If you're invested in any credit card lenders, or are considering doing so, dig into exactly how they make their money. I suspect that you'll find a few shocking but pleasant surprises. You should also be on the lookout for some not-so-pleasant changes in the offing.
For starters, you probably know that card companies like Visa (NYSE: V ) and MasterCard (NYSE: MA ) collect a fee from merchants whenever you charge an expense. That sounds fine, but I never knew exactly how much they collected. At the truecostofcredit.com website, I discovered that if I buy a pack of gum for $1.50 at a convenience store, my card will charge the merchant $0.28, or 19% of the transaction! If I buy a flatscreen TV for $800 at an electronics store, it's only a 2.4% hit ... but that's nearly $20! (The site estimates that if all Best Buy (NYSE: BBY ) customers charged their purchases, the company would fork over nearly $1 billion in fees.)
If you're starting to get disgusted, put your investor cap back on. Remember that these kinds of fees all generate top-line revenue, both for Visa and MasterCard, as well as for banks such Capital One Financial (NYSE: COF ) , JPMorgan Chase (NYSE: JPM ) , and Citigroup (NYSE: C ) . In that light, these fees begin to sound downright appetizing.
Changes coming?
Many critics have complained of excesses in the card industry, suggesting that consumers have been getting ripped off. In December, our friends at the Federal Reserve Board set some new rules for card companies, including the requirement that they mail bills at least 21 days before payments are due. This will lead to fewer late payments and less income in fines. That's good for consumers (yay!), but perhaps not so good for card company investors. Companies were also ordered to stop hiking interest rates without sufficient notice or cause.
With a new administration in Washington, I wouldn't be surprised to see further reforms of the industry. Interested investors might want to keep an eye out.
In the meantime, I encourage you to spend some time in our credit and debt collection -- you might leave with a lower interest rate, tips on avoiding identity theft, or a plan for digging yourself out of debt.
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