Credit-card companies tend to pitch cards with lower penalty fees to well-educated consumers. | Mark Scott/Getty Images

Credit-card companies tend to pitch cards with lower penalty fees to well-educated consumers. | Mark Scott/Getty Images

If you are a college graduate, you’re more likely to be offered a credit card with an annual fee and a higher initial interest rate than someone who didn’t finish high school.

This is one of the conclusions a new working paper from the National Bureau of Economic Research reached in a study of more than 1 million direct-mail credit card pre-approval offers sent out over the course of 12 years.

The study found the amount of school you complete — and to a lesser extent your income — greatly influences the types of offers companies will send your way.

“Introductory APR offers are primarily offered to less-educated and poor clients. In contrast, points and cash back programs are offered to richer customers independent of their educational level,” study co-authors Hong Ru and Antoinette Schoar wrote. “Finally, miles is the only reward program that is predominately targeted to richer and, importantly, more-educated customers.”

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Here are the implications:

  • Credit card companies believe consumers with less education are more likely to pay late or max out their credit cards. This is why they might receive offers that include lower teaser or introductory rates, but higher standard rates and larger late fees and over-the-limit fees.
  • Households with more education get lower penalty fees simply because they are less likely to pay late. However, because this potential source of income might not be available, “it is not in the interest of the card issuers to offer (more educated consumers) features such as low introductory teaser rates,” wrote Ru, an assistant business professor at Nanyang Technological University in Singapore, and Schoar, a professor of entrepreneurial finance at MIT’s Sloan School of Management in Cambridge, Massachusetts.

“We’re not saying that (credit card companies) are bad,” Schoar says. “But what we are saying is in a competitive marketplace, there is a lot of pressure on credit card companies to make profits. And how do you make profits? By trying to maximize the rents you get from your customer.”

In fact, Schoar says she worries that because less-educated consumers receive offers that aren’t as clear on pricing, their credit mistakes are “subsidizing other customers” — the more sophisticated consumers who tend to pay less to use credit.

The impact of Fed rate policy

When the Fed next raises short-term interest rates, it could have an impact on credit card offers – but in different ways for different consumers.

Following past rate hikes, credit card companies increased late fees and over-limit fees but not standard APR and annual fees in offers to consumers with less education, the paper found. For more-educated consumers, interest rates and annual fees “are more sensitive” to a Fed rate increase.

How to read your offer

The study also looked at how offers were constructed to highlight some things and obscure others. Ru and Schoar found that offers with worse credit terms tended to place those unattractive terms in a small font or on the last pages of the offer letter. And offers with higher late fees or over-limit fees tend to contain more photos and less text.

Schoar’s advice for when you get an offer in the mail:

  • “Throw away the first pages because they are so enticing” and may not contain the information you need to make an informed decision.
  • Look at the Schumer box. That’s typically the last page of the letter, and it will tell you exactly how much you’ll pay for credit.
  • Watch out for cards that have very high late and over-limit fees, even if you think you’ll never encounter those fees.

“What we have seen in the data is that people have all these great intentions, but in the end they do fall late sometimes,” Schoar says.

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