The Cumulative Costs of Predatory Practices

• Companies that offered credit cards with predatory features experienced higher losses compared
with issuers whose cards were more consumer-friendly (Frank, 2012).8
• Several studies find that payday loans have high borrower-level default rates. For example, a
recent CRL study found that 46% of North Dakota payday borrowers defaulted within 2 years
of taking out their first payday loan (Montezemolo & Wolff, 2015).9 Payday loans have other
negative consequences in addition to default; for example, Skiba & Tobacman (2009) found that
borrowers are more likely to file for Chapter 13 bankruptcy as a result of taking out a payday loan.
Default, bankruptcy, foreclosure, and other negative outcomes introduce both immediate and
long-term costs. Bankruptcy costs approximately $3,000 for legal fees alone (Lohrentz, 2013).
These events also increase the cost of future borrowing by depressing a borrower’s credit score.
Negative information on a credit report, such as delinquency and default, reduces a borrower’s
credit score, sometimes causing a significant drop. Bankruptcy and foreclosure, in particular,
have large negative impacts as shown in Figure 3.
Figure 3: Negative credit events have a large impact on credit scores
FICO score after
these events:
Source: Gaskin, 2011
Starting FICO Score
~680 ~720 ~780
30 days late on mortgage 600–620 630–650 670–690
90 days late on mortgage 600–620 610–630 650–670
Foreclosure 575–595 570–590 620–640
Bankruptcy 530–550 525–545 540–560
8 This finding is about losses at card issuers and not for consumers. However, issuer losses stem from individual loan defaults, which
affect consumers as well as companies.
9 Several other studies have similar findings. An earlier CRL study found that 44% of Oklahoma borrowers defaulted within
2 years of taking out their first payday loan (King & Parrish, 2011). Skiba & Tobacman (2008) found even higher default rates in a
study of a large payday lender in Texas. Over half (54%) of payday borrowers paid biweekly defaulted within 1 year of having taken
out their first loan. These researchers found in another study that borrowers are more likely to file for Chapter 13 bankruptcy as a
result of taking out a payday loan (Skiba & Tobacman, 2009).
Center for Responsible Lending 13