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Discussion in 'Credit Talk' started by paul, Aug 29, 2000.
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RE: low balance,no balance,no
You have discovered the dichotomy of the credit card industry. If there was a bank who could determine exactly who would be sloppy enough to always pay late and be right at the edge of their limit all of the time, they would make alot of money. Unfortunately, these same people are also the same group that one small disaster, such as an illness or a broken arm or a layoff will push over the edge into not paying anything at all. The bank can pile on the charges, if they wish, but if the person isn't going to pay, they are staring a big loss in the face.
Credit card banks refer to people who pay their bills in full each month as 'deadbeats'. It's ironic as most people consider don't pay their bills at all as the deadbeats. In the banks' case these responsible people are deadbeats because they are not contributing enough to the banks' profits.
Even if a person pays their bill in full each month, the banks still make money anyhow as they charge the merchant who accepts the card a fee (factor) for doing so. This can be anywhere from 1% up to 7% depending on the type of merchant and the volume of business they do with the brand of card accepted.
In addition, all of the banks are federally regulated so if all of the sudden a bank targets these marginal customers and their default rate goes up dramatically, they are going to be scrutinized more carefully.
Most of the large banks are publically traded corporations. If there's "bad news" about their credit card portfolios, such as a high default rate or class action lawsuits, their stock price will take a big hit. This will make the executives with stock bonus plans and stock options most unhappy. This is what's happened to Bank One, the bank that offers FirstUSA credit cards.
There is also alot of competition among banks for market share, both in terms of the number of accounts issued and in the total value of their credit card portfolios.
The key to success for a bank is to have the right mix of customers and achieve balance. They will make money off of the scatterbrains who pay late and people who don't pay attention to their limits or are living on the edge. The need the steady, solid 'deadbeats' as a foundation.
The banks will wind up losing a ton of money if they issue cards to people who ultimately won't pay. The key question is "Who will pay and who won't?" That's why there is credit scoring, but that's another unsolved mystery.
RE: low balance,no balance,no
The banks have a built in insurance policy for those customers who end up never paying their credit card bill,it's called APR. That is why some cards have such high apr's for certain cards,the people who pay these high apr's are paying for all those people who stiffed the bank plus all loses the bank incurs are write off's for tax purposes.