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Research and Statistics

Credit card problems and exit behaviors

Summary

Learn why consumers complain about credit card service, rates, and pricing schemes, and why they cancel cards.

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When consumers are unhappy with their credit cards, they can choose to stop using that card or end their relationship with the card issuer.  Consumer complaints were examined in 2002 by the Payment Card Center of the Federal Reserve Bank of Philadelphia and focused on what the Fed termed “exit behaviors.”

The Fed highlighted the fact that credit cards were the leading source of consumer complaints received by federal financial regulators.  The central bank noted that the main reason for this is simply due to the huge number of credit cards users.  Another possible cause is the increased complexity of credit card pricing schemes, which leave some consumers confused.  Finally, the increased availability of credit cards for consumers with bad credit has resulted in a greater number of new and inexperienced credit card users.

The Fed defined “exit behaviors” as the termination of a consumer’s relationship with a credit card issuer, or as simply no longer using the credit card.  The ability to switch to a new credit card is an option that is more readily available in the credit card market than is generally seen in other financial services areas.

Prior research indicated that the likelihood of a consumer’s exit is strongly tied to money issues and how upset the consumer feels about the problem.  Additionally, the Fed discovered that the chances of exit can be influenced by the consumer’s card-use characteristics.  For example, people who tend to carry a balance on their credit card from month to month may take advantage of balance transfer offers to switch to a lower interest card, or they may simply stop using their existing card and focus on paying off the balance.

Additionally, costs may play a role.  Cardholders with low interest rates may decide not to exit if the other option is a credit card with a high interest rate, while conversely, cardholders with high APRs may be more willing to exit.

Another influence on a cardholder’s decision is the nature of their problem.  Consumers with billing errors that need to be resolved will likely not exit until the error is corrected, but they may stop using the card while they wait for a resolution.  Separately, if a customer service dilemma is the issue and money is not a concern, the consumer can choose to cancel the original credit card and switch to another.

Data from the University of Michigan’s Survey of Consumers, which the Fed referred to, showed that nearly one in six households reported a credit card problem over the previous year.  Out of that group, only 4 percent said they took no action to resolve the issue.  The Fed explained that consumers’ proactive behavior could be due to relatively high levels of expressed dissatisfaction.

However, the degree of action taken by consumers could be due to the ease of airing grievances.  The central bank noted that it is relatively easy to complain about credit cards.  With the Fair Credit Billing Act allowing a consumer to withhold the amount of money involved in a dispute until it gets resolved, there is little monetary cost to lodge a complaint.  Additionally, the credit card industry makes it easy to contact customer service representatives via the card issuers’ 800 numbers and the instructions included in their monthly billing statements.

The study revealed that over 55 percent of respondents who had a problem with their credit card in the past year said they had stopped using their credit card or ended their relationship with the card’s issuer.  As noted earlier, the Fed attributed this turnover to the highly competitive credit card market in which consumers have relative easy exit options.  Not surprisingly, exit rates were higher among consumers who could not resolve their problem, with two-thirds of that group exiting.  Somewhat more surprising was the revelation that nearly half of those who reported their problem resolved also exited.

Using an econometric model to further analyze problem resolution and exit behaviors, the Fed concluded that consumers who were predicted to have their problems solved were less likely to exit.  The model also showed that the more dissatisfied a consumer is, the higher the likelihood of exit, regardless of problem resolution.

Overall, the Fed’s examination of exit behaviors showed that the level of problems with credit cards is relatively low.  The popularity of credit cards and their rising use has clearly resulted in more complaints.  But in the study, of the 1,062 credit card holders polled, only 166 reported having problems during the past year.

This analysis showed relatively high levels of exit behavior, as over half of the 166 respondents who had a problem closed their accounts or stopped using the credit card in question.  The high exit rates are probably due to the highly competitive U.S. credit card market and the relative ease of switching cards.  Meanwhile, the analysis highlighted the importance of problem resolution in lowering the likelihood a customer will exit.  Although exit behaviors cannot entirely be eliminated, problem resolution clearly makes a big difference.  That acknowledgment supports the credit card industry’s investment in customer service.

As shown in the study, the card issuer is the most effective place to achieve resolution.  Therefore, consumers with problems involving their credit cards should not hesitate to contact their card issuer’s customer service department.  Customers who pay their bills on time and remain in good standing have a strong foundation from which to resolve any problems they have relating to their credit cards.

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