The Consumer Financial Protection Bureau published a Data Spotlight on Feb. 16 indicating that small credit card issuers offer much lower interest rates compared to the largest issuers. The report makes use of pricing data from the recently expanded Terms of Credit Card Plans (TCCP) survey, which is conducted by the CFPB every six months.[1]
The added detail in the expanded TCCP survey improves the usefulness of the collected data by offering more granular information on credit card fees and terms and also by enabling a more controlled comparison of credit card terms across issuers. However, rather than make best use of these data, the CFPB conducts a crude analysis from which the agency draws simplistic, misleading conclusions about pricing disparities between large and small issuers. This note demonstrates that the reported findings do not hold up under a more rigorous analysis.
The CFPB estimates a huge difference in interest rates between large and small issuers based on a comparison of program median APRs within credit score bands.[2] The CFPB finds that the median of program median APRs by score band of the largest (top 25) card issuers exceeds that of smaller issuers by 8 to 10 percentage points, depending on the specified score band. The agency equates this to “an average savings of $400 to $500 a year for a consumer with an average balance of $5,000 using a small bank or credit union’s card.”
However, the CFPB’s analysis exhibits multiple flaws, hence falling well short of the standard of clarity and rigor one should expect from a regulatory agency. One important shortcoming is the failure to separate small banks and credit unions, obscuring an important distinction critical for understanding APR differences. Another is the failure to separate out specialty card programs—retail co-branded, travel and entertainment, credit builder, secured and so on—which are almost entirely within the purview of the top 25 issuers, again obscuring important distinctions. A third is the failure to control for the range of consumer credit scores that each program targets or spans, although this information is available in the TCCP data. Finally, the agency gives no consideration to how the credit limits offered to consumers, or other factors absent from the TCCP data, might affect reported APRs.
Using the most recent available data from the TCCP survey (the March 2023 release), we find that APR differences between the top 25 and smaller issuers shrink dramatically after accounting for effects due to credit unions and specialty card programs.[3] This finding is represented in Figure 1, which also applies a more controlled approach to comparing APRs across programs compared to the analysis conducted by the CFPB. Specifically, for Figure 1, we restrict the sample to plans with similarly situated risk profiles—in this case those spanning the highest score range (720 or greater) plus one or more lower score ranges, and we focus on minimum APRs (those charged to the highest credit score customers).[4] In addition to providing a more controlled comparison, this approach has the advantage that program minimum APRs are better populated in the data than median APRs by score band.