Q: I charge virtually everything on my credit card --
groceries, gas, subscriptions, clothing, gifts, etc. I pay no annual fee. I pay no finance charges
because I pay my balance in full before the due date. I get air miles with no
restrictions. The card issuer checks my account for suspicious charges, and
sends me an annual print-out at tax time and numerous mailings during the year.
I’ve sometimes wondered how it benefits the card issuer to
keep me as a customer, since they seem to be giving me all this for nothing. Now,
I’ve heard some card issuers are saying they won’t be able to give people like
me a `free ride’ anymore because the law is going to limit what they can charge
people who are less creditworthy. Is that true? -- MH, via email
A: ‘Free ride’? Give me a break! Credit card companies make a ton of money on customers like you. Despite their threatening noises,
I doubt they’ll risk losing your business by taking away all your perks.
Congress is about to enact a
new law that will curb some of credit card issuers’ most outrageous practices.
You haven’t suffered from these practices because you pay your balance in full; but
they've trapped millions of Americans into ever-spiraling debt.
Among the changes:
Under the new law, card issuers won’t be able to
retroactively change the interest rate on an existing balance until the account
is at least 60 days delinquent. And they won’t be able to let you go over your credit
limit and then charge you a fee for it, unless you’ve specifically agreed to
pay for over-the-limit transactions.
One thing the law won’t do is cap interest rates. Card
issuers can still raise them – just more slowly, and with greater disclosure.
Nevertheless, the credit card industry is unhappy about the new restrictions.
Some
industry spokesmen have said card issuers will make up lost revenue by imposing
new charges on cardholders who pay their balances in full.
They’ve even had the
gall to suggest that until now people like you have been enjoying a free ride.
Want to know how these companies make money?
Their biggest chunk of revenue is
the interest paid by people who carry balances -- an estimated 60% of all
cardholders.
Then there are cardholder fees: annual fees, late payment fees, over-the-limit fees, etc. (And
until the new law takes effect, paying your credit card bill even a day late can automatically
trigger a higher interest rate on your outstanding balance.) Issuers even charge you a $5 to $15 fee for the privilege of paying your balance on time by telephone – another practice the new law will ban.
But they also have another important
source of revenue: They collect fee income from every merchant who accepts
credit card payments.
And that’s where customers like you come in.
The card issuer gets about 2% of every dollar you charge on
your card, says Greg McBride, an analyst at www.bankrate.com. When you make a $100 purchase, the merchant only gets $98.
The credit card issuer gets $2.
You can be sure that merchants add this extra 2% cost right back into your purchase price whenever possible.
For most merchants, this is a worthwhile trade-off even if they can't build the entire cost into their prices, because accepting credit cards boosts their sales. (But as you've doubtless noticed, some
businesses still don't take credit cards. A great steak-house or a beloved
local veterinarian, for example, won't lack customers even though if it only accepts cash and
checks.)
Merchant fees are the credit card industry's
second biggest source of revenue, says McBride. It’s an especially valuable
source of revenue, too – because it’s stable and predictable. The card companies' interest
income is bigger, but it fluctuates along with interest rates.
That's why your credit card issuer has gone out
of its way to keep you happy: You put everything on your card -- and your purchases generate a steady stream of merchant fees. My prediction: most card issuers will stop short of changing their fees and rewards in any way that would seriously risk losing that income to a competitor.
(For a terrrific column about how incredibly badly the credit card industry treats its best customers, see Mark Gimein's piece here: http://www.thebigmoney.com/articles/money-trail/2009/05/19/their-own-interest )
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