Visa has announced an ambitious plan for educating consumers in personal finance: a large, comprehensive webpage centered around a "Financial Football" video game. Their goal is to reach 20 million people worldwide in the next 5 years, and their webpage is top-notch. But should you trust Visa to teach you about credit cards when the company makes money from consumers who are in over their head?
Visa has lots of resources for both educators and a general readership on their webpage. The personal finance section has definitions, tips, calculators, strategies for reducing debt, etc. There are updated articles on helping consumers take advantage of tax breaks, a wise use of financial advice, as well as sympathetic advice on being realistic about holiday expenses in a recession, which counters an obvious "charge now, pay later" approach that could have been suggested given their products.
Calculated Risk asked: "Why aren't consumers being educated on the dangers of not paying off their credit card balance each month?" I like that question. I am not a licensed financial advisor, but having discussed credit cards and consumer finances online with some smart people I think there are three general points I'd like to see mentioned:
1) A credit card is not meant to finance consumer purchases in anything other than the short term. Paying only the minimum balance will take a large amount of time to pay off the balance, time that should be cut down if the consumer can help it. Balances should be paid in full every month.
2) Credit card companies refer to those who pay off their loans in full as 'freeloaders' and 'deadbeats.' As opposed to eras with usury caps, where credit card companies had to be more diligent with how they lent money, the credit card company's profit model can be, and is, focused on consumers that are in over their heads running large balances at high interests. And as opposed to those eras, the relationship is severely more adversarial as a result.
3) Whenever you use your credit card, the business where you are charging is charged a percentage fee of what you've purchased, called an "interchange fee."
So how does Visa's Financial Football stack up here? They get some points on the first part. The general credit card page states: "Stay on top of payments; and realize the true cost of purchases made with credit." On the subpage for Pros and Cons: "Keep track of your spending to ensure that you can repay your credit card bill in full." Another subpage walks through how long it takes to pay the minimum balance.
However the last two points aren't brought up at all.* Consumers should also be made aware that credit card usage has effects on the businesses they shop at - when I have told people, especially former students, about this, they often have little to no clue.
At the end of the day Visa is trying to sell a product.* The relationship isn't as adversarial as a prosecutor advising a defendent how to plead, but it isn't a relationship where interests and incentives are naturally aligned. One doesn't have to dig far to think that their profit model doesn't necessarily sync up with consumer's interests. Where can a consumer go? In this magazine, Economist Robert Shiller suggested:
Many households have access to very little financial insight. In most cases, the only financial professionals they come into contact with are trying to sell them something, whether it's a mortgage or a stock. Independent financial advisers, who provide more-comprehensive advice, have typically been available only to the relatively wealthy. The questions most people need answered are elementary: How risky is this investment? Have prices ever gone up this fast for this long before? Can I afford this loan if interest rates rise? But they're not getting straight answers to these questions.
Financial advice is in some respects like medical advice: we need both on an ongoing basis, and failure to obtain either can impose costs on society when our health--physical or financial--suffers. There's a strong case to be made that the government should subsidize comprehensive financial advice for low- and middle-income Americans to help prevent bubbly thinking and financial overextension. One way to do this would be through co-pay arrangements like those in place for Medicare or for private health insurance. Accredited advisers, charging a flat fee, would be partially reimbursed by the government; the moderate costs to consumers would create a much broader market for their services.
Shiller predicts some of the problems with the approach of having financial service agencies both advise and sell products. More importantly he points to a solution. You go into the courtroom with the option of an attorney, and into the hospital with the option of a doctor. Both have sworn oaths to defend their responsibilities to their client; why can't we have a similar arrangement when it comes to financial services? As TWI reporter Mary Kane notes, the overwhelming debt crisis facing ordinary Americans right now might be causes us to push for genuine independent advice.
*Correction: The author originally, and incorrectly, intimated that Visa sold its products directly to consumers and relied on delinquent customers to make money. He wrote:
Visa isn't going to point out that it wins when consumers carry balances at high interest, or that it barely breaks even when consumers use their products responsibly. And why should they? They don't have a fiduciary responsibility to their clients, so their recommendations have to, on net, not cost them (or at least buy them regulatory goodwill), or else they are leaving $20 bills all over the sidewalk.
This is inaccurate, because Visa does not make money from cardholders' interest. Banks issue Visa cards (and banks may profit from delinquent customers) but Visa makes money by managing electronic payments among financial institutions, consumers and businesses.