This Week in Behavioral #9

Credit card companies offer predatory cards to the poor and uneducated. They offer cards with rewards programs and market-driven costs to the rich and educated. This is not a small thing.

A lot of arguments made about terrible, no-good, very-bad financial products like payday lending or credit cards with hidden fees and crazy APRs are demand-side based -- Customers buy the products; how bad can they really be? We covered why these arguments don’t hold water in the payday lending industry. Today, let’s look at some hot-off-the-press data on the supply-side of the credit card industry.

In a just-released NBER working paper (that we tweeted out earlier in the week, and has already been getting some good press), scholars from MIT look at a really cool data set on credit card solicitations. The data set comes from 4,000 diverse households who collect all pre-approved credit cards they are sent and forward to the researchers.

What they find is perhaps not surprising, but it’s important. Credit card companies send predatory credit cards to poorer, less educated households. Think credit cards with low introductory rates, which then skyrocket past market levels in a few months. Or credit cards with hidden annual fees, large late fees, and so on.

These nefarious features can be thought of as “shrouded attributes”. It’s like when you buy an ink-jet printer for super cheap only later to realize you have to buy their one-of-a-kind super expensive cartridges. Or you rent a super cheap hotel at a resort only to later realize you have to eat at their overpriced restaurant. It’s the small print. It’s the unanticipated costs.

But those examples and that label might make these credit cards sound more like clever gamesmanship rather than what they truly are. These are not just bad credit cards. These are devices that hamper the financial situation of poor households. These are debt traps.

And just like with the payday lending industry, the credit card industry has to hide or obfuscate features of their products because they know they are offering bad products. Demand-side arguments fail to hold. They’re tricking the poor out of their money.

As with all unpublished papers that we write about, this paper should be consumed with the understanding it has not been formally vetted by the peer-review process, and so on.

Lucas Coffman, Frank

Lucas is a professor of behavioral economics at Harvard University and the Chief Behavioral Officer at Frank

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