1. Disclosure of Payout Periods and Costs for Open End Credit
The suggestion that monthly credit card statements should include two new disclosures specific to each monthís changing card balance (the number of months required to repay the present balance and the total amount that would be repaid if only the minimum were paid every month) is flawed for several reasons. The way open end credit works, and the way consumers use it, make these disclosures meaningless. The way in which finance charges are calculated on credit card balances would make these disclosures inaccurate. Worse, adding more disclosure to the mounds of disclosure consumers already receive, would create the potential that the present and more meaningful disclosures mandated by Truth In Lending would be obscured. The irrelevance and dangers of making non-essential disclosures for open end credit have long been recognized by consumer credit experts. Truth In Lending requires that the proposed disclosures be made for only closed end credit. Analysis of millions of monthly credit card payments shows that, unlike the current required disclosures for open end credit which are meaningful to most, if not all, credit cardholders, adding these closed end disclosures, even if it were possible to calculate them with accuracy, would be coincidentally relevant to only a minute portion of cardholders who still might not find them meaningful.
2. Credit Availability for Young Adults
Unilaterally restricting credit card credit availability for young adults under age 21 makes little sense. Most of these applicants have income; many have jobs and families. Credit card issuers do not waive income requirements for young adults. Rather, they waive the typical requirement that approved applicants have an established credit history. Retailers who establish accounts for young adults frequently represent the applicantsí only opportunity to gain credit experience and to begin building the good credit history that will be so important to them later. Typical credit limits for these retail cards are only $200 or $300.
3. Applying Changes in Credit Card Agreements to Existing Balances
It may be reasonable to allow cardholders to opt out of changes to the financial, or cost of credit terms for their card. However, many changes to credit card agreements are not financial in nature. As the primary consumer disclosure document, these agreements are often used to convey important non-financial information and notifications, some of which may be mandated by law. As an example, in a number of jurisdictions, card issuers who monitor customer service calls for training and quality assurance are required to notify cardholders of that fact in advance. These notifications, and changes to them, are highlighted in the agreements. Such non-financial notifications, by their nature, must be applied to all cardholders. Therefore, they should not be subject to an opt out.
4. Teaser Rates
Introductory rates offered by some credit card issuers to new cardholders must not be confused with deferred billing card features that many retailers offer. Deferred billing programs have long been covered by effective disclosure requirements and provide retail cardholders real economic value. Lumping teaser rate new card offers with retail deferred billing offers for disclosure purposes would confuse consumers into thinking they are the same.
Good morning, Mr. Chairman and members of the Committee. My name is Ronald Prill and I am Senior Vice President, Guest Credit for Dayton Hudson Corporation. I am also Chairman and CEO of Retailers National Bank, Dayton Hudsonís credit card bank subsidiary. I appreciate this opportunity to speak to you today on behalf of both my company and the National Retail Federation.
Dayton Hudson Corporation is the nationís fourth largest non-food retailer with annual sales of approximately $31 billion. We are headquartered in Minneapolis and we have three retail divisions. Target is the name of our chain of over 800 discount stores. Mervynís California, is our chain of about 250 stores which sell moderately priced family fashion and home merchandise to the middle market. Our Department Store Division serves upscale consumers in 8 Midwestern states under the names of Daytonís, Hudsonís and Marshall Fields.
I am responsible for all of the operations for our credit card business, from marketing and risk management through customer service, collections and regulatory compliance. Dayton Hudson currently has over 30 million cardholders in its five credit card portfolios. Each of these portfolios covers a different part of the economic spectrum and combined, they cover virtually the entire spectrum of credit worthy consumers.
Iíd like to briefly discuss four concepts concerning credit cards that have recently surfaced. These concepts are important to tens of millions of American credit cardholders and to my industry. For the most part they are based on perceptions about credit cards, however, not on facts. Iíd like to provide some of the facts this morning and help clarify some of these concepts.
Disclosure of Payout Periods and Costs for Open End Credit
The first concept holds that we should add yet more disclosures on monthly credit card statements. Specifically, it has been suggested that we add to each statement both the number of months that would be required to repay that particular monthís balance as well as the total amount that would then have been repaid including finance charges, if the cardholder were to make only the minimum required payment each month. In other words, it has been proposed that the current list of open end credit disclosures that are required under Truth In Lending be lengthened by adding disclosures that are now required only for closed end credit. Since it was first promulgated nearly 30 years ago, Regulation Z has required disclosure of the total number of payments and the total dollars of those payments only for one-time credit extensions such as home mortgages or automobile installment loans. For these closed end credit transactions such disclosure is important, it is accurate and it is meaningful because it describes how these loans are actually repaid. Almost always, a fixed monthly installment - not a calculated monthly minimum - is paid by the borrower until the loan has been totally repaid or refinanced, or until the property has been sold.
But open end credit works in an entirely different way and credit cardholders use their cards and repay their balances in an entirely different way. Because the two types of credit are so different from each other, the Federal Reserve Board of Governors has designated that the credit disclosures also be different. Open end requirements ensure that the disclosures given are not only conspicuous, but also meaningful and accurate for open end credit. The Board of Governors has periodically reaffirmed the considerable differences between the two kinds of consumer credit and the appropriateness of two different sets of disclosure requirements. Adding the suggested disclosures for credit cards would cause confusion for cardholders because it would mean more disclosure, meaningless disclosure and, potentially risk obscuring the current disclosures that are more meaningful.
Finance charges on open end credit cards are typically calculated either daily, based on the balance each day, or monthly, based on the average daily balance during the billing month. In either case, the timing of the receipt of each monthly payment affects the amount of each monthly finance charge. The amount of each monthly finance charge, in turn, affects the number of monthly payments required to repay a particular monthly balance including finance charges assessed. As a result, calculating the number of months required to repay a particular balance and the total amount that would be paid if only minimum payments were made requires that an assumption be made as to exactly when each monthly payment will be received. Depending on what payment receipt date is assumed, the results from calculating the proposed disclosures will differ significantly. Disclosure as imprecise as this would certainly be a major departure from the very disclosure tolerances that Truth-in-Lending has always prescribed.
A recent analysis of Dayton Hudson cardholder payment and charging patterns provides some interesting insight into this discussion. I hope that the Committee will take notice of this information. We looked first at all of the monthly payments that we received during the 12 months ending January 1999. There were just under 75 million such payments and they were made by more than 13 million of our cardholders. We determined how many of these cardholders made only the minimum required payment one month, two months, three months, etc., all the way out to 12 months. We found first that 7.6 million cardholders, or about 59%, never paid only the minimum required payment. Another 2.5 million cardholders, or another 19% paid just the minimum only one month out of the twelve. At the other end of the spectrum, only 41 thousand cardholders, or 0.3% paid only the minimum all 12 months.
Implicit in the proposal for these disclosures, and a condition that would be required to make them accurate, is the assumption that there would be no new purchases charged to the credit card during the payoff period. To test the validity of this assumption we also determined how many of our cardholders did make both purchases and payments on their card in this same 12 month period. Because weíre talking about credit cards, itís not surprising that 12.3 million of our cardholders, which is more than 94% of those making payments also made purchases. Most importantly, nearly 39 thousand of the 41 thousand cardholders who made only the minimum payment for all 12 months also used their card for purchases during the year. So the results of this analysis show that a disclosure of the number of months to repay and the total amount that would be repaid would have been an appropriate disclosure for just over 2 thousand of our 13 million active cardholders, or about 0.019%.
It is likely that our cardholder payment and purchase behavior mirrors that of other large credit card issuers. Some occasionally make only the minimum payment during a yearís time as a convenience. Most pay several times the minimum amount most of the time. It is likely, however, that most of these same consumers make only the "minimum" monthly payment on their home mortgages and automobile loans. This very different behavior confirms that the long standing credit disclosure distinctions between open end and closed end requirements are entirely appropriate.
Consumers already know that they are economically better off when they pay as much as they can as soon as they can. When they elect to make a minimum monthly credit card payment, itís because they have assigned a higher priority to some other short term financial need, not because they donít understand credit terms.
Credit Availability for Young Adults
It has also been suggested recently that the access to credit card credit be severely restricted for young adults until they have reached the age of 21. This idea focuses only on credit cards and not student loans, automobile loans or any of the other forms of credit that responsible young adults may be able to qualify for today.
Dayton Hudson has not been very active in specifically soliciting young adults for our credit cards, either students or non-students. But we do receive applications from applicants under age 21. Some of these applicants already have families and are reasonably well established in a job. Some have two income households. Just as we do for other applicants, and because the Equal Credit Opportunity Act prohibits age discrimination, we examine income and credit history. Sometimes, of course, these applicants donít yet have a credit history. For these cases, we have developed an underwriting structure that allows us to sometimes approve the application and issue a credit card with a $200 or $300 credit limit based on financial ability to repay. That credit limit is subject to adjustment in small increments after the cardholder has established a solid pay history.
We have used this practice for a long time. It has allowed us to provide credit and a chance to begin building a credit history to thousands of young adults while the financial stakes are very modest. We, like other credit card issuers, donít issue credit cards to applicants unless we are satisfied that there is a very high probability that we will be repaid. Thatís also the case for installment lenders and, presumably, for the federal government as it issues massive amounts of credit to young adults if they are also students.
Education is the means for helping young adults to understand the importance of using credit wisely. It is for that reason that we and so many credit card issuers help fund high school credit education and other credit education geared toward young adults. Because younger consumers have not had the time to accumulate significant wealth and because they typically will have a steep upward curve in their productivity, and therefore their income, they are the kind of consumers that can most efficiently use credit if they have been educated to use it wisely. I believe that such education is also a better role for government, rather than unilateral restrictions.
Applying Changes in Credit Card Agreements to Existing Balances
A third recent concept concerning credit cards deals with the changes that creditors make from time to time in the agreement which governs the credit card account and the relationship between the cardholder and the card issuer. I believe this concept is intended to focus primarily on the financial terms of the card, that is, the cost of credit and repayment terms. Some believe that a cardholder ought to be able to opt out of such new terms by canceling the card and repaying the existing balance under all of the existing account terms.
It may be reasonable to allow credit cardholders to avoid new credit terms that would raise their cost for credit they obtained under previous and more favorable cost terms. However, many changes to credit card agreements are not financial in nature. As the primary consumer disclosure document, these agreements are often used to convey important non-financial information and notifications, some of which may be mandated by law. As an example, in a number of jurisdictions, card issuers who monitor customer service calls for training and quality assurance are required to notify cardholders in advance. These notifications, and changes to them are highlighted in the agreements. Another example is a situation where a creditor may want to release a previous security interest. It is difficult to foresee what kinds of new changes will be required in the future. But it seems reasonably safe to say that there will be more mandated changes that are not financial in nature, that require changes to credit card agreements and that are to the benefit of the consumer. Applying an opt out standard to such changes would be harmful, not helpful, to consumers.
The fourth concept that is topical today is that credit card issuers who promote what have come to be known as "teaser rates" to new cardholders should be required to make certain additional and specific notifications concerning those rates. My company has not offered teaser rates. In fact, I am not aware of any retailer that uses this practice.
At Dayton Hudson we do, however, offer special deferred billing promotions from time to time. These promotions allow our cardholders to charge limited kinds of purchases to their store credit cards and not be billed for those purchases for a specified period of time, frequently six months. Finance charges do not accrue during the period of time that billing has been deferred. Once these purchases have been billed, our cardholder can pay them in full and avoid any finance charge whatsoever or pay less than the full balance, in which case finance charges will then begin to accrue, but beginning only from the date of billing. Finance charges are never charged for the period of time that billing was deferred. There already are special disclosure requirements for programs like ours which have been defined as features of existing credit programs, not as the credit terms for the card.
These deferred billing programs are popular among our cardholders because they provide real economic benefit to them. Such programs, and the savings that consumers get from them, are not available on national, multi-purpose credit cards. These deferred billing programs should not be prohibited or allowed to become confused with teaser rates on new credit cards because of new disclosure rules that would make them appear to be the same to consumers.
Thank you again for the opportunity to appear before you today. I would be happy to try to answer any questions you may have.
Home | Menu | Links | Info | Chairman's Page