Credit Cards and the Consumer: Don't Throw Baby Out With the Water

Includes: AXP, BAC, C, DFS, IBKC, MA, V
by: Brian A. Davis

It wasn't so long ago that banks in general, and credit card companies in particular were rolling out consumer credit cards like there was no tomorrow. There were introductory offers that ranged from 6, 12, and even 18 months at zero percent interest rate (that's 0%) for highly preferred customers. The words "annual fee" were extinct... or so we thought.

So a lot has changed over the past three years. Impending credit card laws will take effect soon, and customers as well as banks have all taken a bit. To be more specific, banks are looking for new revenue streams to build up cash reserves. Credit cards became a natural avenue of the cash-strapped banks. According to one article (here):

Retail federation estimates, Visa and MasterCard collected $42 billion last year in "interchange fees," which make up the largest portion of the fees. That's up from $36 billion in 2006, and it has more than doubled since 2001, when Visa and MasterCard collected $16.6 billion.

The educated consumer understands that the year 2010 offers a completely different financial landscape than the days of easy money in early 2000. For instance, underwriting standards have tightened. Not only does the consumer need a pulse, but he must also have a favorable credit rating and a job. In American, as well as the rest of North America jobs have been at a critical shortage.

So we are asked a simple question. Are banks "smart" or "stupid" by throwing the good credit risks in with the bad? A glimpse at some complaints on consumer only substantiates this claim. As a savvy investor, I am looking for the banks and companies who do not cannibalize the preferred customer (see here). There are several banks who appear to be seeking the best of the best, and rewarding that customer with excellent credit terms.

Here is what I have been able to find:


Now more than ever banks must be more cognizant than ever to take extreme caution when dealing with the preferred consumer. A conservative approach which is liberal with credit terms, and fair with annual fees seems to be the most logical approach. While banks control consumer credit, it is the savvy consumer who will exercise extreme prudence and survive the difficult economic times with or without their favorite credit cards. Smart money is on the financial institutions that do not throw the baby out with the bathwater.

Additional source cited:

Disclosure: No positions