Credit Cards » Credit Card News » Smart Credit Cardholders Are Costing Credit Companies
Date June 23, 2009

Smart Credit Cardholders Are Costing Credit Companies

Amidst all the shouting of credit cardholders over how they are being fleeced by credit card companies, it is sometimes difficult to see that credit card companies themselves are suffering in the current credit card crisis.

Smart Credit Cardholders Are Costing Credit CompaniesCredit cardholders, both good and bad, have a huge effect on how a credit card company flourishes or flounders in the current economy. In the case of bad credit cardholders, the cause and effect are quite obvious to see. Bad credit cardholders cost credit card companies a lot when they do not pay off their debts. It can be said that credit card companies are covering themselves from risks by increasing interest rates for riskier borrowers. However, when the borrower ultimately fails to pay the debt, it becomes a write off for the company, a loss in their books.

The effect of good credit cardholders are a bit more subtle to see. Good credit cardholders, by definition are good at maintaining their credit. This means that these cardholders rarely, if they ever do, carry any balance on their credit lines. They are also smart spenders and are well-versed in how to “game” the credit card system so that they get the best benefits without the risk of incurring high debts.

A favorite practice among good credit cardholders is to maintain two or more credit cards while actually using only one credit card. The one or two extra cards are used mainly to keep their available credit up so that they can maintain a high credit score. Since credit card companies will cancel cards that don’t have any activity on them, these cardholders will usually charge minimal amounts on these credit cards and pay them off completely every month. Maintaining a credit card this way can earn the credit card company very little while costing them a lot. Also, the one credit card that these credit cardholders are using constantly is, most probably the one with the best rewards offer. They will also be very punctual in paying any balances. This means that, while the credit company is spending on awards, they are earning little from interests.

When credit card companies lose profits, they will usually spread the cost around, increasing interest rates and other cost of service for their other customers. Bad and good credit cardholders are therefore a problem for both credit card companies and other credit cardholders because, by costing the companies more, they are inadvertently stifling the availability of credit for the average cardholder. Still, as credit cardholders get smarter about handling their credit and move further away from the traditional sources of profits for credit card companies, the companies themselves may have to look for a more profitable business model as the current one.

Date May 30, 2009

Bayh Says Good Credit Cardholders Will Not Be Penalized

Senator Evan Bayh made a stop in Fort Wayne last Wednesday to hold a dialog regarding the recently passed credit card bill and what it will mean for consumers. One of the hottest topics was the credit card industry’s assertion that responsible credit cardholders will be the ones getting penalized because of the practices of bad credit cardholders once the bill becomes active.

Senator Evan BayhAccording to Sen. Bayh, the regulations included in the credit card bill are specifically designed to protect and help out credit cardholders who have been hit by high interest rates and fees because they have had to rely more on their credit cards when the economic crisis hit. The senator told reporters stories about people who saw such incredible interest rate hikes, some from 0% to 29%, just for missing the payment deadline by one day. Many of those experiencing such high interest rate hikes belong to the middle class and, according to Sen. Bayh, they were “getting ripped off by credit card companies”.

With the new law in place, credit cardholders who regularly pay off their credit card bills will be protected from interest rate hikes. Credit cardholders will also have more time to examine their bills, as credit card companies will have to mail the bills 21 days before they become due. In the past, the ruling was 14 days. Notifications regarding interest rate and fee changes will also have to be given to credit cardholders 45 days before they are to take effect.

The legislation will obviously provide protection to credit cardholders who are having problems with their bill payments and are keeping their credit cards active by paying only the minimum amount due. In the past few years, credit card companies have been making a lot of money off these kinds of customers – customers who do not default but who try to keep their credit cards active by paying the minimum amount, which does not really subtract substantially from their debts. This is going to end when the credit card bill becomes active.

Critics are therefore saying that because of the large loss in profits from bad credit cardholders, credit card companies are going to turn to good credit cardholders to make up.

“That is not going to be allowed to happen,” Sen. Bayh said.

He cautioned the credit industry from punishing good credit cardholders and said that should it happen, Congress will probably revisit the law to penalize such practices. He also said that the situation is not likely to become reality. Since the credit card industry is very competitive, a credit card company that penalizes good credit cardholders will probably lose their customers to another credit card company with a better offer.