Exploding The Myth Of The Bad Credit Card Customer
Too often, when we post about undeserved credit card rate hikes, a few readers will justify the credit card company's actions by pointing out that the OP is, in pure business terms, a bad customer. If you're a consumer, this is the worst way to visualize your business relationship with your credit card company. Here's why.
The main problem with this way of thinking, other than that it's incorrect, is that it frames the relationship in terms that favor the company over you. By giving the credit card company all the power, it minimizes your value, and could actually make it harder for you to stand up for yourself when negotiating with the company.
To begin with, let's address this myth:
"When you pay your balance in full every month, you lose the credit card company money."
This is false. The credit card company doesn't get to charge you interest, sure, but it still earns merchant transaction fees every time you use your card somewhere. It's in the company's interest that you use the card frequently, whether you carry a balance or not.
"The company has to raise rates to try to make money off of you."
This is only partly true. If you carry a balance, then any rate hike is going to generate extra money—but the company knows that it runs the risk of you closing the account and freezing the balance, limiting potential future revenue.
If you're one of those no-balance people, there's probably another, long-term reason for the rate hike. After all, if you don't carry a balance, no interest rate is going to generate extra money. The company might be trying to increase its potential payout if you start carrying a balance one day, but remember that they have a detailed view of your payment history; if it's obvious you never carry a balance, then a 5% or 50% interest rate is going to earn them the same amount: zilch.
So why would a company hike the rate on no-balance customers? Maybe it's simply in their interest to carry more high-rate accounts than low-rate ones, and this is the perfect economic environment to slide a chunk of accounts over to the high-rate range under the excuse of "market conditions." Maybe it's really not as personal as you might think, but simply a consequence of decreased competition for your business—the company knows it isn't going to have to fight as hard to keep customers, so why not make the terms more favorable for them while they've got the chance? If you ever do start carrying a balance, they'll be glad they did.
If a company really wants to guarantee extra profits from all customers, including the prompt-paying ones, the only way to do it is to charge a fee of some sort. They can invent an annual fee, for example, or create new fees for transfers or special uses of the card (like obtaining cash advances or paying your taxes). Or they can play really dirty, and drastically reduce your credit limit to increase the odds that you'll generate over-the-limit fees.
"You're not a good customer if you're not generating the maximum revenue possible for your customer profile."
Yeah, right. Look, you're certainly not an ideal customer, but if you were actively losing the company money, it would simply stop doing business with you.
Credit card companies are adjusting agreements to be more in their favor because, quite simply, they can right now. If there's not a lot of demand for your business—as in our current economy, for instance—any smart credit card company is going to downgrade its terms accordingly. After all, they aren't going to have to compete as strongly to attract new customers or keep existing ones. The idea that "no one is lending or accepting new credit card applications" is so popular right now that it works in companies' favor, by making customers think they're powerless to negotiate for more favorable terms.
So remember: although it may be harder to negotiate these days, and although credit card companies may be less willing to budge on terms, you shouldn't think of yourself as a "bad customer" who deserves what you get. It's self-defeating, and it's how the credit card companies would prefer you think.
(Photo: Valerie Everett)
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Comments:
@B: Think about this though: when you use your card, the cost of those merchant transaction fees go somewhere. The merchant isn't just going to eat that cost; they're going to pass it on to the customer. Why do you think gas stations are now offering slightly cheaper gas for those doing cash transactions vs credit (at least in my area that's the new fad)? Ultimately, it's the consumer paying his or her own credit card rewards, after the credit card company takes its share.
i am glad to see that there is an article basically telling all the negative people on this site that they need to stop thinking the way the companies want you to. this is the main reason these companies put so much money into advertising... so that they can make you feel bad for not making them money.
funny how many people's comments on here fall into the above mentioned categories.
I thought merchant transaction fees were paid to the credit card network (e.g. Visa, Mastercard, etc.) and maybe the bank that runs the merchant account, not the bank that issues the credit card. But I've been known to be wrong on many, many occasions.
Unless the bank that issued your card is also the bank that's processing credit card transactions for the merchant, your bank doesn't get anything from the fees. It's Visa/MC/AmEx/Discover that get the merchant fees as well as the bank that handles the merchant's processing account. That's the breakdown I got from a payment processor years ago when I thought about accepting credit cards for my business.
The Payor's bank only makes money off of interest (except with AmEx whom also makes money off of membership fees and merchant fees).
Now I don't know if Visa or Mastercard share any revenue with banks that issue cards with their logos, that information I was not privy to.
"When you pay your balance in full every month, you lose the credit card company money."
This is true, but misleading. The statement I usually hear around here (and have said myself) is "When you pay your balance in full each month, you lose the bank money."
Visa may make money on the verification of the transactions, but it is your bank that is loaning the money. Visa does not provide the credit card, the bank does. And when your card is canceled or your rate hiked, Visa was not a part of that decision (save for fraud).
Another reason not mentioned is that due to the economic downturn, the chance of a person losing their job is much higher. Losing a job means that you'll be tempted to use a credit card to get you over the hump and won't pay off the full balance. So, they jack up rates in anticipation that it happens.
Essentially, the banks are those gas stations that charged $6/gallon after Katrina because they could get away with it and they knew you needed them.
Actually my mother in law just got approved for a pretty high limit card with AmEx. So it is true that you can still get credit. But I guess it does go in the companies interest to think you can't and that your are stuck with the new high rates.
Another side of this has almost nothing to do with the customers themselves; it's just padding margins and metrics. Now an exec meeting with investors can say "Well, we just raised rates by an average of 2.5% across 32,000 customers, and the average balance among our customers is $12,500." Suddenly those numbers can sound much more significant than they actually are, because they include many customers who carry little or no balance, yet they can point to the average balance of all customers, regardless of whether or not they were affected by that change.
This sort of thing seems to be more and more common these days, with everyone scrambling to cover their rears as they are audited, trying to prevent yet another failing bank by essentially manufacturing favorable-sounding numbers for whatever today's purpose happens to be.
Thank you for this post.
I don't understand the people who post such ridiculous comments, seemingly forgetting that YOU are the customer, they are NOT doing you a favor by letting you have one of their precious cards.
@cabjf: Easy, if there's a cash discount, take it by using cash. If not, take your points discount using a card. You can have it both ways!
@B: Yeah... unfortunately, anything you do with a credit card company isn't really "Sticking it to them"... even the rewards programs. They still make their billions.
If you cancel, then you're not really hurting them, per se; you're just not even in the game any more. I suppose the only way you could ever "Stick it" to them is through political activism or consumer activism.
@B: Once, though, I thought about a unique way to make some interesting, custom guitar picks: Get one of those credit cards that allow you to put your own image on them; then order the card, put your funky, custom image; then cut to guitar-pick-sized bites. :) Or, heck, just frame it after cancelling the account. It would be a very interesting wall piece... depending on the art, I suppose. Pretty sure they screen the images, though.
I'd say that given the current situation, if you pay your bills on-time, you are the ideal customer.
This explains why USAA raised my rate, I'm hoping in a few months when I clear out my balance transfer I can renegotiate my rate with them. The 0% is great, and the fact that purchased would have been 7.9% was awesome when my Compass credit card was at 13.5% However, now USAA is 9.9% and Compass is 10% so it's almost like why bother using my USAA card much now?
"After all, they aren't going to have to compete as strongly to attract new customers or keep existing ones."
But they do. All companies do. Or else you eventually run out of customers. The banks appear to be operating as if they are a trailing-edge technology company. As demand drops, the price goes up, and eventually there is no longer a market for the product.
And perhaps, as the good consumerists we should be, the market shouldn't exist as it currently stands. You know, Credit Unions could really take advantage of this and clean up.
Another theory is they are using the 80/20 principle to weed out some customers. The theory states that 80% of revenues should be generated by 20% of the customers. Therefore the other 80% of customers are not contributing much to the bottom line and losing the expense of servicing those (should they cancel due to high interest rates) helps the company become leaner and only need enough overhead to service those that actually generate revenue.
But it's more likely I don't know what I'm talking about and in reality the companies just think it's fun to pull stunts to get us all lathered up.
I understand people (like me) who pay off their credit cards each month are called "Debtbeats" by the card companies.
I am still looking for the sentence in the U.S. Constitution that say you have "a right to a credit card". For that matter a right to a house, car, food, clothes, college education, health care and on and on. You have a right to nothing more than life, liberty and the pursuit of happiness which is supposed to be defended by the Federal government. You have a right to little else.
Two words: Debit Card (or cash)
Screw credit cards and their usurious companies. I cut up 7 credit card threes years ago (business and personal) and I haven't had a personal or business issue that a debit card, check or cash couldn't handle since. (no interest payment, no late fees, no interest rate jacking, etc.). Screw Visa, MasterCard, AMEX and the rest of them!
I noticed this too.
I ODed my checking account once, my mistake and I paid the price....and now im getting a firestorm of credit cards from my bank.....recession...what recession...
@Trey Mahaffey: I have to say I've never seen a commercial that said people are bad customers for paying a credit card balance in full, though.
@Trey Mahaffey: So if the comment isn't in line with your opinion, its a negative comment?
How about a differing comment?
Wow, everybody thinks they know how interchange fees work, but it seems like a lot of misinformation being posted. Here's a Credit Union National Association PDF about interchange fees that covers some of this.
At a very basic level - the merchant bank (e.g. the bank that Sally's Salon has an account with) pays a fee to the card-issuing bank (e.g. Capital One, Citibank, Chase ...) So yes, "your" credit card company makes money for every transaction you make with your card. However, does not get the full amount of the fee. Some of it goes to the network (e.g. Visa or Mastercard).
There's also some good information at creditcards.com, including this nifty animation.
@kwsventures: Um, OK. I'm not understanding what that is supposed to be relevant to.
And so what? Nevertheless credit card companies still seem to be selling cards, and their customers are buying.
@cabjf: I've yet to find a gas station that advertises this...at all. Maybe they don't. But it's 40 degrees with a 20mph wind outside, so I'm probably going to avoid having to walk into the station. I wish there was a way to insert money like you slide your credit card.
@cabjf: It's an old fad become new. When credit cards first became popular, you would see the two different prices. Stations did away with them in order to attract customers. What we are seeing now is just a push back by stations to make a little more money to increase net earnings/stay afloat
@Allen Harkleroad: @themicah: I also trust you don't like the extra cash points. By using credit and paying off the bill every month, I actually also get about $200 a year from the credit card company.
Yes, Consumerist, I, for one, am well aware that the credit card companies are making money off me or they would just close my accounts. And yes, it had occurred to me that maybe Citi raised my rate because they figure times are bad and even previously responsible types might be headed for revolving-balance world. But I also know that the industry term for a customer like me is "deadbeat." And I really like to be sarcastic. ;)
If you're going to be pedantic, we DON'T have the right to life, liberty, and the pursuit of happiness - that phrase appears nowhere in the Constitution.
Well, your call, but it seems pretty silly to me to (a) forego extra interest, (b) not get the 2% cash back on every $ I spend, and (c) be put in a position when you have a dispute with a vendor or your credit card company where THEY have your money, and you need to get it back.
I would cancel the Capital One card if they're hiking it up to 22.9 percent (which they are) but I don't carry much of a balance on it, so I'm just going to pay even more off it off between now and April when it jacks up. It pisses me off, but I don't want to get another credit card right now because I'm afraid they too will find another way to screw me over before the new rules take effect in summer 2010 -is that when it happens, or is it even later? I'm tempted to just wait out applying for any more credit till then, even though I'm a few years out of college and could stand to build up some more of it.
And also, thanks for cutting through the crap with this article. It is much appreciated.
@B: honestly i kinda thought that too. Though if you think about it, you're not making them as much money as they could be, and they do everything in their power to prevent you from doing that, so i'm sure they'd much rather you didn't do it. Their business model relies on enough people carrying balances, getting overages, so you are still being less profitable to them by not handing them over as much free money. Not really sticking it to them, maybe kind of politely presenting it to the man.
@lpranal: Okay, I like that better anyway. floraposte, politely presenting it to the man since year mumble.
@MrEvil: That's not correct. If a bank issues the consumer a card, the bank receives a portion of the merchant fees for every transaction the consumer makes.
That's the information I have from a friend who works in a large bank for a corporate purchasing card department. The department makes huge amounts of money for the bank because of the transaction fees they receive from the transactions.
@JGKojak: I would argue that you are the one that needs money, and I'm the bank providing it to you. I am, in fact, doing you a favor by loaning you money that you do not have. I may send you offers, but you're the one that decides if you need money or not. In essence, you're choosing to do business with me, otherwise you'd pay off the card with another company's money and use theirs.
With credit, there really are only two types of customers - those that have credit scores and history good enough to choose who they do business with, and those that do not have much choice who they can borrow money from due to poor credit history or past failures. Your post makes a lot of sense for type A, not so much for type B.
Hmm, what does y'all's credit look like? Mine is good but not outstanding. I have a Capital One card with 8.9% APR and a BofA one that's 9.9%.
It's not the banks through the credit card that treat us like dirt, it's the government through the banks. Everything the fed is doing now is intended to help out idiots that overextended themselves on credit borrowing. On the other hand, those that have wisely saved for a rainy day are getting the shaft through ridiculously low interest on savings account. With rates such as 0.25 % we might as well keep our money in the mattress. I guess the only silver lining is that next year we will join Geithner in paying less taxes. If we earn no interest we will pay no taxes.
It is hard to @Allen Harkleroad:
It is hard to run a business without some sort of line of credit. I totally agree with you though. I don't have any personal credit cards.
I am fortunate to have not experienced any credit problems. I don't use credit in my personal life just for business purposes, and that is still tooling along just fine, but for how long?
@ARP: and in anticipation that they can garnish or levy you; or sell you to 3rd party collectors - why not? it's not like people can file ch7 or even ch13 or even qualify for MMI/CCCS w/o huge hassles since the "reform".
(disclaimer: if you can pay, do)
If it's not in the terms of service that I must carry a balance, then I am not a bad customer for paying it off every month. I am using the card in exact accordance with the terms I agreed to when I signed up. No more, no less.
So much for my feeling of "sticking it to the man" by charging most purchase to a credit card then paying it off every month. Well, I still like generating the points, though.