Credit cards are filled with little known and little used benefits.    Rental car insurance is the best known of these “hidden benefits”.   All Visa, Mastercard, and Amex cards include this, but a sizable percentage of people are still unaware of this and will purchase the optional insurance.    This is often aided and abetted by the scare tactics of the highly incentivized staff at the rental car counter.

One of the least known benefits that some cards offer is return protection.   I was only vaguely aware of such a benefit when I found myself just a couple days outside of the return window for a child seat I had purchased for my bicycle.    I thought this innovative design would work great, but my 3 year old was terrified.

My Experience With Return Protection

I went to Amex’s site for return protection and looked over the details.   As expected, there were a ton of exclusions for everything from wear items to anything related to motor vehicles.   My bicycle being non-motorized, I am fairly confident that this product is eligible for return protection.     The product cost me $85, well within the $300 maximum per return.    There is also a $1,000 annual maximum.

First, I filled out there online claims form.  That was surprisingly simple.   There were five yes or no questions followed by a couple short answer type questions about why you are returning the product and why it the retailer would not take it back.    I then received a confirmation and a claim number, along with a request for documentation, specifically my receipt.   Unfortunately, you are only given the option of faxing or mailing the documentation.    While I was re-learning how to use my office’s fax machine, I thought it was pretty weird that you can file a claim online, but you couldn’t submit an attachment with the receipt.    I have been told that I will need to wait up to 30 days until my case is decided.    If they determine I am eligible, I will have to return the item to Amex, presumably at my own expense.    Even if it costs me $10 to ship it back, I am probably still better off than eating the $85 or attempting to sell the item on E-Bay or Craigslist.

How Can They Do This?

I really can’t claim to fully understand the business logic behind this and other programs.  I suppose someone thought that consumers would find this to be a valuable service, and they would choose to make more purchases with their credit card if they knew they had this coverage.    Nevertheless, I am pretty sure the vast majority of card holders are not aware of this benefit, and they can only continue to offer it for that reason.    I imagine that administering the benefit is not cheap, and they probably hire some third party to do so.  I have no idea what they do with the product that are returned.   Somewhere, there is an awfully big garage sale going on, I can tell you that.   It wouldn’t even surprise me if they end up being sold by some third party on E-Bay.

The exploitation of college students was specifically targeted by the CARD Act.   In the past, banks were heavily marketing their products on campus to students who had no real means to pay off any money borrowed.  It was a textbook example of predatory lending.   Under CARD, adults under 21 have to show a means to pay their bills or get a co-signer.  Furthermore, banks are prohibited from marketing their products within 1000 feet of campus.

Colleges Getting A Cut From Cards

Think of it as a new twist on cash back credit cards.   Instead of the cardholder getting cash back from the bank for using the card, your local college is getting cash back from promoting the credit cards.   This article in the Denver Post details how cash strapped colleges in Colorado are making deals with banks to promote their products.   The idea is that a banks will pay the school money to co-brand a credit card with the school’s logo.   More money is made off of ATM placements, and even a cut of the merchant fees.    For example, the University of Colorado Alumni Association and the University of Denver both get .5% from each transaction made with their cards, operated by different divisions of Bank of America.       How do we know this?   Another provision of the CARD Act requires that schools disclose their marketing agreements with the banks.   There is no reason to believe that these programs aren’t common at colleges throughout the nation.

Is This A Good Deal?

Whether or not this is a good deal, depends on your perspective.   If you are on the board of one of  these colleges, and you are looking for every dollar you can find to fund your school, these agreements are a great move.    The University of Colorado will make 7.1 million dollars over 7 years, nearly half a million a year.    This is money that the citizens of the state, (like me), or their students, (like my wife), don’t have to pay.

For cardholders, the deal isn’t quite as good.   The University of Colorado card marketed to students is from a local credit union, unlike their Alumni Association card from Bank of America.   Credit unions generally offer better service and more competitive interest rates than bank cards.   On the other hand, the bank cards seem to provide a maximum of 1% cash back to the card holder.    This is pretty much the bare minimum you can expect from a reward credit card.    You will get the satisfaction of knowing that you are benefiting your alma mater, but unlike a cash donation, your sense satisfaction is not tax deductible.

Elizabeth Warren, who has been chosen to set up the Consumer Financial Protection Bureau, put it this way in her testimony to Congress about the CARD Act; “Credit card companies have become masters at probing every human trait—failure to scrutinize bills, willingness to try to help an alma mater, inability to make correct calculations on present discounted value of various card terms.” Simply put, these cards are in the best interest of your school, but it is very easy to find a reward card that would be of greater benefit to yourself.   If you still want to benefit your school, take a chunk of your rewards and make a tax deductible donation at the end of the year.

The most recent financial reform legislation contained a provision to create a Consumer Financial Protection Bureau (CFPB).   The idea is to create a government agency that will be analogous to the Consumer Product Safety Commission, overseeing financial products just like dangerous tangible products are regulated.    Among other things, this agency will be able to continually regulate the credit card industry without an act of Congress.   By doing so, it will fix the inherent flaw of the CARD Act, the propensity of banks to “innovate” new ways of circumventing the intent of the law.

Who Will Head The Agency?

A bureaucracy is only as good as it’s leader, and President Obama has made a choice that will ensure that the agency will live up to it’s potential.   Furthermore, the founder of a government agency leaves an indelible stamp on it’s culture and mission for generations.   Who could doubt that the FBI would not be what it is without J. Edgar Hoover.   Today, President Obama nominated Elizabeth Warren to oversea the creation of the CFPB. To understand why she is an outstanding nominee, it helps to read her 2007 testimony before Congress on the subject of the CARD Act.     At eight pages, it is a relatively easy read, yet you don’t even have to absorb the whole thing to know that she “gets it” when it comes to protecting consumers.   For example, take these paragraphs from the second page:

….the most valuable customers are not those who pay in full each month. Instead, the customers who generate the real profits for the credit card companies are those who stumble and slide, who make payments and miss payments, and who end up paying default rates of interest and penalty fees. To maximize profits from this group, the credit card issuers have a second tier to their business model: they load their initial card agreements with tricks and traps so that they can maximize income from interest rates and fees.

This is where the market breaks down. In a perfectly competitive market, both firms and consumers have the information they need to make sound economic decisions. Because these tricks and traps are effectively hidden from customers—invisible until they bite, that is—credit card issuers face no economic penalty in the marketplace for including them in card agreements. If the consumer can’t tell a safe card from a dangerous one, then the marketplace will not reward the safe card issuer by increasing volume.

She refers to “tricks and traps with such ease and frequency that it would not surprise me if she actually coined the term.  In fact, in her statement today,  she said, “The time for hiding tricks and traps in the fine print is over.”

What Fine Print?

I have a hard time imagining that the old trick of promising one thing and hiding the opposite in the fine print is going to fly under Warren.   In her testimony she says:

Anyone who has ever tried to read a credit card agreement knows that the terms are simply incomprehensible. The inserts sent along with monthly bills to amend the card agreements are filled with language even a lawyer would have difficulty parsing. In such an environment, the average consumer doesn’t have a prayer.

Customers are kept in the dark about these practices, until it is too late. According to the Wall Street Journal, in the early 1980s, the typical credit card contract was a page long. But by the early 2000s, that contract had grown to more than 30 pages of incomprehensible text. The additional terms were not designed to make life easier for the customer.

Risk Based Pricing?

There are still some free market extremists out there who believed that the tricks and traps were merely a legitimate form of risk based pricing.   To them she responds:

This is not risk-based pricing. A risk-based pricing model is about the lender’s assessment of the likelihood of repayment at the inception of the loan, with subsequent calibration as more information is available. Anyone who has a small child, a dog, or a dead relative who has received a pre-approved credit card offer understands that the initial loan is not risk-based. Instead, the model posits putting cards in the hands of every consumer, then maximizing revenues with every possible trick and trap once the customer has begun using the card. Charges for late fees or over-limit fees reflect a price the company believes it can charge without causing the consumer to cancel the card. Interest rate increases may be related to changes in credit, but they may also be related to factors that bear no relationship to the likelihood of repayment or, in some cases, to no change at all in the customer’s risk profile. The tricks and traps are profit-taking, pure and simple.

The greatest day for consumer protection in my lifetime was the day that President Obama signed the CARD Act.   His nomination of Elizabeth Warren to create the CFPB may turn out to eclipse that.