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The US credit card market is one of the largest debt markets in the world. In 2003 total bank credit card debt in the US amounted to $400 billion (source: FDIC Statistics on Depository Institutions). In comparison, the total size of the US corporate bond market in 2003 was $2500 Billion (source: Bank for International Settlements). However, when examining how debt markets function and price risk, the existing literature has focused predominantly on corporate debt. Much less attention has been paid to consumer debt in general and credit card debt in particular, despite the size of the credit card market.
This is the first paper to examine the determinants of credit card penalty fees. The most important such fees are late fees and overlimit fees. The rising level of these fees and their impact has been prominent in recent public policy debates in the US. For example, as part of his 2004 Presidential campaign, John Kerry called for credit card penalty fees to be regulated. Furthermore in March 2005 the US senate rejected a Democratic amendment to the Bankruptcy Bill (S 256) which, if passed, would have placed constraints on credit card providers’ ability to charge penalty fees.
This paper sits at the intersection of three lines of research and policy making: valuation of liquidated assets, debt valuation and credit risk modeling. A variety of work in the past 15 years has found that liquidation values of corporate assets have a material bearing on the debt capacity of the firm prior to default. Though there are competing stories for this connection, the basic intuition has that differences inability to liquidate the firm translate back into differences in risk to lenders. As asset values after default decrease (increase), lenders are less (more) willing to extend credit.
