Pay off credit cards monthly = increase taxes on the wealthy

[dex]

"People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks."
http://www.nytimes.com/2009/05/19/business/19credit.html?_r=1&hp

Note: Companies regularly pay their bills in 30 days or longer.

Credit card companies make money from those who pay off their cc monthly on the float - time between receiving your payment and paying the vendor.

Tone of the article does remind me of the idea of increasing the tax on the wealthy.

I don't think we will see credit card annual fees again - maybe on rewards cards.
We will see shortening of the grace periods = more billing dates.

In the article it mentions charging interest from the time the charge is incurred. I doubt this will happen - people would just use cash more. If it does, a simple solution would be to have a credit balance on your cc; easy with electronic transfers these days.
+++++
Generally, we can expect a plethora of innovative ways for government and companies to separate us from our money.

In the (not too) distant future I think there will be a national sales tax.

 

[dt123]

I love it that the CC industry calls people who pay their balances every month "deadbeats."

 

[Independent]

I've always figured that the "processing fee" (the difference between what shows up on my CC bill and what the card company actually pays the retailer) was enough to cover the costs of running an account that is always paid on time. I've heard that the amount is 3% for smaller retailers, but someone like WalMart negotiates a much lower rate.

If the new laws mean that the always-pay-on-time people like us stop being "subsidized" by the poor risks, I'm fine with paying my full cost. I'll be interested to see how much my costs go up -- I'm predicting it will be minimal.

 

[ziggy29]

If the new laws mean that the always-pay-on-time people like us stop being "subsidized" by the poor risks, I'm fine with paying my full cost. I'll be interested to see how much my costs go up -- I'm predicting it will be minimal.

If my costs go up enough to mostly eliminate the benefits I get from using a cash back rewards card, I'm done with 'em. And if it means an annual fee, I'm cutting 'em up.

 

[Walt34]

I've often said that cc companies sell only two products:

1. Convenience

2. Immediate gratification

We use them (all three) for convenience only. If they start charging additional fees then we'll have to think about what that convenience is worth. Probably not much.

 

[crazy connie]

If they bite too hard on the hand that feeds them they may get verrrrry hungry. The late pay over extenders will continue to have failure rates. The convenience user will switch to debit purchasing or cash. Less merchant fees will tighten down their margins as well. Remind me not to buy V or MC who are simply processors or the lenders who have a large portion of their business on revolving credit.

 

[freebird5825]

My cashback, no-annual-fee credit card sets a 4 business day restriction on successive payments made online.
I synchronize our credit card payments to our alternating bi-weekly paychecks. My "paycheck" is an electronic transfer from "hers" to "our" account. It is not unusual for me to make 2-3 payments in 1 month to keep a zero balance at all times. I don't put it on autopay because I want to see the charges in a nice short list.
Let's the cc companies beat that system!

 

[ziggy29]

If they bite too hard on the hand that feeds them they may get verrrrry hungry. The late pay over extenders will continue to have failure rates. The convenience user will switch to debit purchasing or cash.

Precisely. They may not be getting much in the way of interest payments from the "best credit risks", but they are getting 2-3% of every transaction even when the card holder pays in full each month. That's still not a bad annualized return.

 

[Zathras]

Precisely. They may not be getting much in the way of interest payments from the "best credit risks", but they are getting 2-3% of every transaction even when the card holder pays in full each month. That's still not a bad annualized return.

This isn't really true though, is it?
I mean the transaction fee is paid to Visa, or MasterCard, or such and the interest payments are going to the bank that actually issues the card (e.g. Chase, Citibank, etc).
Perhaps Discover is different as they issue their own cards, don't they? In this case they feed off both ends, but I don't believe most of the credit card industry is like that.

 

[Abreutime]

That's not the best way to look at it. Yes, if someone was GUARANTEED to pay their bills, then they would be profitable. But you have to consider ALL the accounts (say, 1 million accounts) that tend to pay off every month. Take these 1 million accounts, and do you make money off them in the next year. If the answer is no, then they will be assessed fees until they are profitable (or closed if that's not possible).

Now, the above 1 million accounts have 1 major revenue stream: the "interchange" every time a card is used. The credit card company gets a piece, just as VISA/Mastercard gets a piece. The costs associated with having these 1 million accounts over the next year are more numerous. Cost to send monthly statements. Cost for customer service. Interest cost to float them money (which they don't pay interest on). And the largest, most variable cost is the risk that they run up a balance and don't pay you back. This is going to be a small proportion of this population (maybe 30k), but they will generally run up the balance to the credit limit before not paying. So each loss will be many thousands of dollars. So these losses will cancel out the thin revenue drip from dozens of "good" accounts. Only a few disastrous bad losses may tip the scales from profitable to not.

So it may not be worthwhile to offer these million people such cheap credit, if the credit card companies are not able to make their money elsewhere. In the recent past, the "bad" credit people have been profitable enough to subsidize the "good" credit people. If that changes (due to regulations, or simply worse performing portfolios), cheap credit for "good" credit people may become a thing of the past.

 

[dex]

So it may not be worthwhile to offer these million people such cheap credit, if the credit card companies are not able to make their money elsewhere. In the recent past, the "bad" credit people have been profitable enough to subsidize the "good" credit people. If that changes (due to regulations, or simply worse performing portfolios), cheap credit for "good" credit people may become a thing of the past.

There are several flaws in your argument and you fell into the thinking error that is inferred to in the title of this thread i.e. those that pay off their cc monthly are subsidized by those that don't so the former should pay additional money - similar to - the middle class rich are subsidized by the all others so they should pay.

When credit cards began - Diner's Club; AMEX - the business model was to give them to those that could and did pay them off monthly. Not paying them off monthly was a red flag to those companies. So the business model was and still is that cc companies do make money from those that pay off balances monthly. The fees charged and float cover costs and contain a profit.
Those that do not pay off the balance monthly incur additional borrowing costs by the lender. Also, those people tend to have higher default rates and greater use of customer services (my guess), than those who pay off monthly.

To me, the interesting aspect of this story is the parallels to the discussions held about the recent tax increase on those earning over $? (I forgot). Really what the cc companies are saying is we need a certain amount of profit - we are restricted from recouping our costs (by government) from the high risk (and cost) group so we will get it from those who can afford it.

 

[Abreutime]

The business model has changed in the 30 years. Credit cards are more widely available. The companies rarely require proof of income. Annual fees are less and less common on prime borrowers. All 3 of these factors made it easier to run a business without charging interest. (In other words, it would be easy for a small company to replicate the Diners Club with a small portfolio. But it wouldn't make very much money. The margins would be so small that it would be a lousy business to enter.)

The credit card companies are all losing money. They are not charities, and the "certain amount of profit" they're trying to reach is $0 at this point.

My post wasn't an argument, it was a statement of reality. If a credit card company is losing money on any segment of the portfolio, they will stop acquiring those types of accounts in the future, or adjust the cost structure of that segment until it is profitable. This partly explains why credit card offers have fallen by approximately 80% in the last year: new accounts have not been profitable. And getting back to the current legislation... If the new regulations reduce the interest rates and fees the company can collect from those 30k that turn bad (from my example in the previous post), this may tip the scales on the whole 1 million from profitable to not, leading to the credit card company eliminating the credit available to all 1 million.

 

[JOHNNIE36]

The credit card business is one that I never quite understood. How can AMEX make money off of me if I pay my balance every month, in full, by the due date? I did get it that the merchant pays a fee to the card issuer but I didn't understand float. Maybe I still don't. I'll guarantee you that card issuers will never make a dime off of me directly. I won't pay any annual fees and I don't pay interest. As someone mentioned, I'll go to cash before that happens. I use cards so I don't have to carry around alot of cash, so I have some leverage on the purchase of merchandise that is defective or not up to standards and in the case of AMEX to give me cash back and extended warranties on most products. Also, recently I went to work on some fringe credit cards to increase thecredit limits. Some cards I only used once or twice a year when a store sale gave me an additional discount if I used their card. I asked for these increases on line. I got denied by most and I know why. They didn't make any money off me. When I called customer service directly, I know they looked up the records and were not even interested in increasing my credit limit. One card had a limit of $500. I cancelled them all except for the ones with high limits like AMEX, Master Card, VISA. These are at $15000 each. The fringe cards were just hurting my credit score according to Experian.

 

[Notmuchlonger]

If my costs go up enough to mostly eliminate the benefits I get from using a cash back rewards card, I'm done with 'em. And if it means an annual fee, I'm cutting 'em up.

Pretty much how I feel about it. I can go back to cash and checks no problem.

 

[eridanus]

The credit card companies are all losing money. They are not charities, and the "certain amount of profit" they're trying to reach is $0 at this point.

They're not losing money because of credit cards. At least not yet. It's the other banking activities where they're losing money.

Rewards cards have a higher % merchant fee.

Being a credit card processor is an easy gig. I've written software for several niche processors and they make good, easy, money, even on "deadbeats."

AMEX charges merchants the most.

 

[Zoocat]

If my costs go up enough to mostly eliminate the benefits I get from using a cash back rewards card, I'm done with 'em. And if it means an annual fee, I'm cutting 'em up.

Me too, I'll cut them up with PLEASURE and send them all the little pieces.

I am so sick of the CC companies games. Citibank tried to game me with a store card that I was using periodically, paying off the balance monthly when I did charge something. They tried, for two months, to charge me a small fee. I sent them a strongly worded letter to the effect of "take this little fee and shove it." Got a check from them for the $1.25 fee. I'm sure the whole thing cost them quite a bit more than $1.25.

 

[clifp]

Obviously the NY Times have been reading my posts. I made precisely the same point in this post

I have a Costco AMEX card that gives 3% gas, 2% travel and 1% everything else rebate. The fees is the same as Costco membership. Now I am sure Costco doesn't pay a 3% fee to AMEX so I do wonder how they make money. Actually last month for the first in years/ever? I screwed up and missed the payment by a couple of days. Now normally I fight these things, but this time I said forget it they gave me a rebate check for $135 so I won't sweat the 30 odd bucks in fees and interest.

I also have a Schwab Visa card which gives a 2% rebate on everything, automatically credited to my Schwab account each month, no fee no hassle. Even if Visa gets a 3% processing fee and Schwab Bank borrows money from Uncle Sam at roughly 0% interest that doesn't leave a lot of room for profit. If interest rates go back up how do this guys make money with a 30 to 45 day float period.

As the article say only 30% of CC revenue is from merchant fees, as the interest and penalty income decreases from the poor folks who are stuck in a Credit Card addiction hell, that income will have to come to somewhere.

I hope the companies scale back on the rewards and incentive programs, since I think these will be the least damaging to the economy as whole.

There is a real danger of some severe unintended consequences if companies start changing the cards to eliminate the grace period, or make large annual fees or merchants start adding a fee to CC transactions. Although, I don't have specific figures, I am sure that almost universal use of and acceptance of credit card in the US adds greatly to the economic activity of the country. This in turn adds to the profits of the S&P 500 and our retirement portfolios.

Imagine you see an $300 in store that you sort of need, (i.e. somewhere between a necessity and luxury). You don't have $300 in cash there is no ATM around, and you don't have a checkbook. In the new credit card world, the merchant charges a 3% fee for credit or perhaps the credit card company starts charging interest immediately. Being a member of in good standing on the ER boards you are [-]cheap[/-] frugal type, you decide forget it I'll stop by an ATM get cash, and come back in day or two in order save the $9. Well stuff happens and it is several weeks before you have time and cash and stop by the store. Only to discover the item is no longer on sale out of stock etc. you never get the use of the item the store and the manufacture both miss a sale. Multiply this scenario by the millions and you can see the potential problem this will present.

 

[haha]

I didn't understand float. Maybe I still don't.

I think you do understand it. I think the banks that finance CCs actually experience negative float. In other words, it is a cost, not a profit center. There is only so much float, and it goes to the card user, not the bank. The merchant gets paid right away; the user pays the bank as much as weeks later.

Ha

 

[Rambler]

Problem is that there are some things that you need a credit card for. Ever try to rent a car without one? I remember a guy a few years back who had a visa debit card...couldn't use it to rent a car and was left high and dry at the airport.

I never carry a balance, have 3 credit cards but typically only use one of them. Any of them that charge interest will be cancelled as will those that charge an annual fee. If they all do, I'll find one that does not. If I can't I'll keep one, and pay it forward so there is no interest.

R

 

[Mysto]

The argument that a cc company doesn't make money on people that pay their bills on time doesn't hold water. Reward debit cards are issued all the time. All that is missing is the float and they push them on you from every bank if you want them or not. My Etrade bank and my local TCF bank ATM cards are both debit cards and my TCF is a reward card.

If the cc card companies want to play games I will dump the cards and go to debit. I know that they aren't used for some things but I think that would change if necessary.

 

[cashbalancetrouble]

I sit on the sidelines ever year or two and watch the negotiations with two of the major cards for a significant business travel and expense card account. All of these must be paid off in full each month as part of the contract. The perks to get the business are unbelievable. CASH BACK, PREMIUM CARDS, REWARDS PROGRAMS FOR THE EXECS, ETC, ETC

BELIEVE ME WHEN I SAY THERE ARE MAKING MONEY!

And if there are chamges being made, THE CARD COMPANIES WILL BENEFIT>>>>


NOT THE COMMON MAN!

 

[Independent]

Although, I don't have specific figures, I am sure that almost universal use of and acceptance of credit card in the US adds greatly to the economic activity of the country. This in turn adds to the profits of the S&P 500 and our retirement portfolios.

Imagine you see an $300 in store that you sort of need, (i.e. somewhere between a necessity and luxury). You don't have $300 in cash there is no ATM around, and you don't have a checkbook. In the new credit card world, the merchant charges a 3% fee for credit or perhaps the credit card company starts charging interest immediately. Being a member of in good standing on the ER boards you are [-]cheap[/-] frugal type, you decide forget it I'll stop by an ATM get cash, and come back in day or two in order save the $9. Well stuff happens and it is several weeks before you have time and cash and stop by the store. Only to discover the item is no longer on sale out of stock etc. you never get the use of the item the store and the manufacture both miss a sale. Multiply this scenario by the millions and you can see the potential problem this will present.

I'd say that a sudden change in CC use would be a short term problem, but a gradual change wouldn't do any harm. In some people's eyes, it would actually help.

I your example, if I never spend my $300 on that particular item, then I will either: 1) spend my $300 on something else, or 2) save my $300.

In the first case, there is no impact on the economy. In the second, we shift a little towards higher savings/lower consumption, which generates a short term adjustment but could eventually lead to higher productivity.

 

[Abreutime]

BELIEVE ME WHEN I SAY THERE ARE MAKING MONEY!

The credit card companies connected to payment processors or other operations are doing fine. American Express and Discover made money in the last quarter. Credit card companies without other non credit card operations have been losing money. Advanta has halted it's operations due to losses, and capitalone lost 1.4B in 2008 Q4. I'd bet (without looking at the financials) that the banks with substantial credit card operations currently lose money on those segments.

Advanta is not the only reason to doubt the severity of the stress test assumptions about credit card losses. Moody's has said their projection is for industry wide charge-offs to top out at 12 percent in mid-2010, which they say translates to about a 22 percent two year cumulative loss. And again, this is their central prediction, rather than a worst case one.

And even with the Federal Reserve taking heroic measures to prop up the credit markets, the Advanta news is one more indication that the credit crunch and economic downturn may be self sustaining. Banking analyst Meredith Whitney estimates that credit card lines in the U.S. will be cut by $2.7 trillion, or 50 percent, by the end of 2010, as banks try and deleverage and preserve capital. This will constrain consumer spending, hit company profits and spawn yet new defaults.
She describes the credit card companies as playing a game of "hot potato," with no one wanting to be last with exposure to a given business or consumer. Advanta has just pulled some very hot potatoes out of the oven and tossed them at its peers.

New regulatory proposals to limit credit card companies' ability to hike interest rates and impose fees, while perhaps needed in the long term, will have the perverse short run impact of accelerating this deleveraging process -- and consequently reducing access to credit.
Some businesses doubtless which lose credit lines will be pushed over the edge and many more will slow expansion or cut back on investment or staff.
This is particularly troubling in the U.S., where by some estimates small businesses are responsible for two thirds of all private sector new jobs created. It may not be entirely chance that the growth and dynamism of the small business sector has been coincident with the growth and availability of credit to individuals.

 

[walkinwood]

Ron Lieber has a more balanced article in today's NY times
http://www.nytimes.com/2009/05/20/your-money/20money.html?ref=business

I think yesterday's article was way off the mark. There still in competition, albeit not much, in the credit card market.

 

[Abreutime]

There is a real danger of some severe unintended consequences if companies start changing the cards to eliminate the grace period, or make large annual fees or merchants start adding a fee to CC transactions. Although, I don't have specific figures, I am sure that almost universal use of and acceptance of credit card in the US adds greatly to the economic activity of the country. This in turn adds to the profits of the S&P 500 and our retirement portfolios.

I doubt that these changes will be implemented. Just like free checking, free float is now demanded by consumers. This isn't something they can just start charging for again. I assume that these are empty threats, with the aim to arouse opposition to the new regulations. By asserting that these regulations will result in worse deals for the 50 million people that use credit responsibly, it's a way for the credit industry to win the support of these 50 million in their opposition to stuff like price caps and other restrictions. By showing that price caps on bad borrowers hurts the good borrowers, the populism against these companies might be dissipated.