholders include one that contains a minimum payment warning
statement only, and another that contains a minimum payment warning
statement and an example of the amount of time needed to pay off a sample
balance. Table 1 also includes an example of a customized disclosure,
similar to the one that cardholders were shown.

Revolvers generally preferred to receive a customized disclosure about the
consequences of making minimum payments. Specifically, more than half of
the revolvers (42 out of 74) choose to receive the customized disclosure
over the two Bankruptcy Act disclosure options or no disclosure at all
(see fig. 1).

Figure 1: Extent to Which 74 Credit Card Revolvers Preferred and Found
Useful a Customized Minimum Payment Disclosure

Note: Percentages may not total to 100 percent due to rounding.

As figure 1 shows, the revolvers-including some for whom the customized
disclosure was not the preferred option-also generally found the
information contained in the customized disclosure to be useful.
Sixty-eight percent (50 out of 74) of the revolvers found the customized
disclosure either extremely or very useful, while 23 percent (17 out of
74) found the customized disclosure slightly useful or not useful at all.

Although Several Convenience Users Also Preferred a Customized Disclosure,
Most Did Not Believe They Needed to Receive Such Information

Although more convenience users preferred the customized disclosure to
either of the generic ones, the majority (60 percent) were satisfied with
receiving a generic disclosure or no disclosure at all. The number of
convenience users preferring the customized disclosure (15 out of 38) was
equal to the total number who preferred the generic disclosures.

Figure 2: Extent to Which 38 Credit Card Convenience Users Preferred and
Found Useful a Customized Minimum Payment Disclosure

Note: Percentages may not total to 100 percent due to rounding. The
individual percentages for the two generic disclosures also do not total
to the combined percentage due to rounding.

As shown in figure 2, while 37 percent (14 out of 38) of convenience users
found the customized disclosures extremely or very useful, 55 percent (21
out of 38) found it slightly useful or not useful at all.

Revolvers and Convenience Users Cited Similar Reasons for Preferring the
Customized Disclosure, but Not All Cardholders Wanted This Information

The reasons given by both revolvers and convenience users for preferring
the customized disclosure generally were similar. Many of the cardholders
who preferred the customized disclosure or thought that it was more useful
than a generic disclosure said they did so because the information
provided would be specific to their account and change each month, based
on their transactions. For example, if issuers were providing a customized
disclosure, the information on the monthly billing statements would take
into account any changes in customers' accounts that occurred since the
previous billing cycle, including new purchases, payments received,
changes in interest rates, and any fees that might have been assessed. The
customized disclosure, therefore, would provide cardholders with a new
"snapshot" of their account each month, as of the date the bill was
calculated. Many of the cardholders noted that, even if the information
was outdated by the time they received it (e.g., if they had made
additional purchases), just having an idea of the payments needed to pay
off their balances would be helpful. One respondent noted that she found
the customized disclosure more useful than the generic example in the
Bankruptcy Act disclosure because, even though her issuer cannot
anticipate future purchases or changes in her interest rate, the
customized disclosure still would be closer to reality. Some respondents
also found the dynamic nature of the disclosure helped them understand the
consequences of making minimum payments more than the generic examples
because they would be better able to see how purchases or payments made on
their account affected their repayment estimates.

Additionally, some respondents noted that because the customized
disclosure would be updated each month they could track their account and
use the information for budgeting or financial planning purposes. Although
issuers and others stated that the information would not be practical for
cardholders because the estimates would assume no activity on the account,
we did not find that the cardholders we interviewed believed this limited
the usefulness of the customized information. In fact, after we explained
to cardholders that the customized disclosure would represent only a
point-in-time estimate and that the information would change if there were
additional activity on their account, 79 percent (89 of 112 cardholders)
found the customized disclosure more useful than the generic example in
one of the Bankruptcy Act options.

Customized Disclosures Provide Cardholders with Additional Information

Cardholders also preferred a customized disclosure because such a
disclosure provided them with new and additional information. We found
that the majority of cardholders already demonstrated a basic
understanding of the consequences of making only minimum payments. For
example, 68 percent of the cardholders could explain that both the length
of time and amount of interest they would pay would increase if they made
only minimum payments. An additional 29 percent of respondents could name
at least one of these two consequences. Because many cardholders already
understood that making only minimum payments could be harmful to their
financial condition, the information provided by either of the Bankruptcy
Act disclosures would not be new to the cardholder. One cardholder told us
that he preferred the customized disclosure because he already understood
the concept addressed in both Bankruptcy Act disclosure options; however,
the customized disclosure provided him with personalized details that he
found helpful. Another cardholder mentioned that the customized disclosure
gave him a "plan," whereas the other two options were "merely warnings"
and would not tell him anything he did not already know.

In addition to providing cardholder-specific information on the length of
repayment, a customized disclosure also could include information on the
total amount of interest a cardholder would pay if only minimum payments
were made, and the monthly payment amount needed to repay the balance over
some time period (e.g., 3 years). During our interviews, several
cardholders told us that seeing such information would be useful to them.
For example, some cardholders told us they found the information on the
monthly amounts needed to repay the balance over a time period to be the
most useful part of the disclosure because it provided them with a plan
for how to pay off their balances.

The majority of cardholders we interviewed (57 percent) indicated that
they were unlikely to take the initiative to call the toll-free telephone
numbers required by the Bankruptcy Act, and many indicated that they had
not calculated the information on their own to obtain individualized
information. Therefore, if the customized disclosure were not provided
directly on their billing statement, they would be unlikely to receive any
individualized information at all. In fact, many cardholders mentioned
that they liked the customized disclosure because it eliminated the need
for them to calculate the information on their own or call a toll-free
telephone number. Additionally, most of the cardholders were not aware of
or using existing tools such as amortization calculators that are
available on the Internet. Only 41 percent of cardholders were aware of
these calculators, and only 33 percent of those who were aware of the
tools had used them. Also, according to financial educators, it is
important to provide customized disclosures because most cardholders are
not able to calculate amortization periods and total interest payments
correctly.

Some Cardholders Saw Limited Need to Receive Customized Disclosures

Not all of the cardholders chose to receive the customized disclosure or
found the information that it contained useful. As shown in figures 1 and
2, 30 percent (22 of 74) of the revolvers and 39 percent (15 of 38) of the
convenience users preferred to receive one of the two Bankruptcy Act
options. Some of these cardholders explained that they thought the generic
disclosures mandated by this act were simpler and easier to understand.
Others indicated that the example provided in one of the Bankruptcy Act
options gave them a good understanding of the consequences of making
minimum payments, without having to see specific estimated numbers based
on personal account information. Other cardholders specifically stated
that they found the customized disclosure confusing, and some noted that
having the option to call the toll-free number if they wanted additional
information was sufficient.

Finally, some cardholders preferred not to receive any disclosure on the
consequences of making minimum payments, primarily because they already
understood the consequences of making minimum payments. Some cardholders
were concerned that issuers would pass on to them the costs associated
with providing customized disclosures. Other cardholders told us they
probably would not pay attention to the disclosure or that they would not
read it because they did not read their credit card statements.

This report does not contain all the results from the interviews. The
interview guide and a more complete tabulation of the results can be
viewed at GAO-06-611sp .

Customized Disclosures' Impact on Cardholders May Vary

Opinions varied on how effective customized disclosures would be in
influencing cardholder behavior. Consumer groups, financial educators, and
many of the cardholders we interviewed indicated that considerable
benefits might result from providing cardholders with customized
disclosures. Such benefits could include cardholders making larger
payments or otherwise changing how they use their credit cards.

Customized disclosures might have greater impact because they would be
more noticeable than other disclosures. For example, a consumer group
representative and financial educator told us that cardholders generally
are more likely to notice a customized disclosure over a generic one. They
compared providing the generic Bankruptcy Act disclosures on cardholders'
billing statements to providing smokers with the Surgeon General's Warning
on a cigarette pack, and noted that once cardholders become familiar with
a generic minimum payment disclosure, they are likely to ignore it and not
be influenced by the information that it contains. The risk of a repeated
and identical disclosure being ignored appears real, as some of the
cardholders we interviewed said that after seeing the generic Bankruptcy
Act disclosures a few times they probably would stop reading them. In
contrast, cardholders told us that that they would be more likely to
notice customized information each month. Representatives from some
consumer groups and other organizations told us that, because the example
contained in one of the generic Bankruptcy Act disclosures contains a
sample balance and interest rate that is not reflective of most
cardholders' accounts, cardholders likely would dismiss it entirely
because they would assume it did not apply to them.

Customized disclosures also were seen as having a potentially significant
impact on cardholder behavior because they would provide information that
changes as the cardholder's situation changes. For example, one
representative of a third-party credit card processor told us that she
believes that if cardholders were shown information that changed each
month according to the actions they took, they then would be more likely
to change their behavior. Many of the cardholders also indicated that a
customized disclosure would be more influential than a generic disclosure
in causing them to consider increasing monthly payments. For example, one
respondent said that during the months when she might not pay her full
balance, seeing the customized disclosure would make her want to "scrape
together more money from savings" to make a larger payment. Additionally,
another respondent noted that the customized disclosure would influence
him to take disposable income and put it toward his credit card balance.
Another said that seeing the amount of interest he was paying would make
him want to pay off the balance sooner. Additionally, two of the
cardholders we interviewed told us that seeing new information every month
would help them make decisions for the future and might change the way in
which they used their credit cards.

However, others, including issuer representatives and industry
researchers, indicated that customized disclosures might not be effective
in changing consumer behavior. They noted that not all cardholders need
the information provided in the customized disclosure. For example, while
customized disclosures could provide convenience users with illustrative
information, the cardholders-by paying their balances in full each
month-already are modeling behavior that customized information was
designed to promote. As a result, these cardholders would appear not to
need this additional disclosure. Many of the convenience users we
interviewed-who preferred not to receive a customized disclosure-explained
that they paid their balance in full each month, already understood the
consequences of making only minimum payments, and therefore did not need
the additional reminder. Instead, most of the convenience users told us
that they would rather receive information on the first page of their
billing statement that would be more useful to them, such as information
on a credit card reward program. Additionally, because a customized
disclosure would assume that only the exact minimum amount would be paid,
representatives of some issuers told us that such disclosures would be of
limited use to the large number of cardholders who, although not fully
paying the balance each month, do pay more than the minimum amount due.

Some organizations also said that customized disclosures might have a
limited impact on cardholder behavior overall because the number of
cardholders that make consecutive minimum payments appears to be small.
According to issuers, minimum payment disclosures, whether customized or
generic, are useful only to the cardholder population that revolves
balances-specifically, the smaller subset of that population that
habitually makes minimum payments. According to six of the issuers we
contacted, the percentage of their customers who make minimum payments is
small.24 As a result, most issuers questioned the value of implementing
customized disclosures that would benefit such a small percentage of their
customers. Additionally, representatives of one large issuer told us that
their firm had implemented the minimum payment disclosures required under
the California law for 3 months and, while acknowledging that these
disclosures were in place for a brief period, indicated that they did not
notice a difference in the number of cardholders making minimum payments.
As a result of this experience, the representatives said that they did not
expect the proposed customized disclosure to have much of an impact
either.

Customized disclosures also might have little impact on cardholder
behavior because some cardholders are not able to make larger than minimum
payments. Many of the cardholders we interviewed who made minimum payments
told us that they did so because they could not afford to pay more.
Competing expenses and a lack of additional disposable income were the
primary reasons these cardholders gave for making at least one minimum
payment within the last year. A representative from a large issuer also
told us that cardholders who make minimum payments lack the ability to
regularly pay more.

Various Options Exist for Providing Information on Consequences of Minimum
Payments

Issuers, consumer groups, and others that we interviewed suggested
alternatives for providing cardholders with customized information on the
consequences of making minimum payments. Among the alternatives mentioned
were targeting customized disclosures to only certain cardholders or not
requiring the disclosure to appear on the first page of cardholders'
billing statements. While these alternatives might make it easier and less
costly for issuers to implement customized disclosures, they also may
reduce the desired impact of the disclosure because fewer cardholders
would receive the information or notice the disclosure. Rather than
providing customized disclosures, some suggested that government agencies,
issuers, financial educators, and consumer groups expand general financial
education efforts on the consequences of making minimum payments.

Suggested Alternatives Included Fewer Recipients, Flexible Formatting, and
Online Delivery

Consumer groups, issuers, and others suggested that the population of
cardholders that would receive customized disclosures could be narrowed.
For example, a consumer group representative suggested the information
could be targeted only to cardholders most likely to need it, such as
revolvers. A representative of another consumer group told us that such
information ought to be provided to any cardholders that paid the minimum
amount or close to the minimum amount in any given month. Some issuer
representatives asserted that the population receiving customized
disclosures ought to be even narrower, such as cardholders who have made
minimum payments for several consecutive months.

Limiting the number of cardholders who receive customized disclosures
offers some advantages to issuers and some disadvantages to cardholders.
For example, providing customized information to a more limited number of
cardholders would lower issuer costs, such as paper and postage, by
reducing the number of billing statements that might require an additional
page. However, limiting customized disclosures to cardholders who pay only
the minimum could preclude other cardholders from benefiting from such
information. For example, many of the cardholders we interviewed
identified themselves as paying "a lot more than the minimum payment,"
"almost their entire balance," or their "entire balance" each month, yet
found the customized disclosure to be either extremely or very useful.
Some of these cardholders noted that even though they do not typically
make minimum payments or close to the minimum payment, the disclosure
still provided them with useful information in case they ever experienced
a time when they would need to make minimum payments. Some of the
convenience users who found the customized disclosure useful explained
that the information served as a good reminder on the consequences of
making minimum payments.

A second alternative that issuers and others identified would be to place
the disclosure in a location other than the first page of the billing
statement. For example, issuers could be allowed to print the customized
disclosure on either the back side of a statement page or on a subsequent
page. One regulatory official noted that issuers could provide text on the
first page that informs cardholders that customized information is
available elsewhere in the statement. Issuers and a card processor told us
that space on the first page of the billing statement is at a premium
because it typically contains a lot of important information, such as
messages on the status of an account (e.g., over-the-limit notices).

Providing the customized minimum payment disclosures to cardholders in a
location other than the first page of the billing statement would offer
issuers some cost advantages, but a disadvantage of such a change could
include less impact on cardholder behavior. Not being required to place
the disclosure on the first page of billing statements could make
implementing the disclosure easier and less costly for issuers because
they might not need to reformat their statement templates. However,
according to consumer groups and others, not placing the information on
the first page of the statement would reduce its prominence and likely its
influence on cardholder behavior. For example, one representative told us
that cardholders might be less likely to notice the disclosure if it was
not prominently positioned on their billing statement. An industry expert
confirmed that the primary tool issuers use to communicate with their
cardholders is the monthly billing statement. Therefore, removing the
customized minimum payment disclosure from the billing statement entirely
could decrease the number of cardholders who read it at all.

A third suggestion that could reduce the cost of customized disclosures
would involve providing the information electronically or online.
According to an issuer and a consumer group we contacted, customized
information could be provided to cardholders in electronic statements sent
by issuers. Cardholders also could access such information directly on
issuers' Web sites. For example, issuers could provide online calculators
in which cardholders could enter their balances, applicable interest
rates, and payment amounts to obtain repayment and other estimates
specific to their accounts. At a credit card industry symposium held in
June 2005, participants advocated increasing the reliance on technology
for delivering more useful consumer disclosures.25 One issuer that we
interviewed already has implemented an online calculator to provide its
customers with customized information, while another issuer told us they
were currently developing one.

Making customized disclosures available online, rather than in monthly
statements, could prevent cardholders from receiving outdated information
and allow cardholders to access the information when they need it, rather
than limit them to a monthly statement. Online availability also presents
cardholders with the ability to receive only the information they prefer.
Online disclosures also could give cardholders the flexibility to obtain
the information they deemed most useful to them. For example, some
cardholders found customized disclosures only slightly useful, because
they made more than the minimum payment every month. Additionally, one
cardholder said that he would rather see the calculation that showed the
monthly payment amount that would be required to pay his balance off in 1
year, rather than some longer period.

However, an exclusively online presentation could also reduce the impact
of the disclosure. Removing the disclosure from the billing statements
could greatly decrease the number of cardholders that see such
information, because not all cardholders have easy access to the Internet.
Some cardholders we interviewed mentioned that although they were aware of
online calculators to help them estimate credit card payoff times, they
had not used them because they did not have easy access to the Internet.
In addition, even cardholders with the ability to obtain such information
online might not utilize it. For example, only two of the 43 cardholders
with whom we spoke that identified themselves as typically paying "the
minimum amount" or "more than the minimum amount, but not much more than
the minimum," had used an online credit card calculator. Some of these
cardholders were not comfortable with using the Internet for personal
finance. In addition, the consumers we interviewed generally greatly
preferred receiving minimum payment disclosures in their billing
statements. Of the 112 cardholders we interviewed, 73 percent preferred to
receive such information on their monthly billing statement, while about
11 percent preferred receiving the information via the Internet.

A fourth alternative for providing customized information on minimum
payment consequences to cardholders would be to do so less often than
monthly. For example, issuers could provide the information to cardholders
quarterly or annually. Several of the cardholders we interviewed (about 24
percent) were amenable to receiving the disclosure less frequently than
monthly. This alternative could reduce both postage and paper costs for
issuers because additional pages to print the disclosure would be needed
less frequently.

However, if cardholders received the information less frequently, they
would not be reminded of the consequences of making minimum payments in
the months they did not receive the disclosure. For example, one
cardholder we interviewed who typically made only slightly more than
minimum payments said that she "just doesn't really think about it when
she makes the payment," but with a customized disclosure "in front of her,
she would think about it more." Another noted, "Having it [the customized
disclosure] in front of you with your specific information makes it easier
to keep in the back of your mind that you should be quick to pay your
balance off sooner."

Options Besides Customized Disclosures Were also Identified

Consumer groups, federal regulators, and others identified options for
improving the information cardholders receive on the consequences of
making minimum payments that would not entail providing customized
information. For example, one issuer representative advocated expanding
the generic example in one of the Bankruptcy Act options by developing a
wider range of balance amounts and interest rates. With several different
examples available, issuers could provide cardholders with a disclosure
that contained a sample balance and interest rate that would be closer to
those in the cardholder's actual account, without having to incur the
expense of producing disclosures using the exact amounts. While this
approach would not provide cardholders with estimates as specific to their
situation as a customized disclosure, it likely would provide better
information to cardholders whose balances and interest rates were not
similar to those currently used in the example contained in the Bankruptcy
Act disclosure.

Finally, instead of providing customized disclosures, federal regulators,
educators, and consumer groups mentioned that consumer awareness could be
improved by requiring issuers and others to increase financial education
efforts tailored to minimum payment messages. Issuers could do this by
including information about the consequences of making only minimum
payments in solicitation letters or the introductory packages consumers
receive when they obtain a new credit card. Government agencies and
financial education providers could make additional use of advertisements
in various media to underline messages about the consequences of making
minimum payments.

Observations

Our work indicates that credit card issuers and processors have the
necessary data and systems capabilities to provide customized minimum
payment disclosures-that is, to include customized information in billing
statements that would show the length of time required to pay off each
cardholder's actual balance and the additional interest that would be
incurred if only the minimum payment is made each month, as well as the
monthly payment required to pay off an outstanding balance in a given time
period. However, such disclosures are only point-in-time estimates that
would fluctuate as cardholders make additional purchases or increase their
payment amount. Credit card issuers and processors would incur initial
costs, estimated to be from less than $1 million to up to several million
dollars, to revise their systems to make these calculations. They would
also likely incur additional costs resulting from higher postal charges-if
including such disclosures increases the size of cardholder statements-and
from increased customer service expenses, as they respond to account
holder questions about these disclosures. While these additional costs
could increase the ongoing expenses of producing and mailing billing
statements, card issuers are already obligated to bear some portion of
these costs as they implement the minimum payment disclosures mandated by
the Bankruptcy Act. While we cannot estimate the incremental costs of
providing customized disclosures, the known estimated costs appear to be
small relative to the income of the largest issuers, which account for the
vast majority of cardholder accounts. Further, the costs to the thousands
of small card issuers would be minimal because of their use of third-party
processors.

While most of the revolver cardholders whom we spoke with found customized
disclosures very useful, the impact that they might have on cardholder
payment behavior could vary. Many of the consumers that we interviewed
told us that customized disclosures provided more useful information than
the generic disclosures mandated by the Bankruptcy Act, with the majority
of revolvers preferring to receive customized disclosures. However, the
majority of convenience users, while finding some value in the information
contained in customized disclosures, were satisfied with receiving either
the generic disclosures or no additional disclosure at all. While
cardholders told us that such disclosures could strongly influence their
decisions about making minimum payments, not all cardholders' financial
circumstances would allow them to increase their payment amounts.
Therefore, the ultimate impact of providing additional disclosures could
vary.

While providing cardholders with additional disclosures about the
consequences of making only minimum payments on their credit cards would
appear to provide them with useful information, such disclosures would
raise issuer costs and whether the impact on consumer behavior would be
large or small is not known. However, various options, which have both
advantages and disadvantages, for providing such information exist. For
example, providing customized information only to those cardholders who
revolve credit card balances or by providing it to all cardholders but on
a less frequent basis or in another location besides the first page of the
monthly billing statement could make it easier and less costly for issuers
to implement customized disclosures. These options, however, could lessen
the potential impact of the customized disclosure because fewer
cardholders would receive, or be likely to notice, the information.

Agency Comments and Our Evaluation

We provided a draft of this report to the Federal Deposit Insurance
Corporation, the Federal Reserve, the Federal Trade Commission, the
National Credit Union Administration, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision for their review and
comment. In a letter from the National Credit Union Administration, the
Chairman notes that the Administration agrees with the findings of our
report, including that customized disclosures for consumers could feasibly
be required of card issuers at a potentially significant but relatively
reasonable cost and such disclosures could be useful and desirable for
some consumers despite the uncertainty of their impact. The Chairman also
notes that, collectively, the potential impact on credit unions of
requiring card issuers to provide customized disclosures to consumers
should be minimal, particularly since many use third-party processors.
However, the Chairman's letter also notes that the financial impact of
customized disclosure requirements could still be significant for these
small issuers and even more significant for moderate sized financial
institutions servicing their own credit card portfolios, particularly in
institutions where credit card interest margins are already low. The
letter also notes that considering the incremental costs of customized
disclosures is important because such costs will ultimately be passed on
to consumers through increased fees or higher interest rates, which could
result in a negative impact on the same consumers whom the disclosures are
meant to help. As a result, the Chairman indicates that some of the
alternatives to providing customized disclosures that are mentioned in our
report could be more economically efficient than implementing customized
disclosures to increase consumer awareness of the consequences of making
minimum payments.

We also received technical comments from the Federal Reserve, the Federal
Trade Commission, and the Office of the Comptroller of the Currency, which
we incorporated as appropriate. The Federal Deposit Insurance Corporation
and the Office of Thrift Supervision did not provide any comments.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this report. At that time, we will send copies of this
report to the Chairman, Federal Deposit Insurance Corporation; the
Chairman, Federal Reserve; the Chairman, Federal Trade Commission; the
Chairman, National Credit Union Administration; the Comptroller of the
Currency; and the Director, Office of Thrift Supervision and to interested
congressional committees. We will also make copies available to others
upon request. The report will be available at no charge on the GAO Web
site at h  ttp://www.gao.gov. The results of the interviews will also be
available on the GAO Web site at GAO-06-611sp .

If you or your staff have any questions regarding this report, please
contact me at (202) 512-8678 or w  [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. Key contributors to this report are listed in
appendix III.

David G. Wood Director, Financial Markets and Community Investment

Objectives, Scope, and Methodology Appendix I

Our objectives were to (1) determine the feasibility and cost of requiring
credit card issuers (issuers) to provide cardholders with customized
minimum payment information, (2) assess the usefulness of providing
customized information to cardholders, and (3) identify options for
providing cardholders with customized or other information about the
financial consequences of making minimum payments.

To determine the feasibility and cost of providing cardholders with
customized minimum payment information, we reviewed current and proposed
disclosure requirements, including Title XIII of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (Bankruptcy Act), which
amended the Truth in Lending Act (TILA) to require issuers to make
disclosures regarding the consequences of making only the minimum payment.
We also reviewed the advance notices of proposed rulemaking that the Board
of Governor's of the Federal Reserve System (Federal Reserve) issued. The
proposed rulemaking is associated with the Federal Reserve's
self-initiated comprehensive review of the open-end (revolving) credit
rules in Regulation Z, which implements TILA, as well as the
implementation of the minimum payment disclosure requirements of the
Bankruptcy Act. We also reviewed California's Civil Code, section 1748.13,
which had also mandated that consumers receive disclosures regarding
minimum payment consequences. We discussed the feasibility and cost of
providing customized information to cardholders with the staff of six
major issuers and one mid-size issuer. We determined that these issuers
account for about 67 percent of actively used credit card accounts as of
year-end 2005. We provided issuers with a list of 16 cost items to
facilitate discussions of the costs to implement customized minimum
payment disclosures.

We also met with the staff of two third-party credit card processors
(processors) that manage card account data and produce billing statements
for thousands of large and small issuers, who provided us with cost
estimates and technical information about implementing customized
disclosures. In addition, we obtained cost estimates for another three
large issuers from court documents associated with a constitutional
challenge of a California statute that required issuers to include minimum
payment disclosures on billing statements sent to California cardholders.
We supplemented our interview data with a review of 17 comment letters
that issuers, processors, and trade associations submitted to the Federal
Reserve that addressed the implementation of minimum payment disclosure
provisions contained in the Bankruptcy Act. We reviewed two studies about
costs of regulatory reforms and used them to shape our approach with
issuers and processors to study the costs to implement customized minimum
payment disclosures.1

To better understand how producing customized disclosures could affect
issuer costs, we also discussed issuer operations and profitability with
two broker-dealer research analysts that monitor credit card issuing banks
and industry developments. We also met with representatives of federal
banking regulators-the Federal Reserve, Office of the Comptroller of the
Currency, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, and National Credit Union Administration-that oversee
financial institutions offering credit cards, and met with representatives
of the Federal Trade Commission, which oversees nonbank credit card
issuing entities. We also attended a roundtable hosted by the McDonough
School of Business at Georgetown University where representatives of
credit card issuers, industry trade associations, law firms, federal
regulatory agencies, and a consumer interest group addressed
implementation issues relating to the provision of customized minimum
payment disclosures.

To assess the usefulness of providing customized disclosures to
cardholders, we conducted in-depth interviews with a total of 112 adult
cardholders in three locations: Boston, Chicago, and San Francisco, in
December 2005. We contracted with OneWorld Communications, Inc., to
recruit a sample of cardholders that generally resembled the demographic
makeup of the U.S. population in terms of age, education levels, and
income. However, the cardholders recruited for the interviews did not form
a random, statistically representative sample of the U.S. population.
Cardholders had to speak English and meet certain other conditions: having
owned at least one general-purpose credit card for at least the last 12
months prior to the interview, and not have participated in more than one
focus group or similar in-person study in the 12 months prior to the
interview. We selected proportionally more people who typically carried
balances on their credit card (revolvers) rather than those who regularly
paid off their balances (convenience users)-compared with their actual
proportions in the U.S. population-because we judged revolvers as likely
more in need of the information provided in the customized disclosure. See
table 2 for the demographic information on the cardholders we interviewed.

Table 2: Demographic Characteristics of Cardholders Interviewed

Category                       Number of cardholders      Percent of total 
Agea                                                 
18-24                                             12                  10.8 
25-34                                             19                  17.1 
35-44                                             27                  24.3 
45-54                                             23                  20.7 
55-64                                             13                  11.7 
65 and older                                      17                  15.3 
Household income                                     
Less than $25,000                                 16                  14.3 
$25,000 - $44,999                                 25                  22.3 
$45,000 - $64,999                                 24                  21.4 
$65,000 - $100,000                                24                  21.4 
Over $100,000                                     23                  20.5 
Education level                                      
Some high school                                  15                  13.4 
High school graduate                              32                  28.6 
Some college                                      18                  16.1 
College graduate                                  27                  24.1 
Graduate school                                   15                  13.4 
Other                                              5                   4.5 
Type of cardholder                                   
Convenience user                                  38                  33.9 
Revolver                                          74                  66.1 

Source: GAO.

Note:  Percentages may not total to 100 percent due to rounding.

aOne interviewee did not report age, so the total represented for this
category is 111 cardholders.

During these consumer interviews, we obtained cardholders' opinions to
assess the usefulness of the customized disclosure by asking them a number
of open- and closed-ended questions, and asking them more tailored
follow-up questions as necessary to more fully understand their answers.
All cardholders were asked questions to determine their typical credit
card payment behavior and elicit what they already knew about the
consequences of making only minimum payments. To determine their
preferences for various disclosures, we showed each participant three
sample disclosure statements. Two of these sample disclosure statements
contained the language and generic example mandated by the Bankruptcy Act
minimum payment disclosure provisions. The other disclosure presented an
example of language incorporating the components of the proposed
customized disclosure we studied. The sample disclosure statements we
showed to cardholders can be found in GAO-06-611sp .

Each of the cardholders we interviewed was asked a series of questions
about each of the three disclosure statements, including how
"understandable," "influential," "useful," and "helpful" each disclosure
was to their understanding of the consequences of making minimum payments.
After seeing the three statements, cardholders also were asked to compare
the statements and choose the statement they would prefer to receive.
Additionally, cardholders were asked how they would prefer to receive such
information, and how frequently they would like to receive it. Narrative
answers to open-ended questions were categorized into various themes based
on the cardholders' responses. The reliability of the coding scheme was
assessed by comparing the answers of a second, independent coder with a
number of the answers. The interview instrument that was used to interview
cardholders, as well as the results to the closed-ended questions can be
found in GAO-06-611sp.

The data collected through our in-depth cardholder interviews are subject
to certain limitations. For example, the data cannot be generalized to the
entire U.S. population of credit cardholders. In addition, our sample
distribution between convenience users and revolvers was not reflective of
the estimates of the proportion of such cardholders in the overall U.S.
cardholding population because we purposely oversampled revolvers.
Additionally, the self-reported data we obtained from cardholders are
based on their opinions and memories, which may be subject to error and
may not predict their future behavior.

We gathered additional information on the usefulness of providing
customized disclosures to cardholders by reviewing existing academic
research on consumer protection disclosures and applicable public comment
letters on the Federal Reserve's advance notices of proposed rulemaking.
We also interviewed credit card issuers and processors, and a variety of
industry, academic, government, consumer interest, and financial education
organizations for their opinions on the usefulness of customized
disclosures.

To identify other ways of providing cardholders with customized or other
information about the financial consequences of making minimum payments,
during our interviews we asked issuers and processors, as well as a
variety of academic, government, consumer interest, and financial
education organizations for suggestions and alternative options to
providing customized disclosures. We discussed some suggestions with
issuers and processors to determine their feasibility. We also asked the
112 cardholders for their opinions on other ways to communicate the
financial consequences of minimum payments.

We conducted our study between June 2005 and April 2006 in Boston,
Chicago, San Francisco, and Washington, D.C., in accordance with generally
accepted government auditing standards.

Comments from the National Credit Union Administration Appendix II

GAO Contact and Staff Acknowledgments Appendix III

Dave Wood (202) 512-6878

In addition to those named above, Cody Goebel, Assistant Director;
Christine Houle; John C. Martin; Marc Molino; Carl Ramirez; Omyra
Ramsingh; Barbara Roesmann; and Kathryn Supinski made key contributions to
this report.

(250252)

www.gao.gov/cgi-bin/getrpt? GAO-06-434 .

To view the full product, including the scope

and methodology, click on the link above. To view selected results of the
cardholder interviews, go to
http://www.gao.gov/cgi-bin/getrpt?GAO-06-611sp.

For more information, contact David G. Wood at (202) 512-8678 or
[email protected].

Highlights of GAO-06-434 , a report to congressional requesters

April 2006

CREDIT CARDS

Customized Minimum Payment Disclosures Would Provide More Information to
Consumers, but Impact Could Vary

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
requires that credit card issuers (issuers) include in all cardholder
billing statements a generic warning, or "disclosure," about the potential
financial consequences of consistently making only the minimum payment due
on a credit card. However, some have urged that consumers should instead
receive "customized" disclosures in their billing statements that use
cardholders' actual balances and the applicable interest rates on their
accounts to show the consequences of making only minimum payments, such as
estimates of the time required to repay balances and the total interest
amount resulting from continual minimum payments.

In response to a congressional request, this report assesses the (1)
feasibility and cost of requiring issuers to provide cardholders with
customized minimum payment information, (2) usefulness of providing
customized information to cardholders, and (3) options for providing
cardholders with customized or other information about the financial
consequences of making minimum payments.

Representatives of credit card issuers and processors that handle billing
and other operations for issuers said they have the technological
capability to provide cardholders with customized minimum payment
information. The calculations that would be included in such disclosures
require various assumptions, including that no more charges are made on
the account, and decisions on how to address other issues, such as
balances subject to multiple interest rates, that would affect the
estimates' precision. Issuers and processors estimated that the most
significant costs of providing customized disclosures would be for
additional postage, computer programming, and customer service. Although
uncertain about exactly what calculations would be required, the estimates
that issuers provided for total implementation costs ranged from $9
million to $57 million.

In GAO's interviews with 112 cardholders, most who typically carry credit
card balances (revolvers) found customized disclosures very useful and
would prefer to receive them in their billing statements. These consumers
liked that customized disclosures would be specific to their accounts,
would change based on their transactions, and would provide more
information than generic disclosures. However, cardholders who pay their
balances in full each month were generally satisfied with receiving
generic disclosures or none at all. Consumer groups, financial educators,
and others indicated that customized disclosures could reduce cardholders'
tendency to make minimum payments; conversely, issuers foresaw limited
impact because few cardholders make minimum payments and not all can
afford to pay more.

Alternatives for providing customized disclosures include providing them
only to revolvers, providing them less frequently, or in a location other
than the first page of billing statements. While such alternatives could
lower issuer costs, they could also decrease the customized disclosures'
potential impact.

Views of Credit Card Revolvers that GAO Interviewed on Customized Minimum
Payment Disclosure

Note: Percentages may not total to 100 percent due to rounding.
*** End of document. ***