"Credit Unions’ Credit Cards Far More Favorable,” Harvard Study Concludes
Two Harvard University doctoral students recently released findings of a study on credit cards. Their findings: "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."
The Harvard Study, conducted by Ryan Bubb and Alex Kaufman, found that credit unions largely conform to the new rules already, while profitably maintaining the basic features that users know and love.
In an article that appeared in the New York Times, Bubb and Kaufman wrote: "The credit card act is under fire for limiting a number of fees commonly used in credit card contracts, like the charge for going over the credit limit and the increased interest rate that applies once a borrower has missed a payment. These changes might look like a boon for the average card user, but industry advocates claim that fees on delinquent borrowers subsidize the perks for those who pay on time. 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. Some in the industry even say that profitability would require issuers to charge interest from the moment of purchase, thus eliminating the grace period of interest-free lending that borrowers have long enjoyed. These fears are largely unfounded. We have performed a study that compared credit cards issued by investor-owned banks to those issued by member-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."
Additionally, the study found 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.
Bubb and Kaufman further found that the lending model used by credit unions was feasible for banks and other issuers. "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."
John Murphy, President of the Maine Credit Union League, called the Harvard Study's findings "more evidence of the value and philosophy of credit unions. It is gratifying to see that the study is calling for policies and procedures at other institutions to follow the example of credit unions. The bottom line is that credit unions are about always putting the best interests of consumers first. Consumers who use a credit union are already enjoying these benefits and we are seeing more and more people flocking to credit unions because of what credit union membership offers. Credit unions have always been a great deal and, in today's economic environment, that is even more true."
As Bubb and Kaufman put it, "Credit union cards demonstrate that punishing fees are not an essential ingredient of profitable lending. This should help assuage fears that the credit card act will bring disaster for credit cards. Rather, it should nudge them toward the gentler credit union model that many Americans already enjoy."
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