Now, don't get jealous when I tell you that Citigroup (NYSE: C ) recently decided to "upgrade" my credit card. Yep, I'm moving up, turning in my platinum card for a shiny new World MasterCard. And get this: There's no real credit limit. Woo hoo!
That's right, in the midst of a major credit crunch bearing down on everyone else (even major financial institutions like Bear Stearns (NYSE: BSC ) ), I'm getting an unsolicited increase in credit with no set limit.
I pay off my credit cards every month, so I know that I am considered a strong candidate for more credit, even in today's credit-hungry market. In the literature that they sent me, Citi let me know that I have "no need to worry" about going past the spending limit, as long as I pay the amount that exceeds my credit line. Now I have the "flexibility" to do whatever I want, whenever I want (or at least that's what Citi is telling me). And what if I do carry a balance? Well, the APR is only 11.99%, but could get up to 28.99% if I default. No six-month, around-the-world cruise for me, of course ...
All kidding aside, it's actually illegal for credit card issuers to send unsolicited cards unless they are extending your current card. While I'm flattered that the company offered me this type of credit in times like these, I have to wonder what's in it for Citigroup investors, and who is paying for these upgrades?
Issuing new credit cards isn't a cheap initiative. In last year's TJX (NYSE: TJX ) fiasco, AmeriFirst Bank estimated the cost of issuing new credit cards to be $20 per card. According to its website, Citi has 200 million total customer accounts. If just 1% of Citi's overall client base received new cards, the initiative would cost $40 million.
Interestingly, Citi announced yesterday that Mark Rufeh would be joining the company to boost institutional client financial performance and fund performance, with a "disciplined" approach to costs. A year ago, Citi announced big plans to cut costs, but the company continues to struggle and plans to sell more than $12 billion in troubled debt.
While MasterCard (NYSE: MA ) has more than doubled its stock price in a year and the Visa (NYSE: V ) IPO heats up, Citi stock has dropped by more than 57% in the last year. Citi isn't the only card issuer that has seen its value decline: Discover Financial (NYSE: DFS ) has dropped by almost 42%, while Capital One (NYSE: COF ) has fallen by 38%.
But is the consumer credit crunch real? It looks like folks can still get credit if they want it, with the Federal Reserve reporting that revolving credit (i.e. credit cards) actually increased at an annualized rate of 6% in February, while non-revolving credit (i.e. mortgages) increased by only 0.4%.
If these trends continue, I wonder if we'll be able to rig up a system to purchase homes on our new, no-limit credit cards instead of using no-down-payment and adjustable-rate mortgages.
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