Thelma Perry received a promotional letter in 2005 from a bank in Pierre, South Dakota, promising a pre-approved credit card account. The offer had a credit limit of $1,500 with a qualifier under an asterisk: “Most customers receive an initial credit limit of $250.”
From that $250, the bank would deduct a $50 “annual membership” fee, a $119 “acceptance” fee and a $6 “monthly participation” fee, leaving Perry, a Chicago resident, with $75 to spend. If she spent more than $75, she would also incur a $29 over-limit fee. All this is according to a November 2007 report from the National Consumer Law Center, Boston.
Perry sued and claimed that the offer violated the Fair Credit Reporting Act by failing to properly disclose the offer’s terms and by illegally viewing her credit report. The bank responded that the disclosures had been made in eight point type. Perry lost her case in federal court and on appeal to the U.S. 7th Circuit Court of Appeals.
One of the appeals judges asked during the oral arguments: “Who in their right mind would ever agree to accept these terms?” Unfortunately, many Americans with poor credit or no credit history accept predatory credit card rates and fees because it’s difficult to exist in our consumer society without a credit card. Plastic is needed to rent a hotel room, shop online, or buy an airline ticket.
The Law Center’s report tells another heartbreaking story of a sailor who received a credit card from another South Dakota bank, in Sioux Falls. The sailor used her card during a four-day period in December 2006 for $18 at the Post Exchange, $8 for gas, $40 at Kay-Bee toys and $20 at Chuck E Cheese pizzeria. This $85 in spending pushed her over the limit because of the predatory nature of the fees. The fees included: a $95 “program” fee, a $29 “account set up” fee, a $6 “monthly participation” fee, and a $48 “annual” fee. This became an instant debt of $178 with a purchasing power of only $72. Meanwhile she had a balance of $320.81 to pay off on the $85 of purchases.
The sad reality of these two examples is that both are legal. Deregulation and Supreme Court rulings have allowed banks to ignore state laws that would limit interest rates, finance charges and other fees. It’s no accident that credit card operations are located in South Dakota and Delaware—states with no usury caps.
Consumer credit card debt totaled more than $904 billion in June 2007, an increase from $879 billion in 2006, according to the Federal Reserve. The Fed also reported that from the end of 2005 through the fall of 2007, the share of consumer credit card debt that was delinquent increased to 4.3% from 3.5%.
Banks have also increased late charges, over limit fees and other charges. The average late payment fee increased from $13 in 1995 to over $33 in 2005, an increase of 115% according to the Government Accounting Office (GAO). Average over limit fees increased from $13 in 1995 to over $30 in 2005—an increase of 95% adjusted for inflation, according to the GAO.
Credit Union Credit Cards
Credit cards represent a product area where credit unions are demonstrating their philosophy of people helping people through concrete action. The following profiles show how balancing good business practices with cooperative principles help members with credit cards products that offer fair rates with reasonable fees while also educating members about wise use of credit.
Credit unions simply do not offer credit cards with fees of $320 on a purchase of $85. Most view themselves as being in the business of helping members with no credit history or blemished credit get on the road to creditworthiness. Credit union credit cards are a lifeline to members in a financial services environment that is sometimes predatory—especially for low-income Americans.
Student and Secured Visa
University of Wisconsin Credit Union, $1.012 billion assets
UW Credit Union has four credit card products that cover virtually anybody in its membership: Platinum, Platinum with rewards, student Visa, and secured Visa.
“The secured Visa is available for members with poor credit or no credit history,” said Chad LaFlash, director of research and development. “After a year of positive history we can upgrade members to the platinum or student Visa credit card; we are giving them the tools to succeed.” The credit card is secured with a minimum savings account of $500. The credit limit is tied to the amount in the savings account. The card is offered at a 14% APR.
The regular student Visa is available to all freshmen if they have no credit history or a positive credit history, according to LaFlash. If payments are made on time, small incremental increases are made up to a maximum of $4,000 at graduation. A student can also upgrade to the Platinum credit card at graduation. UW Credit Union has an educational component to its credit card program, especially during registration week. The card is offered at 9.9% APR.
‘We talk to the parents and the students about making rational decisions about credit and credit cards,” said LaFlash. “We are trying to get them to think about a credit union alternative before going with a national bank. We are providing a credit card that doesn’t take advantage of them.”
It’s important to let members know the many advantages a credit union credit card has over national bank cards. The latter has high interest rates, excessive fees and sometimes predatory practices. UW Credit Union published the advantages in its newsletter, the Home Front News:
- Trailing interest charges. This occurs when you pay your balance in full and on time; the charge accrues on your balance before your due date. UWCU: No trailing interest charges.
- Universal default rates. If you fall behind on payments on any lender, your credit card company can increase your interest rate, even if you are current on your credit card balance. For example, if you were late on your cell phone bill and it registered on your credit report, but were current on your credit card, the card company could increase your rate. UWCU: We do not include universal default features.
- Over limit fees. Purchases are approved, even when the transaction amount surpasses your allowable credit limit. Over limit fees may also be assessed even when a fee is what caused the over limit situation. UWCU: We decline any purchase that would cause a member to exceed their balance maximum.
- Lower minimum payments. Minimum payments of 5% have been reduced to 2%. UWCU: We have not lowered our minimum payment due.
- Retroactive rate changes. This occurs when an upcoming rate change is applied to your entire balance, including purchases that were made long before the rate change. UWCU: We disagree with this practice and have never done it.
- Mandatory arbitration clauses. To dispute a fee or decision, you can’t sue the card issuer. You must file a grievance with a third party who will rule on your case. Consumer advocates hold that arbitration companies are more likely to rule in favor of the credit card companies. UWCU: We have no arbitration clauses.
Plugged In Credit Card
Linn Area Credit Union, $154 million assets
Cedar Rapids, Iowa,
Linn Area Credit Union offers a Visa card for young adults from 16 to 22 years old as part of its “Plugged In” package program. Young members can qualify for a credit limit of $500 to $2,000 as long as they have a source of income repayment and no derogatory credit report. The terms are 9.9% APR, no annual fee and a 25-day grace period. If the payments are handled responsibly, the limit can be bumped each year, by $200 to $500, by the time the member reaches 23 years old, he or she can qualify for a Visa Platinum card with a $5,000 credit limit.
As with many credit union card programs, education is essential to the Plugged In program. Members are urged to take part in a five minute “quizlet” that informs them about credit card basics. After completion of the quizlet, a prize is given—a compressed T-shirt packaged to look like a credit card.
“We are trying to reinforce what young people need to know to use credit wisely,” said Alice Hagerman, marketing director. “We want to educate young people about credit cards; we want to help them get off to a good start.”
Parental consent is required for underage applicants, but the credit union doesn’t require a cosigner as part of its Plugged-In Teen Young Adult package. “We call parents of 16 and 17 year olds on the phone to make sure they are comfortable with their child getting a credit card and to ensure that they understand the terms the credit card,” said Hagerman. “We determine if the young member has a job, or the parent is going to make the payments.”
Linn Area launched the Plugged In program in March 2005 with 1,610 accounts averaging a balance of $474, by the end of the January 2008; they had 2,233 accounts averaging $411. The range of credit allowed is $500 to $2,500. There is no annual fee for any of their cards. Late fees are $15; NSF fees are $15; and over limit fees are $15.
The credit card program fits in well with the credit union ethos of thrift and education. “The education we provide helps teach thrift and the wise use of credit,” said Hagerman. “So many kids get into trouble with credit cards. We are trying to help them develop a good credit rating. I read a statistic that over a lifetime a good credit rating will save an individual $250,000 in interest charges.”
Family Credit Card
GECU, $1.64 billion assets
El Paso, Texas
Many El Paso area residents are victims of predatory lending including high interest and high fee credit cards. So, when Crystal Long, SVP of lending and remote services, asked her daughter to serve on GECU’s pilot project for the first youth credit card, she was surprised by the teachers’ reaction.
“Teachers thought kids needed to save not spend; they said it wasn’t a good idea,” said Long. “We saw credit cards as a good money management tool, a way to earn a positive credit report.”
GECU launched an educational program about the Family Credit card consisting of radio and television commercials as well as booths at malls. The credit union also gave presentations at vocational schools on how important good credit is to your future, especially when purchasing a home or car.
The Family Credit Card requires a co-signer or sponsor. One of the controls on the card includes a specific line of credit; the amount assigned is deducted from the primary cardholder’s available limit. A unique feature is that the primary cardholder can assign up to 10 separate credit card numbers with a minimum age of 13 years old for an assignee cardholder.
Parents receive a courtesy statement that includes the transaction and payment for assignees under their card. This gives the sponsor the opportunity to monitor and mentor the young adult.
“Members were very creative; cards were used up and down the generational levels,” said Long. “We have an example of a grandmother sponsoring a card for a grandson. Three brothers sponsor a card for younger siblings. Members who have sponsored cards for their parents and spouses use it to give the other spouse a loan or an allowance.”
GECU also offers a Starter credit card for members with little or no credit history that has a $500 credit limit. The Rebuilder credit card is for members who have had credit blemishes or a credit score in the 500 range.
“We try to give our members a chance,” said Long. “If you get the Rebuilder card and handle it well, it can be a steppingstone to build creditworthiness for a new home or a new car. Our philosophy is to counsel members to help them become successful; we take an extraordinary amount of time to get them back on their feet.”
The credit union is truly a member advocate organization. In 2008, 95 financial literacy courses will be offered, everything from improving credit scores to investments and business lending. In 2007, GECU offered 89 courses.
Credit Card Consolidation Loans
Member’s Credit Union, $193 million assets
Winston-Salem, North Carolina
Members Credit Union began offering credit card consolidation loans since June 2006. The average age of the borrower is 44; lower than the average age of the membership. The credit union will refinance up to $15,000 of credit card debt from other financial institutions and will pay the lenders directly to ensure payment. The average loan is $11,161 with an average monthly payment of $229.1
As of December 2007, the credit union was providing the loan at 10.45% APR, which was 400 basis points lower than the regular unsecured loan rate. The credit union restricts the consolidation loan to members with FICO scores of 650 or higher. Only three loans have been written off in first 18 months of the program. The credit union has made more than 756 consolidation loans since the program started for a total of $8.43 million.
University of Iowa, $619 million assets
Iowa City, Iowa
University of Iowa Credit Union uses a direct mail campaign to reach A-, B- and C- credit members with less than $15,000 in unsecured debt. Members receive a pre-approved check they can use for more than just loan consolidation. The credit union has been using the direct mail campaign for three years and found it most effective for debt consolidation after the holidays.
New borrowers get a 60 day grace period on new loans and there are no pre-payment penalties. Members are not allowed to pay down higher-interest credit union debt with the checks. About 30% of the borrowers are under the age of 30. As might be expected, members with lower credit scores respond more often to the check offer than those with the higher scores.
It is difficult to exist in our consumer society without a credit card. The national bank credit cards often turn predatory for Americans with poor credit or no credit. The effects of this unfortunate behavior on our low-income citizens can be especially devastating. As the profiles in this report indicate, credit unions are following good business practices while practicing social responsibility with credit card products that offer fair rates with reasonable fees while also educating members about the wise use of credit.