The Backwards Credit Card Model

Every time I travel by Delta I get some air miles, which is a reward for being loyal and profitable to them. If I buy stuff worth $50 from Kohl’s, they give me $10 in Kohl’s cash. Panda Express has given me some kind of a discount card, which I use to get 10% off on every meal. Discount Tires will rotate my car tires free for life because I bought them there.

So basically, the airline, retail, food, auto and, I think, most other industries, give me a discount if I am loyal and profitable to them. The more money I make for them, the cheaper they make their services for me.

If you look at the credit card industry - it is the exact opposite of this.

The strongest criticism of the credit card regulation changes that were recently passed was that the credit card companies will have to cut back on their rewards program or charge an annual fee. This would hurt people who paid off their monthly balances and had good credit habits.

What is interesting is that no one defended the rule changes saying that they were fair, and that says a lot.

What they said was that if you don’t let us screw the people with bad credit habits, we won’t reward the people with the good ones.

The credit card model is such that it makes money off of people who spend a lot, don’t pay off their balances, take cash advances, forget making a payment, etc.

If you pay off balances in time, not run up too much credit and generally be good, your APR will go down. So, that means that if you don’t make much money for the credit card company, then they will reward you and allow you to make even less money for them.

On the other hand, if you run up a high balance that you don’t pay in full, take cash advances, hover close to your credit limit and other such things - your APR goes up.

So, if you make money for the credit card company, they will punish you by slapping you with higher interest and fee charges.

This is just the inherent nature of the credit card business and has generally worked well over the years. But, we must recognize that this is how it works and that you can’t use these arguments to say that you shouldn’t get rid of unfair rules that push troubled people deeper in the hole.

If you tell me that I won’t get 1% cash back because you can’t charge a penalty rate on someone else who defaulted on some other credit line, I won’t mind at all. In fact, I may just thank you for being nice all these years and say that it’s time to be nice to someone else.

Comments

[rick12345:]

You are missing the point i am afraid. The underlying reason for introducing new legislation was to stop unscrupulous banks from using marketing techniques to attract potentially vulnerable customers, in effect getting themselves into even more debt that they cannot possibly pay off. For your information credit card debt is almost 1 trillion dollars nationally and repayment defaults are expected to skyrocket over the coming year. At present large banks such as citi and wells are reporting defaults of 10%.

May 27 10:26 AM

[SAUBW:]

I use credit cards extensively for convenience but pay off the balances in full every month and have a credit score over 800 - even after being punished by credit card issuers with recent huge rate increases, cutting of unused credit lines and advance fee jack-ups (none of which I pay anyway, since I never use them). I could give a hoot about rewards too, I just don't want to be robbed blind. However, I view these recent "changes to card agreements" as a financial attack on me by the issuers, not as a lessening of benefits. They still make money off the interchange too, although not the absurd amounts they stick lots of higher-risk people through interest and "fees." So, I will just stop using their cards entirely and see if they are happier w/o the interchanges fees (2-7%) that the merchants pay. Don't want to be an unwanted customer that pays their bills you know...

May 27 11:29 AM

[Bylo-:]

I only have one credit card but nearly everything I buy goes on it; gasoline, food, electricity, phones, etc. Then they debit my checking account so I don't even have to write a check! I pay off the balance each month and never incur any fees of any kind. Like user 409605, I could care less about interest rates.

I guess that's why the CC industry calls people like us "dead beats"!

May 27 03:57 PM

[THofler:]

Traditionally, credit card companies made little or no money on people who are very responsible borrowers, and made a lot of money on those who are a little irresponsible, and lose a lot of money on those who are very irresponsible.

The author fails to grasp the fact that before a person becomes a very irresponsible defaulter, they were first a little bit irresponsible and a payer of high rates. This is a perfectly sensible business model.

The REAL problem with consumer or motgage credit in the U.S. is that lenders have no recourse. I say garnish the wages up to half the default value.

May 28 12:31 AM

[Tom Jacobs:]

I think the author makes a good point. One can look at other questionable business models as well such as cell phones or cable - reward new customers but charge the highest rates to existing customers and charge fees for switching carriers, etc.

May 28 09:06 PM