Why do we love credit cards so much?
It’s a question most of us have probably wondered about. Credit cards are convenient, easy-to-carry, and most of all, fun to use. They give you access to a pool of funds that you can use anytime.
On top of that, you get cash backs whenever you shop at participating retail stores. Restaurants, hotels, and car rentals also shower you with rewards when you use credit cards.
But while they’re quite good for making life purchases convenient, a good many of us have been stung by unexpected interest rate increases and fees. These compound into debt problems that become hard to pay back. It’s estimated that 120 million Americans carry credit card debt and don’t have enough money to pay more than the minimum each month.
So how can credit cards be fair and ethical to customers? At Aspiration, we’re always looking for solutions to make the financial system more accessible and ethical for the public. Our neobank aims to make money work for the planet and local communities.
In this article, we explore what the features of ethical credit cards are and how you can choose one for yourself.
How can credit cards be ethical?
Credit cards can be ethical and useful at the same time by:
By setting fair interest rates
Interest rates are one of the biggest gripes that people have about credit cards. Banks charge outrageous interest rates on credit card balance, at an average of about 20% annual percentage rate (APR).
These rates are higher than those on mortgages or auto loans, which are about 5% on average. Financial analysts say that banks set high interest rates for credit cards to compensate for the risk that credit card holders may not pay back the loans or pay them back late.
The only problem is that these high interest rates actually make it harder for people to pay back their credit card debt since the interest keeps accruing as long as there’s an unpaid balance in the account. It becomes an ethical problem when people spiral into a nightmarish cycle of never-ending credit card debt.
Setting fair interest rates would help credit cards become more ethical for customers. A low, regular APR of around 10% or lower is decent, and so are introductory credit card offers that charge 0% APR for the first 12 to 18 months, albeit only if the conditions are clearly explained and planned for with customers.
Making credit card fees transparent
Banks offering credit cards should also make all their fee policies transparent.
It’s the best ethical service banks can do for their customers – it’ll help establish a trusting relationship between customers and their banks and help customers understand the full cost of getting a credit card.
Banks need to be clear with their customers on fees before they open a credit card account, including late fees, annual fees, balance transfer fees, cash advance fees, over-limit fees, and more.
In addition, banks should inform their customers about when and how interest rates will increase. Customers are sometimes unaware that special deals like low-APR teaser rates are not permanent. It needs to be the banks’ responsibility to clearly explain the conditions for the low-APR rates, and give advance notices of when interest rates will increase.
Do not encourage unnecessary spending
Credit cards should also not encourage unnecessary spending.
Rewards, cash backs, and high credit allowances give the illusion to customers that every purchase they make is easy and creates positive returns when in reality, the purchases add up so much that cardholders may not have enough money at the end of the month to pay the minimum balance.
Instead of encouraging spending, banks should work together with customers to help them see how a credit card plan might work out. A full walkthrough of credit card fees, potential changes of service, and interest rates will help customers realize that it’s not just the things they’ve purchased that they need to pay back but also the extra fees and rates for the credit card service.
This would help customers think twice before making spontaneous and trivial purchases with their credit cards. After all, who would want to pay 20% credit card interest on a $10 t-shirt?
What does ethical banking have to do with sustainability?
Credit cards and banks may seem like a far cry from concerns about sustainability. But they’re inextricably linked because the world’s worst polluters are being funded with money from large banks.
Many banks, including American banking giants JPMorgan Chase, Bank of America, and Wells Fargo, have been investing billions of dollars into fossil fuel, Big Agriculture, and logging companies. Their money undermines global efforts to keep forests, ecosystems, and communities intact.
Ethical banking is needed to buck this trend. Many sustainable banks practice ethical standards that are helping the planet transition to a low-carbon economy. These banks, which include our neobank, Aspiration, invest money in sustainability-focused organizations and clean energy companies.
They make sure that money is used to protect the planet. They divert funds away from destructive industries and give them out as loans to small businesses and families to help keep wealth in the community.
And most importantly, they treat their customers with ultimate respect and fairness. They provide full transparency on all of their investments, financial products, and services so customers know the full costs of opening personal and business bank accounts with them.
Customers are informed of fees and interest rates up front, and these are all priced fairly so that banking benefits the customers instead of sending them down a debt-ridden path.
Features of ethical credit cards
Owning an ethical credit card helps you make sure that your money is not being taken advantage of by the bank. You’re more likely to keep track of your credit card balance, pay back your debt on time, and donate to a charitable cause with an ethical credit card than a traditional one.
If you’re looking to get an ethical card or switch to one, here are some key features you should look out for.
They give to charity
Some ethical credit cards donate a percentage of each transaction, usually around 0.05%, to charity.
These credit cards, also known as affinity cards, are jointly issued by a bank and a partnering charitable organization. They’re designed for customers who want to make a charitable donation each time they spend money. Popular causes that receive donations from credit card purchases include wildlife conservation and breast cancer research.
Some banks may also donate an additional $3 to the charity whenever someone signs up to an affinity card or renews one. Others may provide cash backs with retail store purchases that can be given to charity.
They charge fair interest rates
They’ll offer a regular, fair APR of about 10% and keep you informed about any changes to your interest rate terms. They won’t increase your APR just because you made a late payment or missed a credit card fee. Instead, they’ll provide advance notice of any changes and sit down with you as necessary to explain the interest rate conditions when you open your credit card account.
They provide transparency on loan policies
Banks offering ethical credit cards will also provide full disclosure on the card’s payment terms, credit allowance, fees, and penalties to anyone who is applying for a credit card.
They will help you understand the factors that went into the APR calculation for your credit card account, using your credit history. They’ll also let you know how long it would take for you to pay off your credit card balance if you only paid the minimum each month.
Thanks to the Credit Card Accountability, Responsibility, and Disclosure Act that was passed by Congress in 2009, all banks issuing credit cards have to provide disclosure on their fees and refrain from manipulating customers about credit card offers.
What’s the most ethical credit card?
For a truly ethical credit card, Beneficial State Bank and TCM’s affinity credit cards are your best option.
They’ve partnered with prominent environmental organizations, including Clean Water Action, Amazon Watch, and the International Living Future Institute, to offer ethical credit cards with good APRs and giving back options.
These organizations receive donations from each transaction you make with your credit card. The funds are used to operate their environmental sustainability projects. Amazon Watch, for example, works closely with indigenous communities in Brazil, Colombia, Ecuador, and Peru to protect the Amazon rainforest’s ecosystems from exploitation and illegal logging.
Beneficial State Bank’s ethical credit cards offer an introductory 0% APR for the first 6 months. After that, the regular APR is set at about 10%, depending on your credit history. There’s no annual fee but they do charge 3% on transfers. More information can be found via Beneficial State Bank’s website.
Aspiration is an ethical neobank that puts the planet at the heart of our banking practices. Through our Plant Your Change initiative, you can link your credit card with our reforestation program to join us on our mission to plant 100 million trees. Each time you make a transaction, our system rounds up the transaction amount to the nearest whole dollar and plants a tree using the spare change.
It’s our mission to turn every transaction into positive action. Join us today to help us build a sustainable planet.