A new study from FINRA Investor Education Foundation caught my eye with its conclusion that women with low levels of financial literacy were more likely than similarly situated men to screw up their credit card management.
My first reaction was: Not me. But, then, I’m not the typical female credit card holder and I’m definitely not financially illiterate.
Why higher APRs for women?
A curious finding from that study was that women were more likely to have higher credit card interest rates than men.
According to the study, “Females pay half a percentage point more in credit card interest rates than men, regardless of financial literacy level. And both men and women with low levels of financial literacy pay more in credit card interest rates than those with high financial literacy.”
The data found a half a percentage point difference in the interest rates (APRs) paid by women over what men pay (15 percent for women with low financial literacy versus 14.5 percent for similar men). That may not seem like a lot, but as the study notes, “over the course of a lifetime a female consumer could pay hundreds of thousands of dollars more in borrowing costs relative to a male with the same demographic characteristics.”
Why is this? Gender is not a consideration in credit card offers or approvals — or it shouldn’t be.
It’s worth noting that the Federal Reserve’s monthly consumer credit report (called the G.19) shows average interest rates on credit card accounts assessed interest was 13.04 percent in February 2012 — slightly lower than the rates reported in the FINRA study.
As that study notes, credit card management can be influenced by a number of things, namely, unemployment (you might miss a payment or two if you’re stressed out, looking for a job or juggling to stay afloat on the monthly bills), income (living paycheck-to-paycheck and overspending), and race (often tied to where you live or income).
Higher interest rates are a function of how well you manage your credit card account. One potential reason for a higher APR is late payments. Federal credit card laws allow banks and credit unions to hike interest rates on existing balances if users miss more than two payments (are more than 60 days late making a payment). The laws allow for a “cure” of that hike for good behavior.
Retail credit cards?
We all know women shop more than men. Moms do most of the family shopping in the average U.S. house. (It’s true that there are “Mr. Moms” out there, but they are the exception.) Could it be that women have more store branded and co-branded retail credit cards, such as Macy’s, Sears and Bloomingdale’s? These cards carry higher than average interest rates.
As the CreditCards.com 2010 retail credit card survey indicates, retail card APRs can be as high as 27.99 percent. Shoppers at retail outlets such as Target and others can be bombarded in the aisles or at the register with offers to save 10 percent on that day’s purchase if they sign up for these high-interest store credit cards. Women are in the line of fire of these promotions and that may be one explanation they pay higher rates.
Women earn less?
We’ve seen the wage and income studies over the years about how female workers make on average a fraction of what men earn. The latest figures released in January 2012 by the U.S. Bureau of Labor Statistics shows for every dollar men earned in full-time weekly wages, women on average made only 81 cents in 2010. Those lower wages often pay the full boat for day care and child rearing costs, especially for single mothers. We know that in divorce, women are often — but not always — far worse off financially than men and left to care for children. Court-ordered child-support payments are sometimes years in arrears.
Women with tighter family budgets may struggle more to make ends meet and pay credit card bills on time each month to avoid incurring penalty fees. Are financially-strapped women making more payment mistakes and thus getting zapped with higher APRs? Maybe.
Poorer credit ratings?
Another factor affecting the interest rate you pay on a credit card is your credit rating. Could it be that more women than men have had train wrecks with their finances? People with bad credit pay more than average consumers because they are at greater risk of defaulting on their loans. First Premier Bank’s whopping 79.9 percent interest rate offering may have lured more female than male applicants. It’s just a guess on my part. But a lot of factors I’ve already mentioned (lower earnings, more difficulties making ends meet) may contribute to lower credit ratings.
Of course, we can’t rule out subtle or outright discrimination from credit card issuers. It wouldn’t be the first time. The Federal Reserve found in 2010 that banks based credit decisions in part on where consumers shopped, what they bought or who held their mortgages. A 2008 study by the Federal Reserve of Boston — “Credit Card Redlining” — found that people living in white neighborhoods were more likely to be approved for credit cards than those living in black areas.
If Target can figure out that a woman is pregnant based on her shopping habits — as reported by Charles Duhigg in the New York Times — then banks can probably also figure out gender-based ways to zing users.
As they say in the research world, more studies are needed to explain this gender gap. FINRA concludes that both women and men would benefit from greater financial literacy and information about proper management of their credit card accounts to avoid late fees and higher interest rates.
See related: Study: Women get stuck with higher credit card interest rates