Credit card "deadbeats"

[smith234]

http://blog.readyforzero.com/youre-dead ... t0GOPkrJdg

I just read on a few websites that if you pay your credit card bill every month without carrying a balance, you're called a "deadbeat" in the credit card industry because the card companies make very little money off of you.

Credit card companies make the most off people who carry a balance and pay interest. For other people like me who never carry a balance, get rewards like a few % back on gas and groceries, and even occasionally open credit card accounts to get big sign on bonuses, I think the cc companies must lose money on us.

So, that begs the question, why do credit card companies continue to give cards to people they know will cost them money? Why not stop giving people who they know are most likely to never carry a balance? Surely they can see who keeps doing this over time. Is it simply because of a perception problem? That is, they don't want to be seen as targeting people who are financially insecure?

[mortal]

My understanding is they make a lot of their revenue with 'merchant fees' that they charge the business.

[Dru]

I'm sure there's a proportion of cc users who stop paying, go bankrupt, etc. maybe someone who pays in full each month hedges the cc companies' bets against he folks they never fully collect from. And maybe we spend more than we would if it were all done in cash, so the volume helps make up for the lousy return.

Would be interesting to know what % of Cc bills are paid in full monthly.

[sport]

If they did not make money on those accounts, they would not offer them.

[black jack]

I'm sure there's a proportion of cc users who stop paying, go bankrupt, etc. maybe someone who pays in full each month hedges the cc companies' bets against he folks they never fully collect from. And maybe we spend more than we would if it were all done in cash, so the volume helps make up for the lousy return.

Would be interesting to know what % of Cc bills are paid in full monthly.

About 29%, based on the one minute I spent finding and reading this: http://www.creditcards.com/credit-card- ... s-1701.php

[Leesbro63]

I'm sure there's a proportion of cc users who stop paying, go bankrupt, etc. maybe someone who pays in full each month hedges the cc companies' bets against he folks they never fully collect from. And maybe we spend more than we would if it were all done in cash, so the volume helps make up for the lousy return.

Would be interesting to know what % of Cc bills are paid in full monthly.

Can you explain how a group who pays in full each month hedges against a group who become uncollectable? Seems to me that the group that hedges against the uncollectables would be the group with a big balance but staying current with at least minimum payments..paying huge interest fees.

My guess is that it's a numbers game. Putting out cards to those likely to always pay in full generates merchant fees and some percentage fall into the trap of paying less than in full. Also like assets under management, banks have an incentive to make their "book" of customers and available credit to be as large as possible

[nisiprius]

...why do credit card companies continue to give cards to people they know will cost them money? Why not stop giving people who they know are most likely to never carry a balance? Surely they can see who keeps doing this over time. Is it simply because of a perception problem? That is, they don't want to be seen as targeting people who are financially insecure?...

Possibly because they can see that short-term optimization and focussing brutally on a narrow view are not optimum in the long term.

1) Merchants pay 2% to 3% on every purchase. Got that? Two to three percent of all of retail commerce, including most internet commerce, flows straight to the banks. It's like a privatized sales "tax." This is almost invisible to consumers because the contract with the credit card companies prohibits them from charging credit card customers more than other customers.

2) Ubiquity is socially and culturally valuable to the credit card industry. As things stand, credit cards are almost universal among "the banked," the middle class, etc. This is because there are many reasons to use one and few reasons not to. other than to obtain loans. Generally, it is very useful to be able to pay without cash: over the Internet, when traveling. Even locally, the short-term loan represented by the few weeks until the end of the month is useful in freeing you from the tyranny of knowing your exact balanced, and having to delay or forego timely purchased you can actually afford.

If they kicked out 29% of their customers, that would mean there were so many people without credit cards that they would become a meaningful financial force and credit cards would lose their ubiquitous position. Internet merchants would have to find a new way to get paid (or perhaps have done so in bitcoin, although I'm extremely skeptical of everything about bitcoin). I'm not imaginative enough to figure out how it would all work, but a world in which 29% of the people most able to pay one time couldn't get credit cards would be different from the world we live in.

3) Although it was very fashionable for a while, the concept of trying to drive customers away--trying to drive your least profitable customers away, of course--is basically the opposite of what businesses should be doing. Intentionally driving customers away seems to fundamentally wrongheaded that I cannot believe it is really a wise long-term strategy.

4) The people that do things like intentionally ticking off customers to make them go away--or kicking out customers that are earning merchant fees for you--don't take into account how angry this makes people and what long memories they have. I'll bet that everyone here who's over thirty can name at least one big company they will never do business with because of having been treated badly by them once.

[nisiprius]

I couldn't quickly find the grand total for all U.S. retail commerce, but I did find this, which is just for convenience stores alone--which might be a place you'd expect to see more cash and less credit card use than elsewhere: Credit and Debit Card Fees

Total credit and debit card fees surpassed overall c-store industry profits for the sixth consecutive year... Credit card fees are the second-largest expense at the store level. Only labor costs are more.

[Toons]

Great!
I am a
Debt-Free
Deadbeat

[prudent]

They may not make a lot of money on deadbeats, but I do not believe they are losing money on them.

Another part of the strategy is that even if a bank's customer is not paying any interest on a credit card, they are still using the card... which means they aren't using a competitor's card. Maybe they will be able to upsell that customer to a more profitable product, service or account. And as long as the card is being used, there is a chance that one day that customer will not pay in full. They know from their research that people tend to spend more when using credit. Some of those people let it get away from them.

Also there are plenty of people who never intended to carry a balance but succumbed to the siren song of "buy that now, you deserve it", or had a costly emergency to deal with, or need to cover expenses during a layoff. As long as they have that customer, there's a chance for making more profit.

[INDUBITABLY]

Don't forget that they know who you are and have all of your transaction data, which they can mine for useful trends, repackage and sell to third parties. That has to be worth something.

[MilleniumBuc]

They also hope that the 'deadbeats' have something happen where they cannot come up with the full balance payment.

[Rob5TCP]

.. This is almost invisible to consumers because the contract with the credit card companies prohibits them from charging credit card customers more than other customers.

That is changing. Almost all gas stations have a cash or credit card rate (at least in NYC). The rebate I get on the gas almost makes it a wash. I still use the c.c. because I need the a record of my business expenses.

Online, I've seen merchants with a different cash or c.c. rate (APMEX comes to mind). This may become more ubiquitous.

[blueblock]

They wouldn't offer the service if it didn't make them money, in this case through processing fees charged to the merchant.

But also, I wonder how commonly they really think of us as deadbeats. The last time I needed to replace my credit card, the operator said, "You've been a valued customer for many years. As a courtesy, we'll overnight the new card to minimize your inconvenience. Thank you for your business." If they really thought of me as a deadbeat, I doubt they'd say things like this.

[vtjon]

As mentioned earlier, the interchange fees of 2%-3+% are significant though there are a lot of people taking a cut along the way. In fact, when you a use a rewards card, the merchant is charged a higher rate than if you use a regular credit card.

[Texanbybirth]

Great!
I am a
Debt-Free
Deadbeat

[dodecahedron]

In fact, when you a use a rewards card, the merchant is charged a higher rate than if you use a regular credit card.

Do you have a source for this statement?

[traveler90]

Also many cards now have the annual fee. Most people with these cards are probably people who pay off their cards, so the CC company is getting some revenue back from the fees.

[ResearchMed]

In fact, when you a use a rewards card, the merchant is charged a higher rate than if you use a regular credit card.

Do you have a source for this statement?

Yes, although it isn't my "statement".

In our former vacation rental business, the "type of card" is shown, as is the percentage we are charged.
Further, the "terms" of the agreement with the charge processor states this specifically (different charges for rewards, or debit vs. charge, etc.), as well as a number of other "extra surcharges". (Most of the "extra surcharges" were tiny fractions of a percent, or even a flat "X cents per transaction", but I'm sure it adds up like crazy over the millions of transactions processed.)

IIRC, the restriction against giving "lower cost for cash" was dropped a year or two ago.
It didn't affect us, as we always insisted on charge for both our protection and the guests'.
Many smaller businesses ignore that rule anyway.

RM

[bradshaw1965]

I'm sure there's a proportion of cc users who stop paying, go bankrupt, etc. maybe someone who pays in full each month hedges the cc companies' bets against he folks they never fully collect from. And maybe we spend more than we would if it were all done in cash, so the volume helps make up for the lousy return.

Would be interesting to know what % of Cc bills are paid in full monthly.

About 29%, based on the one minute I spent finding and reading this: http://www.creditcards.com/credit-card- ... s-1701.php

I think it might be closer to 59%, not clear how many of the dormants aren't using the card but are paying off a balance.

[RustyShackleford]

So, that begs the question, why do credit card companies continue to give cards to people they know will cost them money? Why not stop giving people who they know are most likely to never carry a balance?

It's worse than deadbeats never paying finance charges, late fees, etc. People like me love to get airline affinity credit cards that offer huge bonuses of frequent-flyer miles for spending some modest amount: typically $3000 in the first 3 months. It's gotten to where I half-seriously say that you're a sucker if you actually pay for airline tickets (if you fly only 2-3 times a year, like me).

People at flyertalk-dot-com make a science of this. The best is probably Southwest, where you can get two different cards offering 50K points each (at one point it was actually 4, if you could qualify for the 2 business cards); and if you do 'em in the same year, you soon end up with 110K point within a year, so your companion flies with for free for the remainder of the year and the following year. It's just insane. But I digress ...

[takeshi]

So, that begs the question, why do credit card companies continue to give cards to people they know will cost them money? Why not stop giving people who they know are most likely to never carry a balance? Surely they can see who keeps doing this over time. Is it simply because of a perception problem? That is, they don't want to be seen as targeting people who are financially insecure?

They may make less but they still make money on swipes and other applicable fees. However, I have no idea if it is less money is made in such cases. A heavy transactor could be earning a creditor quite a bit in swipe fees even if they are a small percentage of each transaction. This is only anecdotal but I have a lot more credit card spend now that I'm paying every statement balance in full then back when I was carrying balances many years ago.

They have to balance the "deadbeats" that tend to be more reliable with less reliable consumers that may earn more in interest. Interest owed doesn't really mean much if the person isn't actually paying what is owed. Some creditors may swing more one way than the other. Some have greater risk tolerance. Some want to run a tighter ship.

Regardless of the "type of credit card user" mentioned in the link the odds are always in favor of the house.

[mptfan]

I just read on a few websites that if you pay your credit card bill every month without carrying a balance, you're called a "deadbeat" in the credit card industry because the card companies make very little money off of you.
...
So, that begs the question, why do credit card companies continue to give cards to people they know will cost them money?

You contradicted yourself, first you said the credit card company "makes very little money" off of people who don't carry a balance, then you said people who don't carry a balance "cost them money." It can't be both.

The answer is that credit card companies make money off of people who do not carry a balance because the credit card issuer collects fees from the merchants. I believe merchants pay, on average, about 2% of each transaction for visa and mastercard transactions, and about 3% for American Express transactions.

[LadyGeek]

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