Facts Matter: CFPB Extends Its Misrepresentations About Credit Card Marketplace with Database that Picks Winners and Losers

On the eve of change in leadership, the Consumer Financial Protection Bureau (CFPB) released three items this week that all aim to take jabs at the credit card industry: (a) a circular to law enforcement agencies about credit card rewards; (b) a research report, titled “The High Cost of Retail Credit Cards;” and (c) a “first-of-its-kind tool” the CFPB purports will help consumers find the right credit card “using unbiased, comprehensive data.”

In doing so:

• The CFPB either misunderstands, misrepresents, or disregards risk-based pricing in the market (against specific direction from Congress);

• The CFPB makes sweeping claims about “bait and switch” practices that don’t show up in any material way in its Consumer Complaint Database; and

• The CFPB’s uses incomplete data, ignores key aspects of credit cards that consumers have demonstrated they value, and drives consumers towards products that may not even available to them – let alone a better choice – with its new “unbiased comparison tool.”

First, a quick catch-up on the credit card market.

“Let’s start from the very beginning. A very good place to start.” – Maria, The Sound of Music

“Look, I’ll tell you what. You go back a ways, you know, before I was a llama, and this will all make sense.” – Kuzco, The Emperor’s New Groove

To understand the problems with the CFPB’s recent releases about the credit card marketplace, it’s important to understand the broader context in which the CFPB’s claims arise. (Because Facts Matter.)

Over 4,000 issuers compete across four major networks to offer a wide range of credit cards to American consumers. Card issuers compete on a number of different dimensions, from their ability to underwrite consumers, rewards offered, interest rates, fees, and broader benefits like airline lounges and a host of product innovations.

Even once a credit card issuer wins a consumer’s business, the issuer has to vigorously compete and innovate to keep that consumer’s business. In one month alone, credit card issuers mailed more than 610 million credit card offers to consumers which included balance transfer offers that – 95 percent of the time – offer zero percent APRs, and average fees of less than three percent. According to CFPB research, in 2022 balance transfers totaled more than $53 billion. That’s equivalent to the seventh-largest credit card issuer losing 100 percent of its customers to its competitors—and demonstrates that consumers have tremendous buying power to shop, compare, and switch rates. Given this vibrant ecosystem, and the wide range of Americans’ financial circumstances, American consumers have highly-personalized relationships with their credit cards.

The CFPB CARD Act Report notes that about half of American credit card accounts carry a revolving balance from month-to-month. For those credit card consumers, interest rates and late fees are key considerations.

But for another half of American credit card accounts, the consumer pays the balance off in full each month. For those “transactors,” APRs and penalty fees generally don’t matter as much to their choice of card.

With the average American having around four credit cards, each consumer has a “portfolio” of payment options that is likely very personalized to their circumstances and preferences. They may use one card for discounted purchases at their favorite retailer; another card for every day purchases; and another credit card for travel benefits, like access to airline lounges.

The CFPB’s own research shows that credit cards are, by far, the primary way people become credit visible – helping build their credit scores, and ladder up to more complex financial products and those with better rates.

Therefore, it is critical to understand that one-in-five Americans do not qualify for traditional credit. These consumers may not have access to the wide range of financial products that often enables a broader set of financial choices and outcomes. Importantly, these consumers may not be able to build their credit (or at least not as quickly), which can support better financing for bigger, more meaningful purchases such as a car loan or a mortgage—to create stability, build wealth, and improve their financial well-being.

Spoiler Alert: Risk-based pricing.

The CFPB’s primary punchline for its new research report is that retail cards are more expensive than general purpose cards. But it is essential to consider the fact that private label cards charge-off at nearly double the rate of general purpose cards, and it is critical that issuers are able to price for this risk.

When Congress passed the CARD Act in 2010, it specifically directed the CFPB to provide regular reports on the impact of the regulation on, among other things, risk-based pricing of credit cards, including the cost and availability of credit.

Risk-based pricing is at the heart of the credit card market – and indeed most lending markets. As Experian explains, “risk-based pricing” is a method in which lenders use factors such as your credit score and income to estimate how likely you are to make on-time payments. Then, they base your loan or credit card rates and terms on your degree of risk as a borrower. In general, you can expect to secure a lower interest rate if your creditworthiness is strong because it means you’re more likely to repay the debt as originally agreed. On the flip side, if you only barely meet the lender’s minimum eligibility criteria, you can expect to pay a higher interest rate.

Credit cards, including retail cards, are the primary way consumers with low or no credit scores access a well-regulated source of credit. Because there’s a higher risk that these consumers won’t repay their loans, however, these consumers with lower scores or thinner credit histories often receive higher APRs to price this risk accordingly as to not create undo risk to lenders. As these consumers demonstrate a strong payment history of paying their credit card on time, card issuers may “migrate” them to other cards with lower APRs.

While the CFPB’s press release completely ignores this important feature, its own research reportaccompanying the CFPB’s press release seems to understand some of these concepts:

“Private label issuers generally have less restrictive underwriting than issuers offering only general-purpose products. Retailers want as many of their customers as possible to qualify for their store card, but issuers also need to consider the additional losses associated with greater approval rates than general purpose products. The annualized charge-off rate on private label cards hovered around 10 percent (nearly double general-purpose products) prior to the pandemic and remained higher in 2021 and 2022 even as delinquency rates declined across the market. Store card issuers charge consumers higher interest rates and greater fees than general purpose credit cards, partially due to less restrictive underwriting and the lack of meaningful interchange economics on private label cards.”

With less restrictive underwriting, store card issuers are able to offer more consumers with lower credit scores access to credit, understanding the higher risk presented and the need to offset and appropriately price for that risk. Data from the CFPB’s most recent CARD Act Report (p. 16; CBAchart below) shows that the share of private label credit cards (including store cards) held by below prime consumers is much higher than that of general purpose credit cards.

If an applicant or card portfolio present increased risk, the issuer has a safety and soundness obligation to price that risk accordingly. These distinctions are an important part of what makes the credit card market diverse, and able to serve more Americans, while also prudently managing risk.

In short:

• Retail credit cards have higher default rates than general purpose credit cards;
• Therefore, they have higher APRs than general purpose credit cards; and
• But that’s how more consumers, in particular those consumers on the margins, are able to access these important sources of credit, and how lenders are able to manage their risk.

The lack of “bait-and-switch” evidence.

“Well, he had a point. ‘Course he carried it a bit too far. He thought that every windmill was a giant. That’s insane.” – Justin Playfair, They Might Be Giants

The CFPB, in bold font, declares “CFPB Moves to Stop Credit Card Reward Program Schemes.” But the CFPB cites very little evidence to substantiate their claims of widespread consumer harm or even consumer frustration – particularly in light of the clear value that consumers enjoy from their credit card rewards.

The Bureau’s press release argues that “[c]onsumers have reported to the CFPB that these rewards can be difficult to redeem or are sometimes devalued by policy changes by partners.”

CBA checked the CFPB’s math, however. Credit card rewards constitute just two percent of complaints about credit cards and less a tenth of a percent (0.1 percent) of all complaints since January of 2020. As CBA’s analysis explains, complaints and issues do exist but are by far the exception rather than the rule.

Additionally, research by the CFPB (pp. 68-70) shows that consumers are earning more rewards on average than ever. And as CBA research indicates, rewards credit cards offer tangible benefits for many consumers who manage their credit effectively. Indeed, rewards cards may actually spreadbenefits across income bands more evenly than losses, which are more likely to be concentrated amongst high-income consumers.

The CFPB’s claims about its “unbiased” and “comprehensive” shopping tool would likely meet its own definition of deceptive marketing practices.

 “Oh, a bad machine doesn’t know that he’s a bad machine “
– Ahmet, Midnight Express

Dwight: “…and that’s why you have an Assistant Regional Manager.” Michael: “Yes it is…Assistant to the Regional Manager.” Dwight: “Same thing.”  

In this week’s release, the CFPB launched an “Explore Credit Cards” tool, which is described as “unbiased” and based on “comprehensive data.” The CFPB boldly proclaims that “[b]y enabling consumers to explore cards based on credit score range, interest rates, fees, and rewards offerings, the tool also affords consumers with a higher degree of certainty when searching for cards for their situation.” And the CFPB’s site represents, in large font, that “Our database can help you find cards that are best for you.”

The problem is that the CPFB’s claims about its product differ from the CFPB’s fine print. A reasonable consumer might be surprised by what card he ends up with if he trusts the CFPB’s claims.

First, the CFPB’s tool only covers four percent of credit card issuers.

Over 4,000 credit card issuers compete in the credit card marketplace. But the CFPB sample only includes 172 credit card issuers, most of which were “selected by the CFPB” to create what is described as a representative sample.

If a credit card issuer hasn’t been lucky enough to be included in the CFPB’s hand-picked sample, their cards don’t show up at all in the consumers’ search. This is clearly bad for the issuer – but it also leads to bad consumer outcomes – as it clearly reduces the competitive options being presented to consumers by 96 percent.

Said another way, a reasonable consumer might read the CFPB’s claims to mean that they’re using “comprehensive data” about the credit card marketplace to find the “best credit card for you.”

But, in making these claims, the CFPB markets a database that offers “comprehensive data” about some credit cards in the marketplace. And the only way to redress this is for issuers to submit their own information to the CFPB so, in the words of the CFPB, they “have a chance” to be included in the sample next year.

Second, although the CFPB’s tool asks consumers about their preferences for credit cards, in our testing, the tool appears to skew heavily (even solely) towards prioritizing cards based on APR.

This fundamentally misunderstands the credit card market: by the CFPB’s own data, about half of consumers pay off their entire balance each month. So, for half of the market, APRs are a minor consideration, at best.

Indeed, when the CFPB first started studying the Card Market in 2013, they noted that consumers may choose their credit card for over a dozen different reasons. Importantly, there’s a wide range of preferences, reflecting the different ways consumers use credit cards – even within their own personal portfolio of credit cards.

Unfortunately, in recent years, the CFPB’s CARD Act Reports don’t really explore what consumers think. And now, with this new tool, the CFPB tells consumers what they should think: APRs and only APRs. The CFPB claims that “Our database can help you find cards that are best for you.” But it regularly directs consumers to apply for cards that do not meet consumers’ expressed preferences – and in many cases, cards they are clearly ineligible for.

In CBA’s testing, for instance, a CBA analyst input into the database that they: had a 720 credit score or greater; are located in the District of Columbia; and are solely focused on rewards, as they have paid their balance off in full for over a decade. In response to these inputs, the first choice offered by the CFPB was a credit union product that would require the analyst to be “a student, professor, or staff member at any South Carolina technical college or state chartered college or university.” And notwithstanding our analyst’s expressed focus on rewards, the site offered no information about any rewards offered by the card. (Even worse, our analyst had to click through card options four times before discovering that the card did not offer a balance transfer.)

In subsequent testing, the CBA analyst specified that they preferred a card from a bank. The CFPB tool’s top recommendation was a bank whose closest branch was over 500 miles from where they live. Even worse, it was a card that was limited to employees of the bank!

Moving forward, the CFPB should work with industry to better meet the diverse needs of American consumers.

In its rush to push out headlines in the last days of the current Administration, the CFPB looks like it is, again, prioritizing headlines over facts and data. But in this case, they run the risk of directing consumers to entirely wrong options.

Moving forward, CBA hopes that the CFPB will open its doors to working with industry to collaboratively address the needs of the American consumers that both the government and retail banking industry serve.

For instance, for all of its concerns about the “high” APRs that consumers face, the CFPB doesn’t appear to be educating consumers on the market-based tools that are easily available for lowering those rates: balance transfers. CFPB CARD Act reports have openly questioned whether consumers are underutilizing balance transfers because they “miscalculate the financial benefits or incorrectly assume they would be denied access to balance transfer offers.”

And concerningly, the CFPB has noted that balance transfers may not be used more frequently because of a “lack of awareness,” particularly among younger consumers. One survey found that over a third of cardholders carrying a balance were unaware of their ability to transfer their balances. This includes 50 percent of Millennials and 61 percent of Gen-Zers.

Earlier this year, CBA launched a consumer education campaign focused on helping consumers build their “Credit Card Confidence.” The website helps consumers understand the types of cards they should consider, without picking specific winners and losers – instead asking consumers three basic questions, beginning with whether a consumer pays their balance off in full each month or not which helps the consumers better understand whether they should focus on APRs or rewards.

The Credit Card Confidence website educated consumers about the importance of APRs –while also giving them tools to better their situation, such as teaching them about balance transfers.

CBA continued the work by partnering with influencers on social media to meet consumers where they’re at. Feedback indicates that consumers welcome the help. As one commentator noted:

“I’ve always wanted to look into something like this but I’m so afraid it’s a scam or I won’t do it right and screw myself. Financial literacy is the #1 thing I wish someone had taught me, or could hold my had through it because it’s terrifying.”

That comment then sparked a robust conversation, with multiple people sharing their personal experiences and struggles with seeking out useful information.

Financial education is scary enough for consumers.

It is CBA’s hope that the CFPB starts moving beyond name-calling and loaded “bait and switch” language that doesn’t help anyone, and beyond inaccurate or cherry-picked datasets – and instead starts looking at robust credible analysis of the credit card markets and other financial products and markets to fulfill its mission of actually protecting and supporting consumers, particularly through financial education.

CBA’s influencer videos were viewed over 12 million times; favorited around 200,000 times; and most importantly, were shared by consumers themselves over 5,000 times. But industry can’t do it alone – and for too long has had a regulator that seems, almost reflexively, to insist on working at odds with industry on every issue.

If the CFPB can move past political campaigning and headline grabs, CBA could work together with the Bureau to make actual progress in helping consumers improve their financial lives.