What credit card companies think of you, based on their pitches.
If you want to know what credit card companies think of you, look at your mail.
Are you “pre-screened” for lots of mileage-reward cards? Banks think you’re rich and educated.
Do you mostly see offers for low-APR teaser rates? Banks think you’re poor and uneducated — and, perhaps, vulnerable to financial traps.
To get ahead in a highly competitive industry, credit card companies have become increasingly sophisticated — and specific — about soliciting new customers. They have also learned to be savvy about wringing profits from their cardholders, even if that means taking advantage of people’s behavioral weaknesses.
The game happens before our very eyes. Recently, MIT economists Hong Ru and Antoinette Schoar analyzed more than a million credit card mailings collected by Mintel, a company that pays people to read their junk mail. The economists scanned the terms of these offers and noted the income and education levels of recipients.
Their preliminary findings, based on data from 1999-2011, span a seismic shift in the credit card industry. The CARD Act of 2009 curtailed many industry practices that legislators deemed abusive. Ru and Hong’s data offer a unique window into an era not so long ago.
These were the broad patterns the economists discovered: Richer people were more likely to get cash-back, point-reward or mileage offers. Poor people were more likely to get offers that advertise a low introductory APR.
Mileage cards tended to be marketed at college graduates, while cards with teaser APR rates were sent to the less educated. Cash-back and point-reward cards were offered equally to people at every education level.
The innocent explanation for these trends is that banks offer people cards they are most likely to want (and qualify for). Different folks, after all, have different needs. But as Ru and Schoar dug deeper, they found that this wasn’t the whole story.
Cards with travel rewards epitomize the kind of product aimed at the rich and educated. It’s a fairly exclusive niche.
In contrast, the card offers sent to poorer, less educated people were often loaded with risky features: Low introductory APRs, high late fees and penalty interest rates that kick in if you break the rules.
“Poorer people usually have worse credit, so standard economic theory predicts their regular APR should be higher,” says Schoar, a professor of finance at MIT’s Sloan School of Management. “And it’s not clear why the late fees, the hidden fees, the fees that hit you when you fall behind on your payments— why are they so high for the poor.”