TAILIEUCHUNG - Credit Card Pricing Developments and Their Disclosure

The Securities and Exchange Commission (“Commission” or “SEC”) has prepared this Report on the role and function of credit rating agencies in the operation of the securities markets in response to the Congressional directive contained in the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). 1 The Report is designed to address each of the topics identified for Commission study in the Sarbanes-Oxley Act, including the role of credit rating agencies and their importance to the securities markets, impediments faced by credit rating agencies in performing that role, measures to improve information flow to the market from rating agencies, barriers to entry. | Discwss n Paper Payment Cards Center Credit Card Pricing Developments and Their Disclosure Mark Furletti January 2003 Summary Public data proprietary issuer data and data collected by the author from a review of over 150 lender-borrower contracts from 15 of the largest issuers in the . suggest that over the past 10 years credit card issuers have drastically changed the way that they price their product. This paper outlines the history and dynamics of credit card pricing over the past 10 years and examines how new pricing methods are addressed by current regulatory disclosure requirements. Payment Cards Center The Federal Reserve Bank of Philadelphia Ten Independence Mall Philadelphia PA 19106. Email . Thanks to Rick Lang Peter Burns Robert Hunt Joseph Mason Michael Heller and Norman Lee. The views expressed here are not necessarily those of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. Federal Reserve Bank of Philadelphia Ten Independence Mall Philadelphia PA 19106-1574 215 574-7220 Intense competition for new customers and the adoption of new technologies in the credit card industry has decreased the price of credit for most consumers as measured by one well-understood metric the nominal annual percentage rate APR . For card issuers this has meant surrendering some of the net interest margin they enjoyed as a result of high APRs in the late 1980s and early 1990s and instituting pricing strategies that consider an individual borrower s risk and behavior profile. As nominal APRs have decreased issuers have come to rely on new pricing techniques to maintain or increase portfolio profitability. These techniques include new APR strategies fee structures and methodologies to compute finance charges. This paper outlines the history and dynamics of credit card pricing over the past 10 years and examines how pricing methods are disclosed to consumers. The analysis concludes by discussing the .

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