When American consumers face their long list of holiday-shopping credit-card bills this month, they might feel a little better if they've signed up for the United Way's "Pennies for Change" fundraiser. For participating consumers, each use of a credit card automatically adds a 1-cent donation to the United Way, the nation's preeminent network of 1,300 locally based entities working to address community conditions and human needs.
The penny ante could mean big bucks for the United Way over time. But it could also undermine the United Way's longstanding commitment to supporting financial literacy for consumers. And it might buy the credit-card companies some desperately needed whitewashing at a time when Congress is looking hard at the industry.
Since announcing its program last month, the United Way has only signed on about a dozen credit card-issuing banks and credit unions as charter members of "Pennies for Change." Still, capturing a penny off of every credit-card transaction represents potentially substantial income for the organization.
American households use well over a billion credit cards for about $1.7 trillion in purchases, an amount that continues to rise. Revolving credit-card debt totaled $943 billion as of November 2007, according to Federal Reserve statistics, with the median American household carrying more than $2,000 in revolving debt.
One charity-governance blogger has called the plan tacky, criticizing the notion that consumers would give a measly penny to charity if they charge an expensive dress or a hi-def television to their credit cards. The tiny charitable donation compared with what might be luxury purchases strikes some people as grossly disproportionate and demeaning to the social needs that United Way is trying to address.
But the problem isn't that "Pennies for Change" is tasteless and gimmicky. It's that United Way's fundraising scheme actually contradicts and undermines a core component of its "community impact" agenda: promoting financial literacy as a way to fight poverty. United Ways across the nation have put money into financial literacy programs to help households of all income levels avoid the spiral of indebtedness that has contributed to increasing levels of bankruptcy and decreasing levels of savings.
Promoting credit-card usage through cause-related marketing is hardly a step toward financial literacy. Current credit-card interest rates average more than 13 percent. Nearly all the credit-card companies raise cardholders' interest rates when payments are late – without telling them when it happens, in most cases. About 1.3 million credit-card holders declared bankruptcy in 2003. Since under half of cardholders pay just the required minimum each month, credit card indebtedness continues to soar.
More than one-third of cardholders with balances above $10,000 have household incomes of $50,000 or less. Thirteen percent have incomes below $30,000. Lower-income families increasingly tend to use credit cards to pay for health and other basic needs – not designer dresses or handbags.
Promoting credit card use as a mechanism for charitable giving is not an antipoverty message befitting the United Way's community-impact agenda.
But linking to the United Way certainly helps credit-card companies and their bank sponsors. Banks haven't earned a lot of sympathy in the current crises over predatory lending and subprime foreclosure. Working with the United Way – one of the most trusted and valuable brands in the world, as measured by Interbrand, a firm – gives these lenders a boost in public image.
Good PR through charity link-ups is even more important for credit card-issuing banks. Last May, Sens. Carl Levin (D) of Michigan and Claire McCaskill (D) of Missouri held hearings and introduced legislation to stop what they called unfair credit-card practices. Their bill called for limiting interest-rate hikes, applying rate increases only to future debt, prohibiting interest charges on fees, and more. Last month, Senator Levin chaired another hearing on abusive credit-card practices, such as automatically raising cardholders' interest rates when their credit scores declined or when they were late in making payments.
The United Way may have found a cause-related marketing scheme that, because of US consumers' increasing addiction to credit cards, will yield big infusions of contributions over time.
But the banks and credit-card companies may have found a useful tool to fend off bad press, angry senators, and looming federal restrictions. The holiday announcement of Pennies for Change got much more press attention, abetted by United Way marketing materials, than the results of Levin's credit-card hearings did.
For credit card-issuing banks, mired in the subprime mortgage scandals, a cause-related marketing scheme linked to the United Way represents the highest in corporate financial literacy. Yet it also undercuts the United Way's attempts to increase individual financial literacy – a key tool in its antipoverty efforts aimed, in the organization's own words, at "promoting self-sufficiency and strengthening families."