Income and the CARD Act’s Ability-to-pay Rule in the US Credit Card Market 
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 prohibits US lenders from issuing loans that credit card borrowers lack the “ability to pay” (ATP). The act requires issuers to consider ATP when originating a credit card loan and when increasing the credit limit on a card. This paper investigates the impact of the rule on the credit card market. In particular, it studies whether ATP has affected card issuers’ practices involving credit limit increases. It conducts the analysis by studying the accounts of five large banks that collectively comprise about half of the US credit card market.
Key Findings
- The CARD Act’s ATP rule has not been a binding factor for credit limit increases because nearly all credit limits are well below the levels that the ATP rule requires. The ATP requirements have constrained lending only to people with very low or no documentable income or assets.
- Even if cardholder minimum payments increased, ATP requirements would still typically not bind, suggesting there is, in practice, little interaction between minimum payments and ATP.
- When an account has a change in income, the account’s credit limit increases nearly 27 percent of the time. Yet, conditional on a credit limit increase, the size of the income change does not affect the size of the credit limit change.
- Even accounts with updates that show a decrease in income often have a credit limit increase, although credit limit increases more frequently follow reported income increases: Thirty-one percent of income increases and 19 percent of income decreases are accompanied by a credit limit increase of $100 or more in the same month as the income update.
- Cardholders who use about half of their available credit are more likely to receive a credit limit increase relative to cardholders who use most or little of their available credit.
- Cardholders with higher annual percentage rates are slightly less likely to receive credit limit increases.
- Credit score increases raise the likelihood of a credit limit increase.
Implications
After the origination of a credit card account, the direction and size of the account holder’s income updates are largely unimportant for credit limit changes. However, the authors hypothesize, income updates are a valuable signal of the cardholder’s engagement with that credit card. Consumers who are engaged may be more likely to use their card and less likely to default, even if they report a decrease in income, so their accounts may be more profitable for card issuers.
Abstract
In consumer credit, “ability-to-pay” (ATP) rules require lenders to consider whether the consumer can repay a loan without experiencing undue hardship. ATP rules have recently been implemented or considered in many countries and markets. Using a large panel of credit card accounts, we study the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act’s ATP rule and its effect, if any, on the US credit card market. We find that the rule appears to have had no effect on bank credit decisions because actual credit limits are almost always substantially lower than reasonable ATP limits. We examine other factors that may explain banks’ credit decisions. Nearly 27 percent of consumer accounts that had a change in cardholder income received a credit limit increase of $100 or more in the same month as the income change. Most credit limit increases followed an income increase, although 19 percent of the instances of an income decrease also were followed by a credit limit increase. Most credit limit increases occurred without cardholders providing banks with income updates. The magnitude of the income change coefficient when an income update occurred is estimated to be nearly zero. We conclude that after the origination of an account, the direction and size of the account holder’s income updates are largely unimportant for credit limit changes from either a regulatory or bank profitability standpoint.