Hispanics & Credit Card Debt Stuck in the Red:

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1 Hispanics & Credit Card Debt Stuck in the Red: How bad debt impacts the Latino middle class NCLR conference July 24, :30am to 12:00pm

2 Outline Family economic reality Estate of debt Consequences Industry Practices Recommendations

3 Household economic overview

4 Household Income Decline 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20, Hispanic Black White Source: State of Working America, Economic Policy Institute

5 Uninsured People without health insurance by race/ethnicity: White, not Hispanic Black Asian Hispanic origin (any race)

6 Rising Health Care Cost Increase in Health Insurance Premiums Compared with overall inflation and workers earnings 15 percentage of increase Health Insurance Overall Inflation Workers Earnings year

7 Less Income, Lower Savings Personal Saving as a Percentage of Disposable Personal Income, % 8% 6% 4% 2% 0% 7.7% 7.1% 4.6% 4.3% 1.8% 1.4% 1.0% Year Source: Bureau of Economic Analysis

8 Less Income, Lower Savings Median liquid holdings by race/ethnicity 2004 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- $4,000 White (inc. Arab) $500 $600 $2,700 Black/Afr.Am. Hispanic Median Source: SCF 2004

9 The Rise in Debt Continues $900 $880 $860 $840 $820 $800 $780 $760 $740 $720 $700 $879 $827 $744 $734 $719 $ Source: Federal Reserve Board

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11 Methodology o 1,150 Households Surveyed by Phone Household income between 50% and 120% of Local Median Income Have credit card debt for longer than three months o One-third of all low- and middle-income households qualified representing 41 million people in 15 million households o Margin of error is plus/minus 3 percentage points

12 Sample Characteristics o 78% were non-hispanic Whites o 8% Latino o 10% African American o 4% Asian and Other o 70% had some post-secondary education; 35% had a bachelor s degree or higher

13 Sample Characteristics, con t o 39% had household incomes below $35,000; o Median income $40,000 o 57% were married o 54% had a child under age 18 o 43% live in the suburbs; 31% urban; 25% rural

14 Major Topics Covered o Amount of Credit Card Debt o Length of Time in Debt o Reasons for Being in Debt o Payment Plans and Practices o Consequences of Debt

15 Amount of household with Credi Card debt

16 Mean/Median Amount of Debt Mean: $8,386 Median: $5,000

17 Level of Credit Card Debt

18 Compared to 3 years ago Compared to 3 years ago, is the total amount of credit card debt less, about the same or more? 45% Less 12% About the same 42% More

19 Length of Time in Debt Mean: 3 ½ Years (43 months) Median: 2 ½ Years (30 months)

20 Reasons for Debt 48% car repairs 38% home repairs 34% major household appliance 29% an illness or medical expense 25% a layoff or job loss 21% college tuition and expenses

21 Borrowing for the Basics o Over 1/3 of households reported using credit cards in the past year to pay for basic living expenses Average number of months: 4 Median number of months: 3

22 Predictors of Higher Debt o Why do some households have higher credit card debt than others? o Regression results: Households reporting a layoff or major medical expense more likely to have higher relative debt Higher relative debt due to use of credit cards to pay for basics

23 Hispanics: Borrowing to Stay Healthy o Higher credit card debt and larger amounts among medically indebted households Medically Indebted $9,200 Average debt Non-Medically Indebted $5,620 Average debt

24 Hidden Credit Card Debt o 40% of homeowners had refinanced their home in the past 3 years o Over half used the money to pay off credit card debt o Amount paid off: Mean: $12,000 Median: $10,000 o Amount households still had in credit card debt: $14,000 on average

25 Stress and Distress o 47% had been called by bill collectors o Just under half reported being late or missing a payment at least once in the past year o 15% had entered into a settlement with credit card company o 13% had filed bankruptcy

26 The Credit Card Industry: Brief Overview

27 Lender s Prerogative We reserve the right to change the terms (including APRs) at any time, for any reason

28 Current Practices o Universal Default o Fees, Fees, Fees Average $39 o Zero Grace Period for Late Payments o Interest Rate Hikes Applied Retroactively: 12.99% APR 29.99% APR = 130% increase

29 Regulatory Background Marquette (1978) Ruled that banks could charge highest rate permitted in the state where bank is located Banks move to lender-friendly states like South Dakota and Delaware where there are no usury laws States lost ability to regulate interest

30 Regulatory Background, con t Smiley v. Citibank (1996) Established that fees were in essence interest and therefore fell under same guidelines as Marquette Before Smiley, most states limited late fees to $10 or $15. Today top ten issuers charge $35 to $39

31 Trends In Fees Revenue from all Consumer Fees: 1995: $8.3 billion 2005: $30 billion Late Fees Fastest Growing Source of Revenue: 1996: $1.7 billion 2006: $12 billion Late Payment Grace Period Disappears

32 Top 3 Issuers, End of 2005 Chase Bank of America Citigroup $147 billion $146.9 billion $109.5 billion Total $ billion Source: CardWeb

33 Conclusion Address Demand for High Cost Credit o Enhanced Savings Incentives o Better Protections Against Income Volatility o Health Insurance Reform the Supply Side o o o Eliminate Universal Default Limit Penalty Rate Increases Prohibit Retroactive Rates

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