Bankruptcy

Illinois State Treasurer Shilling for Barclays Bank

By Bob Lawless

Well, I won't sleep so well tonight knowing the same masterminds that came up with the following idea are also in charge of our state funds. Today's State-Journal Register (full article here) reports the following:

Moms, dads and other adults can use credit card purchases to beef up children's college savings accounts under an initiative state Treasurer Alexi Giannoulias announced Wednesday.

The Bright Start Futuretrust MasterCard is "like a frequent-flier program geared toward college savers," Giannoulias said in a telephone interview.

Similar to credit cards that allow their holders to accumulate "miles" or "points," the Bright Start card directs 1 percent from every purchase into a Bright Start college savings account, he said. Some merchants offer additional rebates.

"If you're using the card to purchase items you'd buy anyway, why not pay for college?" Giannoulias said. "Every little bit helps."

Later, Giannoulias adds, "This credit card should not be used to incur more debt or as a substitute for a family's obligation to save for a child's higher education," he said. "It's a supplement, not a replacement." His full press release is here, half of which looks like it was cribbed from credit card company marketing materials. At least the corporate marketing genuises were smart enough to call it the "Futuretrust Master Card," which sounds better than what it is--just another credit card from Barclays Bank.

What's wrong with this? Here are a few starters.

First, the annual percentage rate on these cards does not range between "12.49 and 14.49 percent" as the treasurer's press release claims. This credit card is a MasterCard that comes with the same laundry list of fine-print disclosures as any other credit card. To understand the terms, one must plow through a dense set of terms and conditions which are available here. It's not clear to me why the treasurer's office would make this claim. The card carries a default annual percentage rate as high as 29.49 percent. The non-default rate ranges from 13.24 to 19.24 percent. The card also comes with a six-month teaser rate of 0%, which goes away immediately and is replaced by the default rate if the cardholder misses a payment or does something that otherwise would constitute a default.

Why not use the card to pay for college, as Giannoulias claims? Many readers might even have the same thought as my colleagues have argued to me about their credit cards -- "I pay off my credit card bills each month, so why not get the 1% back for college savings? It's the credit card company that is the sucker for giving me such a great deal." Yeah, right. If you believe that, I have an affinity card to sell you. The lesson here is the same one I tried to teach my teenage son the other day when I said, "Most people overestimate their own abilities." He shot back (ironically, I hope), "Well, I'm better than most people at estimating my own ability." The affinity cards seem like a great deal because most people overestimate their chances to pay on time and to reap the benefits of the affinity program -- that's why the credit card companies love affinity programs.

The Futuretrust program is just another affinity program designed by a credit card company to increase the use of its card. Affinity programs have played such a prominent role in the growth of consumer debt that Columbia law professor (and former Credit Slips guest blogger) Ronald Mann devotes an entire chapter to affinity cards in his excellent book on the credit card industry, Charging Ahead. In a nutshell, credit card companies market affinity cards because they cause consumers to spend more than they otherwise would. Also, consumers systematically overestimate the benefits they will eventually reap from an affinity program. Giannoulias should know that most people who will sign up for the program will spend more and incur more debt, exactly the opposite behavior he pretends will happen. Instead of embracing this affinity credit card programs, he should be thinking about regulating them.

I would have hoped that a supposedly sophisticated elected official who is in charge of investing my state's tax money would not fall for a cheap sales pitch. How can the Illinois state treasurer be such a sucker for slick marketing hype from the banking industry? Guess which industry made the most campaign contributions to Giannoulias in his last campaign (see here from FollowtheMoney.org). Hint: it's the same industry where Giannoulias worked before becoming state treasurer. Maybe he is not such a sucker after all.

Full post as published by Credit Slips on January 03, 2008 (boomark / email).