In a rapidly digitizing world, people use a variety of institutions, products, and services to manage their financial lives. But the data generated from these interactions are often fragmented in ways that make it impossible for policymakers, researchers, financial service providers, and other decisionmakers to understand the holistic nature of people’s financial lives—how they pay their bills, handle their spending, save for emergencies, manage their debt, and build wealth for the future.
To address this challenge, the Urban Institute has launched the Financial Well-Being Data Hub, which seeks to inform actionable solutions that advance equity and improve households’ financial security. Through the data hub, we examined the 2015 Military Lending Act (MLA) expansion, which extended a 36 percent annual percentage rate (APR) cap and other consumer protections to most types of revolving credit, including credit cards and overdraft lines of credit. We believe policymakers can use our results to fine-tune consumer protections that expand access to affordable credit.
Understanding how the MLA affected service members’ financial well-being
Although the MLA expansion was intended to improve the financial well-being of service members, we found that the policy had no effect on credit and debt outcomes among residents of military communities with subprime credit scores (less than 600). We focused on individuals with subprime credit scores because they are most likely to use credit products with higher APRs and to be affected by APR caps.
Using data from one of the major credit bureaus, we found that the 2015 MLA expansion:
- Had no significant effects on credit card ownership or credit limits for residents of military communities with subprime credit scores;
- did not decrease delinquency or collection rates on revolving loan products among consumers with subprime credit scores;
- did not affect the credit scores of service members with subprime credit scores; and
- may have reduced credit access for consumers with deep subprime credit scores (less than 500).
To better understand our results, we used complementary credit bureau data from February 2022 to assess average APRs on revolving loans held by residents of military communities with subprime credit scores. We found that the average APR on revolving loans was 17 percent and that few consumers had revolving loans with APRs around 36 percent.
From this finding, we concluded that lenders did not respond to the MLA expansion by setting rates at or just below 36 percent, because average APRs on revolving credit products were already lower than 36 percent before the policy was expanded—in other words, the expansion did not meaningfully affect borrowers’ credit and debt outcomes. In fact, data from the Federal Reserve show that average credit card interest rates were historically lower than 36 percent and have increased over time.
Embracing evidence-based solutions to improve financial well-being
Currently, Congress is considering passing the Veterans and Consumers Fair Credit Act, which would apply a 36 percent APR cap to most closed and open-ended credit products available to borrowers. A coalition of 188 organizations (PDF) representing a variety of industries and numerous elected officials support this legislation. Although our research does not assess all aspects of the Military Lending Act, it suggests that the policies of the 2015 MLA expansion, including the 36 percent APR Cap on revolving credit, did not improve borrowers’ credit health. Therefore, policymakers, regulators, and advocates could consider alternative ways to protect consumers.
Evidence from Colorado, for example, shows that requiring borrowers to pay back loans in affordable installments over a period of at least six months, rather than in a lump sum, resulted in individual borrowers spending 42 percent less when paying back payday loans. Additionally, research suggests that fee disclosures, which can help borrowers visualize the cumulative costs of a loan, reduce the likelihood of borrowing a payday loan by 11 percent. Policymakers and advocates could consider these policies and others as potential avenues to improve borrowers’ financial well-being in lieu of extending MLA provisions to revolving credit.
Harnessing consumer data to improve financial security and advance equity
Through the Financial Well-Being Data Hub, we plan to build on this initial research by exploring how small-dollar credit products can support borrowers’ credit health. We also plan to explore how other programs and policies affect financial well-being, including the baby bonds program in Washington, DC and occupational segregation among Black women in precarious work arrangements.
By applying analytical techniques, drawing upon decades of financial well-being research, engaging experts in Urban’s Office of Race and Equity Research, and collaborating with stakeholders across the financial well-being ecosystem, we hope this initiative provides unique insights and advances evidence-based solutions based on a holistic understanding of people’s financial lives. Stay tuned for updates on the Financial Well-Being Data Hub.