Study Of Credit Unions Indicates CARD Act Will Benefit Consumers
Two Harvard doctoral students in economics compared how credit unions and banks operated their credit card divisions, and concluded that the recent CARD act "is likely to bring about moderate, and even positive, changes," as banks begin to emulate parts of the fairer business model of credit unions. Specifically, they say, all the doom and gloom from the banking industry about how consumers will get shafted by the new rules is mostly fearmongering.
We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate - and when they do, they charge less than other issuers.
While virtually all banks and other for-profit issuers increase the interest rate if the borrower fails to make a minimum payment on time, most credit unions do not. Similarly, credit union fees for exceeding the credit limit are on average just half those of other issuers. But contrary to industry assertions, more responsible card users don't pay the price. Credit union cards actually offer lower annual fees and longer grace periods than regular cards.
The question is, can credit unions and banks use the same model? "Absolutely," they write:
Banks and credit unions compete for customers in the same market. The primary distinguishing characteristic of credit unions is that they answer to a different group of owners: profits that are not reinvested are paid to the union's shareholder-customers as a dividend, much as investor-owned banks reinvest or pay dividends to their shareholder-investors.
There's one area that will be affected, however: reward programs. But as the authors point out, reward programs are subsidized by lower-tier customers who are poor and/or carry high debt loads, so getting rid of that sort of model may be part of the cost of creating a fairer system overall.
"A Fairer Credit Card? Priceless" [New York Times]
(Photo: frankieleon)
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Comments:
The part about CU's is right.
I have a card with a local CU with no default rate. A 2% Balance Transfer Fee rebate(they pay you), 6.9% APR Fixed on both Cash Advances and Purchases along with I believe a $10 late fee(I haven't been late, but I believe thats the fee).
Oh yeah, overlimit? They do the right thing and decline it.
@gumby101: Technically, since credit card users are borrowing money from the bank, they are doing us a favor. That being said, their actions are beyond acceptable and I fully agree with the rest of your post.
Not all banks are ev0l. I actually almost overdrafted the other day (first time in 8 years) - I say almost because TD Bank wouldn't let the charge go through. I called up the Real People # on the back of the card and spoke with a very apologetic lady after the 3rd ring. She transferred me to a customer service person (again, no wait) who helped me transfer money from savings to checking. Debit card ready for use again immediately.
Love TD Bank.
@Coles_Law: So it is perfectly OK for a bank that is borrowing money at <1%APR to reloan it-@ 10% APR then raise the rate to 25% APR because of the economy?
-to a person who has never been late on any credit account in the last 7 years(reporting period)?
Credit unions also generally don't offer rewards cards that are nearly as good as the ones the banks do. To me that sounds like responsible users WOULD pay the price for these reforms.
I dearly wish that I could remember where this was explicitly stated (I think on the FTC website), but I recall that, as set out by law, fees (such as those levied for overdrafts, etc.) are solely for the purpopse of making the bank whole again after a customer screws up and NOT a vehicle for profit.
If fees are, by law, not supposed to be a means of profit, why can't the government set some kind of legal standard for them? Cap them to the bank's loss, or something. If I overdraft 59 cents on a cup of coffee, why does the bank need a $39 charge to become whole again? Based on what I read before, this is (should be?) technically illegal. I need to find this document again.
But what if I don't WANT a fairer system? Rewards programs are SWEET.
/not even being remotely sarcastic
@WraithSama:
It goes along with what I just said that there was an article a few months back detailing how many billions of dollars in profit each bank made solely from fees. It is absoludicrous.
@johnva: Indeed. I think it was long agreed that those responsible AND on top of their credit card bills (since you can be responsible overall, but not on top of credit card for various legitimate reasons) potentially stands to lose the most thanks to the CARD Act.
@johnva: Ok, I can go with you there.
BUT they don't collect junk fees either and have low APRs.
If I need to finance something, I always put it on my CU card.
6.9% APR fixed.
I don't think rewards programs from prime banks are going anywhere.
People will still revolve, banks/CUs will continue to get interchange fees.
Really? I just got a letter from B of A stating that my 7.99% fixed rate rewards card is going variable. It basically stated they were doing this across the board. How is that pro-consumer?
You can prove anything with a study.
it will be the end of 0% interest, $0 or capped at $75 balance transfer fees on balance transfers. so I won't be able to transfer the credit card limit in cash to my checking account and then stuff it into a savings account and earn a year of interest free money on it anymore. :(
You can tell it will benefit consumers when the credit card industry is against it.@WraithSama: If there already was such a law that was also enforceable, then why would the credit card companies be opposing this new law, if the new law didn't change anything?
I doubt that I will ever go back to a bank. I am a member of a huge credit union, they are simply the best institution that I have ever worked with. Closing on a home later today and it was completely hassle free, my realtor described it as "textbook" no delays, no harassment from the lender, just a credit check and a couple w-2s and we were off. Oh yeah and 100% financing with no PMI. Banks can suck it!
The credit card companies' logic never made sense. In order to maintain profit margin, creditors will have to offer more credit in order to get the additional interest income lost from not being able to jack up rates. Because not everyone will eat up the additional credit, they'll have to offer more credit than that proportionate to what they won't be able to get through jacking. Net result: more credit, not less.
Take away the lucrative fees, the argument goes, and credit card issuers will be forced to ax free plane rides, slash generous credit limits and impose hefty annual dues for all.
What was missing from this is that the credit card issuers are charging the fees against one customer and using that money to benefit another customer. The customers who have had to pay the excess fees were not the ones that benefit from them. How is this fair?
People should certainly pay for the costs they cause. If a bank's losses are X dollars due to a bounced check or missed payment, then by all means charge them for that.
The people who get perks should get them in proportion to how much benefit they bring to the bank by being a customer, and doing a lot of business through the bank. If the bank profits from them, and wants to share a portion of that profit back to keep the customer from switching to a competitor bank, then that's just good business.
But stealing from the poor to pay more to the rich is simply wrong. I'm glad it's being made illegal. I wish it had been all along. Maybe we wouldn't have the economic problems we have now, had we all along had laws in place to make all businesses accountable.
@wcnghj: I've never paid any "junk fees" or interest in years of using bank credit cards. So I don't see how rewards programs would be anything but a loss for me personally.
@youbastid: The question is whether they're doing that because they have to, or if they're doing that because they have a convenient excuse.
@I Love New Jersey: So, out of curiosity, if you don't read formal studies and (going out on a limb here, humor me) assuming that "you can say anything with statistics", on what do you base your decisions? Which local newscaster has the prettiest hair or shouts the loudest?
If you don't have the intellectual tools to evaluate information - to become an independent thinker, really - seek them out. Otherwise, it's a dark cave you'll be living the rest of your life in.
If not, at least have the good grace to hide your willful ignorance. It's sort of embarrassing to watch.
@johnva: True. But it could be said that your rewards are paid for in large part on the backs of presumably stupider and poorer people. Is that ethical?
@VotaIdiota: Agreed, I'm going to keep loving my cashback rewards. However, I do have credit union cards and would absolutely drop a huge expense on them rather than my reward cards... because I am certain the CU would be a safer, and more fair, creditor if my situation changed quickly.
@Trai_Dep: It could also be said that my rewards are paid for in large part on the backs of presumably less responsible people. I've got no problem with that.
And while we're assuming things, I'm going to assume that a lot of my tax dollars go towards taking care of those same people who are presumably stupider and poorer. Way I see it, this just helps even things out a bit.
@NutToNut,ByMyBastard!_GitEmSteveDave:
No, not entirely. The bank only sees a fraction of the fee a merchant pays.
How can they give me 5 thankyou points on one dollar(Dining)? When redeemed for a gift card thats 5% back.
The merchant didn't pay 5%.
@I Love New Jersey: Well, that's not actually true.
According to the tenets of postpositivist science (which is certainly de riguer at Harvard, amirite!?!), one can never prove anything with any study. Really, the core of any "study" is simply to make observations around a hypothesis and establish confirming or disconfirming evidence. If none of that evidence has falsified the hypothesis, then at best we have just failed to falsify the hypothesis, but we haven't proven it.
... oh, I'm sorry. Was that not what you were talking about?
@Trai_Dep: I'm kind of with both of you. I mean, the entire retail economy of the US is formed on the backs of poorer people, and that doesn't factor into shopping all that often; also, my foregoing the rewards offered isn't going to help credit card debtors.
But yeah, the system become disproportionate in the advantage/disadvantage spectrum. Much as I love getting thousands back over the years, I can deal with the disappearance of those bennies if it means that people in debt aren't getting so relentlessly screwed. (Kind of the way I feel about taxing my health insurance benefits.) I wouldn't, however, believe that that was a real exchange without the CARD act or other legislation, though.
I'm through with Bank credit cards. I called Chase Executive Customer Service the other day to ask for a rate reduction on my 2 card accounts they migrated from WaMu. The best they would do is cut the rate on my existing balance to a 12.9 fixed for 2 years, but any NEW charges would prevail at the higher rate. This, in spite of always paying more than the minimum and having only 1 payment that missed the deadline by 2 days in nearly 2 years! Note to self: Pay these off and cancel the accounts, become your own banker and screw these guys! Oh, they did credit me 2 months interest at the old higher rate but clearly they don't want me to remain as a customer.
@wcnghj: Chase is cutting theirs back, Discover (not a prime bank, but still) has capped the hell out of theirs. I think it's going to be the equivalent of frequent flyer rewards twenty years ago--they'll still exist, but they're going to go from munificent (for the strategic user) to modest.
@wcnghj: Not all cards have rewards programs. In the US, the intercharge fee is ~2% of the sale. If three people charge, and only one has a rewards program, there's 6%.
Pretty darn arrogant of those guys, though, to just dismiss the possibly negative impact on rewards cards. Basically, the government is deciding that I, as a beneficiary of rewards cards, should suffer so that other people should pay less in interest and fees.
@Jessica Schwartz: Funny, I left TD for the exact opposite reason - I miscalculated and wound up overdrafting badly, which came as a shock to me because I'd previously HAD no overdraft, and had never requested any. I went into the branch office, and was told that there is no way to disable overdrafting at all - I could turn down the limit but not shut it off.
@olderbudwizer: That is a reasonable offer. Why would you care about new purchases? Are you still racking up revolving debt?
@wcnghj: Notice that the $0.01 conversion rate is only applicable when redeeming for certain items. Usually, the gift cards come with stipulations. In other cases, the rewards are sold to the CC company at a very discounted rate - for example, airlines give credit card companies major discounts vs. face value.
@floraposte: Yeah, it's very fuzzy. The economist in me says, Tora! Tora! Tora! But then the crunchy in me winces. I guess I try to go the middle path. There's no objective right or wrong, of course. It's all personal.
Myself, I'm leery of gimmicks. I avoid mfr's rebates because of all the hoops, and I'm generally the same regards cards: give me no-fee, no gotchas, low rate, I'm good. My capitalist attention is better spent elsewhere.
Once good thing about the CARD act is that hopefully it'll take out the worst actors' actions, so the sticky moral issues might become less of an issue.
@wcnghj: There was nothing in the letter that said anything about opting out. I scoured the fine print. A few years back I received a letter like this from Chase and opted out, but there's no option for that in what they sent me.
@I Love New Jersey: You like saying this a lot, and it's a pretty retarded point, as veg-o-matic has already pointed out. I would advise against using it as a constant fallback.
@J.T Dabbagian: I love TD. A lot. Even their handling of the transition from Commerce was well done and seamless. I have to keep a bit more in checking than I otherwise would, but being open 7 days a week and paying for my ATM fees is enough to make me want to hug them.
I don't feel any pity for people who will lose their rewards. Those rewards are costing someone money somewhere, which results in higher overall fees for someone, somewhere.
It reminds me of government healthcare. Many people freak that they will have to pay higher taxes for those who can't afford health care, yet these are probably some of the same people whining b/c they aren't getting free rewards (that are also costing someone more money to pay for said rewards.) I find the mindset that it is okay to cost others money, but when others cost me money, I get flaming mad to be hypocritical.
I've benefited from many a reward program, but if getting rid of them will make the system more fair overall, I am all for it.
The banks just got all bent out of shape because they're actually *starting* to be held somewhat accountable for their practices and overcharging.
Last time I checked, the banks are supposed to be doing US a favor, not the other way around.
I know I'm taking it a little extreme with this part, but one wonders why should I feel safe with banks these days with ATM skimming and banks fortified like prisons? They're slow to respond to things and are a hassle to get things fixed. And another point, where's the guest/customer service these days?
Last thing, if they have a problem overall about the new card act, that's strictly their problem.
Bye.