Tuesday, July 7, 2009

How Credit Cards Work, Part 2

On one level, the profit to be gained from credit cards is obvious from the end of our last discussion. Every time a user doesn't pay his bill in full, a bank adds on interest to the amount owed, and assuming that the user eventually pays up, all of that is profit. If we've got 170 plus Americans alone who aren't paying their bills in full, there's a lot of money to be made -- especially given the crazy high rates that are charged, which can go as high as an incredible 23.99% if you're deliquent for a number of months. (Again, assuming they pay up eventually. About three weeks ago, the New York Times ran this report on credit card companies who are settling with far less than the full amount owed in order to get something.)

A far lesser but consistent profit to be gained is from annual fees. Consider, if you have 7 million people using your card, and you charge a very conservative $20/year, you've just brought in $140 million a year. It's nothing compared to the promised land of interest charges, but still, it's a nice chunk of change.

There are three answers to this question. First, we provide the banks with stability. They know they can depend on us by and large to come through with the money we owe. And so even if a whole bunch of people don't pay up (or pay at all, for that matter), they can rest assured that money will be coming in as well as going out.

Second, as long as we're using the card, there's always the possibility that we might not pay in full. Probably most of us have in fact had times when that was exactly the case. So, even if we're not the cash cows others are, the potential for profit is still there. Especially if, as some banks are now doing, they suddenly change the date that bank statements are due without proper notification.

The third answer is the most surprising. Tune in tomorrow...

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