Eye-catching credit card mailers that fill every household’s mailbox have become as American as baseball and apple pie. In 2016, credit card companies mailed out 4.6 billion pieces of credit card advertisement that came with colorful envelopes and intriguing features. The wide variety of offers provides consumers with more personalized choices. However, the myriad of choices also makes it more difficult for consumers to compare offers and find the right card for themselves. And since many offer letters are designed to draw people’s attention to the enticing features of a card while shrouding high fees and other payment terms, people who do not pay enough attention to the fine print may later find themselves stuck with unexpected fees they never noticed.

Professors Antoinette Schoar from MIT Sloan School of Management and Hong Ru from National University of Singapore conducted a study that analyzed 1.3 million credit card offers mailed to a representative sample of U.S. households between 1999 and 2016, collected by Comperemedia. The data cover comprehensive details of the card offers, including Annual Percentage Rate (APR), late fees, reward programs, and others. They also analyzed the design of the offer and used big data tools to characterize the degree to which enticing information is either highlighted in big font or placed on the front page of the offer, while less appealing features—such as late fees—are displayed more obscurely.

The study further found that credit card companies more heavily target less-educated consumers with hidden and back-loaded fees. Overall payment terms, such as late fees or over-limit fees, are more often buried in the fine print. In contrast, attractive features, such as low teaser rates and cash rewards, are highlighted on the front page. For example, only 6% of the offers mention late fees anywhere on the front page, but if there is a cashback reward program or a low-interest teaser rate, almost all offers will mention it on the first page. Besides, this strategy of offering back-loaded fees and shrouded termsis used more heavily when targeting less-educated consumers (even after holding constant the level of income, credit scores, and other consumer characteristics). Compared to those with graduate degrees, consumers who did not finish high school are 12% more likely to receive offers with low teaser rates and 8.5% more likely to find their penalty rate hidden on the back page.

Even the type of language that is used in the offer letters varies between more educated and less educated consumers. Surprisingly, less-educated consumers receive offers that use much easier language and fewer complex terms on the first page. However, the back pages of the offer, which contain detailed contract terms, are more challenging to read because they have more obscure words and longer sentences. In other words, less educated people are targeted with mail offers that have the most substantial readability gap between the front and back pages. This makes it more challenging to understand the crucial features of the card.

These observations run counter to the notion that banks are catering to customers’ personalized needs. If severely credit constrained consumers were actively looking for back-loaded cards—i.e., those with low teaser rates and high back-loaded fees—we would expect all the terms of the offer to be clearly displayed. This way, a consumer could easily compare the terms of the offer they are looking for, and there should be no need to hide or shroud the back-loaded payment terms. Yet in reality, these terms are usually hidden on the back page, in small font and difficult language. This suggests that rather than catering to borrowers’ preferences, these terms are used to target people’s behavioral biases and inattention.

The researchers also found that when the federal funds rate (FFR)—the banks’ cost of funding—rose, the late and over-limit fees in unsophisticated customers’ offers also rose, suggesting that banks were using these features to pass funding costs to these customers. In offers to sophisticated customers, FFR increases were associated with increases in regular APRs and annual fees, and with decreases in late fees and over-limit fees.

Not surprisingly, banks appear to monitor the likelihood that unsophisticated customers will default on their debts and incorporate these probabilities into the way they target different consumers with card offers. The researchers found that when a state’s unemployment insurance benefits increased, thereby providing borrowers with smoother cash flow in the event of job loss, banks issued potential borrowers within that state offers with more reward programs, late fees, and default penalties. Further, banks increased the number of colors in offer letters and moved the back-loaded features to the end of the letter. Taken together, these results suggest that credit card companies realize that there is an inherent trade-off in the use of back-loaded features in credit card offers: They might induce customers to take on more (expensive) credit, but at the same time they expose the lender to higher risk if those consumers do not anticipate the actual cost of credit. In other words, card companies seek to maximize the amount of fees they can extract from less-sophisticated borrowers without increasing their likelihood of default.

The Card Act of 2009 has curbed some of the most egregious features of credit cards, such as the use of high over-limit fees and excessive late fees. However, there are still many ways credit card issuers can shroud the costly features of a card. This might prove especially problematic during the current crisis, with the COVID-19 pandemic causing unemployment rates to surge at the fastest pace in decades. Many consumers might find themselves stuck with cards whose features and implied cost of credit they did not fully understand at the time that they took them out. And once the teaser rate period expires, households might struggle to pay these costs.