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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: