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If the credit card offer you receive in the mail has more photos and less text – or the card’s fees are buried in fine print – it could be the issuer thinks you can be duped into signing up for a card that’s not necessarily in your best financial interest, two researchers say.
MIT professor Antoinette Schoar and Nanyang Business School (Singapore) professor Hong Ru analyzed more than 1 million credit card offers mailed between 1999 and 2011 and found evidence that lenders are strategically tailoring offers based on how smart or savvy they think their targets are.
“Credit card terms that are offered to more financially sophisticated consumers differ significantly from those offered to unsophisticated customers,” wrote Schoar and Ru in a June 2016 working paper for the National Bureau of Economic Research.
For example, cardholders with more education tend to receive card offers with higher upfront costs, such as large annual fees, but less expensive penalties when the cardholders fail to make a payment. Cardholders with lower levels of education, on the other hand, tend to receive card offers that advertise a less expensive APR – such as a limited-time 0 percent APR on purchases – but list substantially higher charges such as penalty rates and late fees.
In addition, issuers target consumers with less education by sending “offer letters with back-loaded terms contain more photos and less text.” For example, “the worse the credit card terms, the more likely they are to appear either in small font or on the last pages of the offer letter,” wrote Schoar and Ru.
The researchers say that card issuers appear to be taking advantage of cardholders’ gullibility by advertising terms that better educated cardholders would notice and reject.
According to Schoar, of the Massachusetts Institute of Technology, the study sheds light on the darker side of consumer advertising. “As more and more personal data becomes available, businesses are now able to target customers in a personalized and sophisticated way,” Schoar wrote in The Wall Street Journal.
“On the bright side, that means you can get products and services that are tailored to your needs,” she wrote. “But, according to our research, the downside is that companies can also more effectively target your behavioral weaknesses, self-control issues or lack of attention to the fine print.”
That means you need to be more discerning when you receive targeted offers, says Schoar – particularly if you think you’re being targeted because you have a lower income or lower levels of education.
“Independent of your educational status, consumers should know that they have the power and information to choose well,” she wrote. “Each credit card offer in the U.S. must by law have a text box that contains all the relevant terms of the offer in one place.
“This is called the Schumer box after Senator Chuck Schumer of New York. The best way to choose a credit card is to literally throw away all the marketing material at the front of the offer, and simply focus on the real information in the Schumer box,” she wrote. “This is true no matter what your income or education level.”