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Consumer Debt Issue

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The Consumer Federation of America’s study indicating American’s are sinking in debt has drawn criticism from VISA and others. VISA said yesterday credit card debt accounts for only 3.7% of total consumer debt and that household debt as a percentage of total assets has remained constant at about 16% since 1989. Meanwhile statistics compiled in Bankcard Update/Bankcard Barometer also indicates card volume has grown significantly in the past three years but the percentage of charges actually incurring finance charges continues to decline. At the end of 1996 consumers owed about $400 billion on bank credit cards however more than $100 billion would be paid-off be finance charges begin.

BANK CARD YEAR-END INDUSTRY STATS
       YEAR          VOL        RECV        DEBT     R/V      D/R
                     (all in $ billions)
       1990:         $264       $174        $157     66%      90%
       1991:         $288       $189        $164     66%      87%
       1992:         $326       $202        $172     62%      85%
       1993:         $393       $241        $200     61%      83%
       1994:         $489       $287        $230     57%      80%
       1995:         $636       $360        $280     57%      78%
       1996:         $698       $404        $303     55%      75%

vol-volume;recv-receivables; debt-interest accruing recv; R/V-recv/vol; D/R-debt/recv
Source: CardTrak 3/97

FULL STORY:
Visa U.S.A. has prepared this fact sheet in response to the Consumer Federation of America’s news conference today concerning credit card debt.

Dr. Thomas A. Layman, chief economist for Visa U.S.A., is available to answer specific questions pertaining to credit card debt. Please contact the telephone numbers below for more information or to speak with Dr. Layman.

Consumer Credit and the Economy

The wide availability of personal consumer credit is vital to the U.S. economy. Consumer spending accounts for roughly two-thirds of the nation’s gross domestic product. Output and employment would suffer if there were a diminution in the wide availability of consumer credit.

Bank Cards and the Consumer

Bank credit cards are an extremely efficient payment tool and means for extending consumer credit. Bank credit cards offer consumers more flexibility and utility than other types of credit. Consumers choose what to buy, when to borrow, whether to pay of the card balance in full or in installments. Thanks to strong competition in the industry, consumers have a wide variety of bank cards to choose from. Visa alone has more than 6,000 independent issuers.

Bank Card Debt, Other Consumer Debt and Assets

While bank cards are a popular type of credit, a January 1997 Federal Reserve survey finds that all credit cards account for just 3.7 percent of total consumer debt. Mortgage debt and home equity loans account for 68.2 percent of consumer debt, followed by installment loans and other types of debt, according to the Federal Reserve.

In its latest survey, the Federal Reserve also finds that total household debt as a percentage of total assets (the leverage ratio) has remained constant at about 16 percent since 1989. (Page 13, page 16, Federal Reserve Survey, “Family Finances in the U.S…,” January 1997.)

The Federal Reserve survey said there is “little evidence of a serious rise in debt payment problems between 1992-1995.” In addition, the survey noted, “Family debt and family assets both rose strongly from 1989 to 1995. Home mortgages and home equity borrowing as a share of total family debt grew strongly …. The share of credit card debt also grew strongly between 1992-1995, but it remained a small part of total family debt.” The survey said, “The increases between 1992 and 1995 in both the prevalence of borrowing and the median amount of debt owed would normally be expected in a period of economic expansion.” (Page 1, page 13, page 16, Federal Reserve Survey, “Family Finances in the U.S…,” January 1997).

Payment of Credit Card Debt

The vast majority of bank credit card holders, 97 percent, meet their monthly obligations.

The Federal Reserve January Bulletin survey indicates that 44 percent of families with credit cards carry no balance (page 17). Given that the Federal Reserve data is captured at a particular point in time, this number may be even greater if one takes into account so called “transactional use” of bank cards, as opposed to actual credit balances.

In testimony before the Senate, Federal Reserve Board Governor Janet Yellen noted that, “Some of the increase in consumer debt is merely a reflection of the greater prevalence of convenience use of credit cards as a substitute for cash or check payment, with card balances paid in full each month.”

In addition, with the dramatic rise in “co-branded” products (cards linked to airlines, hotels, and other retail establishments) many consumers have shifted from private label (store-specific) cards to bank cards.

Interest Paid on Credit Card Debt

Consumers pay on average just $6 per month more in bank card interest payments today than they did in 1992.

Outstanding balances per bank card account rose from $1,544 in 1992 to $2,209 in 1996, about 9 percent per year. At today’s interest rates, which are lower than in 1992, this represents an average increase in interest payments of only $6 per month compared to 1992.

Extension of Credit

The Federal Reserve statistics show that the biggest increase in credit card borrowing from 1992 to 1995, 11.5 percent, occurred among families with incomes ranging from $50,000-$100,000. That compares to an increase of only around two percent for families with incomes below $50,000. This would suggest that credit is being extended to those who have the greatest means to repay their debt (Pages 18-19, Federal Reserve Survey, “Family Finances in the U.S…,” January 1997).

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