online cash advance
Fed Study Unintentionally Paints Rosier Picture for Online cash advances
Credit cards have proven to be both a useful tool in establishing a credit history and a bane to those consumers who hope to maintain a good credit history. The temptation to “swipe and go” has been actively cultivated by the American media. With the magic plastic in hand, consumption is quick and easy. Those who pay off their credit cards each month may escape the revolving interest trap, but the vast majority of credit card users must not pay their balances in full. If they did, why would credit card companies offer reward programs? If consumers weren’t tied into earning points and paying interest fees, the programs wouldn’t be profitable for the companies.
What about Online cash advances?
According to multiple sources, over 10 million U.S. households use online cash advances each year. These short-term loans are paid off over a set period of time, typically two weeks’ time. They fulfill a need and are not a swipeable ticket to impulse purchases. Certainly online cash advances CAN be used for impulse buys, but lenders make it clear that this is not advisable. Furthermore, the amount available is finite, typically smaller than the credit limit available on a credit card.
Yet Sources Continually Try to Connect Online cash advances to Financial Ruin
Take the January 2009 interdisciplinary study “Online cash advances and Credit Cards: New Liquidity and Credit Scoring Puzzles?” Written by Sumit Agarwal (Federal Reserve Bank of Chicago), Paige Marta Skiba(Vanderbilt University Law School) and Jeremy Tobacman (University of Pennsylvania), this study attempts a statistical correlation between credit card default and online cash advance use. In particular, the trio attempts to make the case that consumers consistently make bad decisions by choosing to take out online cash advances when they have credit card liquidity.
There must be a reason that consumers make such a choice, however. Agarwal, Skiba and Tobacman do not define such reasons, so I will attempt to fill the crucial gap.
Methodology and Results
Agarwal, Skiba and Tobacman analyze a sample of 102,779 people who took out online cash advances from a single lender (this is significant, as I’ll show in a moment) and 143,228 with credit card accounts in states where the same online cash advance company operates. They discovered that while credit card issuers used FICO scores as the primary means of determining a consumer’s credit worthiness, the payday lender used Teletrack scores instead, which tend to track borrowing history more on the subprime scale.
According to the study authors, Teletrack scores were eight times more effective at predicting online cash advance default than FICO scores. Thus, it can easily be assumed that the more effective credit evaluation device creates more successful online cash advance transactions that it would defaults and additional fees. The mainstream media is too often ready to accuse the payday lending industry of wielding such fees like a fire hose on unwitting consumers, but the truth of the matter is much less dramatic.
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