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Dream On, Credit Card Companies!

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I'm a credit card deadbeat, and I'm proud of it. And if credit card companies think they're going to start making any more money off me, then they'd better think again -- and they better make sure that every single card issuer sticks with the party line.

Credit card companies have taken it on the chin lately. Many of the banks that issue credit cards have already gotten hurt with bad mortgages and other toxic assets. Four card issuers -- American Express (NYSE: AXP  ) , Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) -- saw card charge-offs jump over the 10% level in April. Delinquencies are also up, and Washington will likely pass new restrictions on practices like increasing interest rates on existing balances without notice and charging over-limit fees.

But recently, some have talked about trying to get those with good credit to contribute more to credit card company profits. While it's easy to understand why card companies would like to find any way they can to earn profits, there's a simple reason why imposing fees on the customers they call "deadbeats" won't work: Unlike balance-carrying, interest-paying borrowers, we actually have a choice -- and we'll vote with our feet, happily leaving the credit card industry with even less revenue.

A great partnership
The attitude that many card companies are taking with this is patently ridiculous. According to them, the roughly 50 million of us who use cards without incurring interest charges and annual fees are "making out like bandits" -- especially those who earn cash-back rewards, frequent flier miles, and other perks for charging their purchases on their cards.

But before you start crying for the financial institutions, let's get a few things straight:

  • Issuing banks, along with merchant networks like Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) , get a nice chunk of every purchase I make on my cards through interchange fees, which often run around 2%.
  • When I make a purchase from a foreign company -- even if that purchase is in U.S. dollars -- I pay a foreign transaction fee to my card company. That charge can run as high as 3% with some card companies, such as US Bancorp (NYSE: USB  ) .

In exchange for that revenue stream, credit card companies give me two benefits: They give me an extra month or so between the time I charge something and when I have to pay my balance, and they give me those rewards; in my case, somewhere around 1.25% in cash back.

I see that as a win-win for both me and my card company. The cash-back incentive makes me put more things on my card than I normally would. I get a little extra interest from money in my bank account. And since what I get is still less than what the card companies actually make off me, they come out on top, too.

Don't mess with a good thing
But from past experience, I know what happens when card issuers decide to cut back on their incentives to creditworthy cardholders. Those cardholders find another card. After all, there's always another card company out there willing to grab a little market share from a competitor. To succeed with plans to get fees from those with good credit, card issuers would have to have a unified front.

But even with that, spurning their top customers would end up hurting banks. Customers would turn back to cash, debit cards, and other payment methods, cutting into total card revenue. And after all the effort financial institutions have made to cross-sell credit card customers into other, more lucrative segments of their businesses, do firms really think their customers will stick with them if they renege on the promises that lured them in the first place?

Sure, I expect to see more rhetoric from card companies about how great a deal I and others with sterling credit have gotten over the years. But the card companies have earned a lot of profits from me, too. If they want to shoot themselves in the foot, we'll be happy to take our business elsewhere -- and take the revenue we generate with us.

For more on the state of the financial system, read about:

Learn more about getting and preserving your good credit in The Motley Fool's collection of credit card resources

The Fool owns shares of American Express, which is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Dan Caplinger loves his credit card rewards. He doesn't own shares of the companies discussed in this article. The Fool's disclosure policy is a dream come true.


Read/Post Comments (19) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2009, at 10:40 AM, wolfhounds wrote:

    You're not alone. My first reaction was to ditch my one credit card altogether. I haven't carried a balance in twenty five years, so I'm essentially paying cash each month. My debit card will do nicely, thank you.

  • Report this Comment On May 20, 2009, at 11:00 AM, carguy622 wrote:

    Amen! BOA raised the rate on a card that has been fixed at 4.9% for the last 4 years to 9.9% variable. Joke's on them, I won't be using that card anymore.

  • Report this Comment On May 20, 2009, at 11:05 AM, FREDTHEPLUMBER wrote:

    THE CREDIT CARD SCAM THEY DON'T WAN'T YOU TO KNOW ABOUT! THE BAMKS ARE AT IT AGAIN, CRYING POOR. WAH ! CHECK OUT ALL OF THE NEW BANKS BEING BUILT. THEY DON'T LOOK LIKE SINGLE WIDES TO ME. OVERCHARGES, DOUBLE CHARGES ETC. AND EACH TIME YOU MAKE A PURCHASE , THEY CHARGE THE BUSINESS OWNER A FEE. PAY CASH OR USE A DEBIT CARD

    USE THE POWER OF BOYCOTT AND CUT UP THE CREDIT CARDS AND MAIL THEM BACK TO THOSE LEACHES. THEY WILL COME CRAWLING BACK FOR YOUR MONEY ONCE THEY GET HURT IN THEIR WALLET! BOYCOTT ! ! IT'S THE ONLY VOTE THAT COUNTS!

  • Report this Comment On May 20, 2009, at 12:28 PM, JaunyG wrote:

    If I was the credit card company, I would close up shop and retire. Who needs credit cards anyway? I don't.

  • Report this Comment On May 20, 2009, at 12:46 PM, scottgeiger wrote:

    I have heard the same FUD as well and had to laugh... "It's going to cost customers more to get credit" and "many people won't be able to get credit" - seriously? So they [the banks] are going to reduce their own clientele? Isn't that going to hurt them more? Must be some kind of high finance that I am not aware of.

    Seriously though, there are some advantages of having a credit card. If you use a debit card and your card number is stolen and used fraudulently that comes right out of your bank account. Yes you can dispute the charges and can get your money back, but that could be several days or weeks.

    So unless you are forced to (i.e. personal bankruptcy) I wouldn't drop my credit cards altogether. But shop around and get the best deal for how you use credit cards. And don't hesitate to call the card company and "negotiate"

  • Report this Comment On May 20, 2009, at 1:59 PM, JaunyG wrote:

    Can I pay off my credit card the same day I purchase something?

  • Report this Comment On May 20, 2009, at 2:39 PM, masterN17 wrote:

    Too bad for credit card issuers that debit cards exist. There is absolutely no reason for a solvent individual to use credit over debit other than the rewards. (And don't some banks have rewards for debit usage now?) The second financial lesson my dad gave me was never carry debt on plastic. (The first was simply "save".)

  • Report this Comment On May 20, 2009, at 2:40 PM, masterN17 wrote:

    Sorry to double post, but I also think its hilarious that credit companies refer to solvent individuals as "deadbeats". I laughed out loud during a meeting upon reading that; thanks TMF.

  • Report this Comment On May 21, 2009, at 4:12 AM, NotDefenseless wrote:

    Don't use Citibank, Chase, Bank of America and Amex. They monopolized the credit card industry taking about 70% of the mkt share. Shop at other banks to replace their cards because regulators had failed oversight of antitrust laws.

  • Report this Comment On May 21, 2009, at 10:28 AM, VintageCat wrote:

    I cancelled my AMEX account of over 25 years three days ago. I was coming up on the annual charge for "membership" and since I might use the thing once or twice a year (if that) I decided that a debit/credit card from my local credit union would do just fine. Since I'm a "deadbeat" they didn't even argue.

  • Report this Comment On May 21, 2009, at 10:52 AM, j2allen wrote:

    Great post! The only reason I keep a credit card is for the reason scott mentions above - if you get fraudulent charges on your debit card, it takes awhile to get the money back into your account, whereas you just dispute the charge on credit card.

    As for the card companies not making any money, ask any business owner how much they fork over to card companies for the "priviledge" of accepting plastic. That 3+ percent aint peanuts!

  • Report this Comment On May 21, 2009, at 10:52 AM, BMFPitt wrote:

    I've already prewritten a letter to either of my credit card companies should they dare to charge me fees or cut my cash back. It's sort of a Microsoft Word version of the scene from Braveheart where he demands the English commander kiss his own arse. I almost hope one of them forces me to send it.

  • Report this Comment On May 21, 2009, at 11:09 AM, potente wrote:

    Couldn't agree more. When I heard they plan to start finance charges from the purchase date, remove the grace period, add membership fees and remove cashback bonus ... I immediately thought ... I'll have to dust off my debit card and go back to using cash. I have nver paid 1c in finance charges or an annual fee in my life, what makes them think I would continue using credit cards? I ONLY use CC for the miles and cash back, and I know they make a ton of money off of me since I use CC for everything!! The moment I have no benefit using a CC, I have no problem using my debit card, cash or checks!

    Who are they kidding? There is a reason I have a stellar credit, don't pay finance charges, fees, and I have money to pay off my balance, save and invest. Because I am smart with my money!!

    I am like uncle scrooge ... I would never use them if it would cost me even 1 penny more!

  • Report this Comment On May 21, 2009, at 11:14 AM, pete4357 wrote:

    BMFPitt - I love your attitude...letter at-the-ready.

    check out this website - funny (some bad lang.)

    http://www.passiveaggressivenotes.com/

  • Report this Comment On May 21, 2009, at 11:51 AM, BMFPitt wrote:

    Here's a copy:

    In response to your notice on #DATE#, which stated your intention to #WHATEVER# with my credit card account, I have proposed the following as a counteroffer.

    * Someone with a rank of senior management or higher will call me at (XXX) XXX-XXXX no later than #DATE# to inform me of your intent to continue to profit from transaction fees via my continued business with your company.

    * I will recieve a written guarantee that no annual fees shall be imposed, nor will I face any reduction in cash back or any increase in interest rate for a minimum of two years without a breach of the card agreement on my part.

    * My cash back rewards shall be increased by at least 0.25% for a period of at least 90 days as a gesture of good faith, due to the nature of my having to write this letter.

    * I will not launch a personal crusade to inform others of the factors leading to your decicion cease doing business with myself until such time as the above deadline has passed without a satisfactory resolution.

    I look forward to hearing from you, and hope to continue our mutually profitable relationship.

  • Report this Comment On May 21, 2009, at 4:45 PM, jfielhauer wrote:

    Dan,

    You really need to rethink your rationale about the win-win situation. If your credit card is charging the business a 2% transaction fee, then the business is making your purchase 2% more expensive than necessary. If you're getting 1.25% back, then you're paying the credit card company 0.75% of every purchase. That's a win for the credit card company and a lose for everyone else.

  • Report this Comment On May 28, 2009, at 5:22 PM, phinrichs wrote:

    Not only was I a deadbeat, I earned a profit from the credit card companies until recently. For several years in a row I got offers from credit card companies to open an account and transfer balances with no fee and no interest for limited periods. So I invested the cash in CDs & MM savings and kept moving the balance from one company to the next while making minimum payments. All that's done now - no offers since last fall so I had to pay the balance. Still, I earned about $1k on about $11k since 2007 instead of paying them. Oh, yeah, I also got frequent flyer miles that I used for a Hawaii trip last month.

  • Report this Comment On June 12, 2009, at 5:51 PM, 102971 wrote:

    Another thing that the credit card companies are doing which has not been touched upon. I had three credit cards with Bank of America all of which carried balances of below 40% of my credit limit. The reason I had these balances were because Bank of America had sent me offers to transfer balances from higher rate cards at 0% so I was paying them no interest. Last week I received three letters from Bank of America reducing my credit limit on each of these cards to just $100 over the then outstanding balances. When I telephoned to complain I was informed that they were doing this because I only used the cards for balance transfers. This, to me is an unacceptable reason for reducing credit limits particularly since the credit bureaus will now show that I am borrowing 95% of my limit instead of the previous 40%. Naturally this will affect my credit score with each of the credit bureaus and FICO.

  • Report this Comment On June 21, 2009, at 4:57 PM, benny626 wrote:

    This has gone on far enough. Seems as though Bank of America, AmEx, Citibank and others have taken it on themselves to destroy our economy after WE have bailed them out of bankruptcy. I had over a 10k credit limit with BOA reduced to 500.00 with perfect payment history after I paid off my total balance of 8k. I did this with the intent on freeing up some of my credit line to do some purchasing, then some selling, just like I have always done over the last decade. Now, impossible. I say we sue. We worked hard to have good credit and the banks don't like the way the government has stepped in to fix their messes so they are sticking it to us and hard. When everything starts going to pot they'll look over at the current law makers and say, "see, we told you so. Don't tell us how to run our banks." This is nothing short of treason. Systematically destroying Americas purchasing power to cripple this economy even more has to be criminal. These are inside players that control what we are capable of spending and how we look on paper. If they decide that an available credit line of 10k be reduced to 500.00 there is nothing a consumer can do. They even had the nerve to say I defaulted on my student loans. That was totally fabricated but now it's on my report. Great Lakes, they carry my note, had no idea what I was talking about and told me to call the Department of Education. I want to scream "I am mad as hell and I am not going to take it anymore." but it is a whisper of "help" in a paper bag. We need to band together to confront these Anti American Businesses, like Bank of America and Amex. We need to resolve this or PULL OUR MONEY COMPLETELY OUT. No bank accounts, no credit and watch this system fall, cause that's is where it is all going. If I knew that this country's credit was collapsing at the hands of Big Banking I would have defaulted and kept my money in a mattress like Granddad.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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