Part I of this Article presents available data on credit card delinquencies and chargeoffs, and examines the relationship with data on the number of personal bankruptcy filings. The data reflect an historical increase in the rate of credit card defaults over the past twenty-five years, as well as a rise in personal bankruptcies in the 1990s which is astonishingly highly correlated with the rise in credit card defaults.
Part II reviews data relating credit cards defaults and personal bankruptcy filings with two general economic factors: the cyclical state of the economy and the household debt burden. Credit card defaults and personal bankruptcy filings have exhibited a strong countercyclical component, moving upward in recessions and downward in economic booms, and have also tended to rise as the ratio of debt to disposable income has increased among American households.
Part III analyzes the effect which credit card profitability has had on credit card defaults, arguing that the extranormal profitability of credit card lending has been an important factor contributing to the high current levels of delinquencies and chargeoffs. Parts IV and V discuss the effect which deregulation has had on credit card profits. The profit margins of credit card issuers substantially increased beginning in 1982, as a result of the functional deregulation of credit card interest rates coupled with prevalent consumer behavior. This has created incentives for card issuers to relax their credit standards, in turn leading to a secular increase in the rate of credit card defaults. Part VI explores the likely consequences of recent proposals to further limit the dischargeability of credit card debt in bankruptcy. The Article concludes that various proposals for limiting the dischargeability of credit card debt are likely to lead to an increase in the expected profitability of lending to marginal consumers and to an increase in outstanding balances lent to marginal consumers. The predictable effect of further restricting the dischargeability of credit card debt is thus an increase, rather than a decrease, in the incidence of overextended consumers and an increase, rather than a decrease, in the already high rate of credit card delinquencies. Such a result, presumably, runs counter to the objectives of policymakers.
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Credit Card Defaults, Credit Card Profits, and Bankruptcy
