The credit-union model of credit cards
An op-ed in today's NYT argues that despite new legislation restricting the fees credit-card companies can charge consumers, there's a decent chance that your good-citizen cardholder won't suffer a worst-case scenario of high annual fees, absolutely no perks and interest charges that start to accrue as soon as purchases are made. Ryan Bubb and Alex Kaufman, doctoral candidates at Harvard, point out that credit unions already largely comply with the terms of the new law, and they manage to offer plenty of the same perks cardholders get from other card issuers. They write:
We have performed a study that compared credit cards issued by investor-owned banks to those issued by customer-owned credit unions. 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.
Here's the study they're referring to (it's a PDF).
Now, Bubb and Kaufman do admit that rewards programs are likely to become less lavish—in fact, they already have. But they don't particularly care if it means that people overwhelmed with debt stop "subsidiz[ing] the vacations of those who manage to pay on time." I'm with them on that.
I think this is a particularly telling chart from their paper:
The credit-union model of credit cards is, at its heart, one of moderation, one without extremes at either end. That would definitely be interesting to see more broadly adopted.
Barbara!
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1
Woot!
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Full disclosure: I'm legally required to woot this, because I work at a credit union. But it's a fair point that the credit union model in most forms of lending is one of broad moderation - with obviously different criteria, you'd see similar benefit curves for first and second mortgage programs as well.
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That's not always good for prime customer retention. You do start to lose well-positioned borrowers to those into APRs. But it does mean that the costs of credit are more boradly shared, which has it's own benefits. -
2
Barb,
My local community credit union offers a Visa card with a 7.9% fixed APR. It's been at that rate for the last ten years and hasn't changed. They don't charge any of the usual (cash advance/balance transfer/annual membership/etc) fees, have the standard window to pay in full without finance charges and have local customer service that's never been outsourced. They also manage to have a single page cardholders agreement that doesn't require a law degree to decipher and which doesn't include the arbitration clause that's SOP for the big banks.
Why anybody would do business with the big boys is beyond me. Ten pages of legalese that changes on a monthly basis, customer service that's outsourced to foreign countries, interest rates that border on usury, etc, etc. I haven't had to deal with them for six years and have no intention of ever doing business with them again.
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3
Woot! Just wanted to try that out. I like it. As I do a credit-card agreement with no arbitration clause--amazing!
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4
Washington Mutual used to have a clause in some of their agreements that let you opt out of the arbitration clause if you wished to do so. I exercised this right and made sure to save the acknowledgment letter from them in case it was ever needed.
After it became Chase I got a new cardholders agreement with an arbitration clause. When I called them to cancel I wound up speaking to an outsourced CSR, something that had never happened when it was WaMu. The fact that they can charge APRs that exceed 25% yet still can't find the money to pay an American $10/hr to answer their phones makes my blood boil.
WaMu was one of the few national banks I ever had good luck with. I was very sorry to see them fail.
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5
This is why I'm not the least bit worried about the threats the big credit companies have been making. If Capital One ever starts charging me immediate interest on purchases or raises my annual fee, I'll just fax them a picture of my extended middle finger, and I'll get a card through my credit union.
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6
Why not get it with your credit union now? If someone is going to profit off your credit card transactions (as they do even if you don't carry a balance, see interchange fees) it might as well be the credit union.
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