August 18, 2009, 5:00 am

Credit card perks ups and downs – why business relationships have to be fair

by: The Financial Blogger    Category: Credit Rating & Credit Bureau
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This is a guest post by Mr Credit Card from He reviews credit cards (lots of them) and knows quite a bit about the industry. If you are looking for a new card, he has compiled a list of the best credit card deals and offers.

Just last week, Mike had this post about watch out rate shoppers. He mentioned how he hated it when rate shoppers called him “just for a rate”. What ends up happening at the end of the day though, is that rate shoppers get lousy service. But this is a typical pattern for those who only want to get free service, or just the cheapest price. Businesses hate them. The savvy ones learn to NOT compete on price but on other factors. The not so savvy ones get caught up in a wave of downward spiraling price competition that just drives the business to the ground.

In my space, credit card issuers have fallen for the low cost (in their case, teaser rates) game to attract new customers. They gave out deals that were really not profitable for themselves. Consumers were savvy enough to taken advantage of them. But when the sub-prime crisis blew up everything, credit card issuers began to cut back and hurt lots of innocent folks in the process.

In this post, I would to highlight some incredible deals card issuers were offering, how they were taken advantage of, and how they are hurting every one as they realize their folly.

Abuse of gas credit cards – Gas stations (or rather the oil companies) have always made use of gas credit cards to instill customer loyalty. If you go to any gas station, you will find brochures offering their both their gas cards and gas credit cards. Typically, most gas rewards cards pay anywhere from 3% to 5% rebates when you make gasoline purchases at their gas stations. So for example, a Shell Mastercard allows you to earn 5% rebates at shell stations.

Soon, credit card issuers began to offer their own version of their gas credit cards. Rather than allowing card holders to earn rebates at one particular station, they structured their cards to allow cardholders to earn rebates on gasoline purchases at ANY gas station. To make their cards more attractive, they allowed card holders to earn unlimited rebates.

This is when the trouble started. Those who cut coupons will understand the concept of coupon stacking. In credit card land, credit card stacking involves combining various reward cards to maximize the rewards that you can earn. Well, many business owners, salespeople (who drove a lot for their sales meeting) started getting credit cards that paid rebates on gasoline purchases. But more importantly, many of them used them exclusively for gas. This became a no win proposition for credit card issuers. At best, credit card issuers make 1.5% to 3% from merchants who accept credit cards. But when most cards do not charge annual fees, customer pay in full every month and you are paying 5% rebates on gasoline purchases, credit card issuers will lose money on these cards.

So what do they do? Well, they simply put caps on the amount that a card holder can charge before they stop earning rebates on gasoline.

0% Balance Transfer Abuse – When interest rates got to rock bottom in 2002, the era of easy money was to continue for the rest of the decade (at least till now). Credit card issuers also joined in the fun by offering the classic bait and switch tactic. They started offering 0% APR if you transfer your balance from another credit card over. Their rational was simple. Once a customer signed up, credit card issuers figured that they were more likely to stick around. Well, that did not turn out to be the case. Consumers began looking at the 0% offer as another method of financing. Here was what they did.

?Consumers used 0% deals in place of a home equity line of credit

?Consumer arbitraged 0% deals by borrowing at 0% and putting it in a high yield savings account

?Consumers used these 0% deals to finance large purchases

The 0% balance transfer credit card segment became so competitive that soon, every credit card company was giving away these deals for 12 months and waiving the balance transfer fee. But rather than stick to the card that they originally got, consumers simply jumped to the next 0% balance transfer deal when their introductory 0% period expired. They simply got a new card. Soon, credit card issuers realized that these deals were unprofitable for them because consumers did not stick around. They began to reintroduce balance transfer fees and reduced the length of introductory periods for 0% APR from 12 months to 6 months.

Soon, credit card issuers were fighting back. For example, there have lots of complaints that Chase has increased the minimum payment on their cards from 2% to 5%. Moves like that where your payment doubles can be crippling for folks who do not have room in their budget for emergencies.

Issuers heavily promoting student credit cards – But consumers have not just taken advantage of credit card issuers. Credit card issuers have also way heavily promoted their student credit cards at campuses. It is one thing to promote credit cards, but another to actually pay colleges for every card that is signed up, or pay (sponsor) clubs for promoting their cards at their booth! The majority of students don’t really know about money management.

Let’s think through this for the moment. If you are a new immigrant, or do not have a credit history, there is just no way that credit cards are going to issue you a regular unsecured credit card. More likely, you may have to start off with a secured credit card. But this rule does not seem to apply to college students who (mostly) have no history and very little income! Why are credit card issuers willing to issue cards to students who have no credit history? I guess they want to get them as customers when they are young and hopefully become customers for life? (not too sure if this is really sound?).

For this one, the latest credit card bill of rights has imposed limits on the amount of credit they can extend to college students.

Give credit lines too easily, now reducing Credit Lines – During the boom years of 2003 to 2007, credit card issuers were giving excessive credit lines to many folks. Then, when the financial crisis hit in 2008, all of a sudden, they began reducing credit lines across the board. While there are folks that should not have credit lines issued to them at all, the sudden disappearance of credit has a lot of collateral damage. It is one thing to tell someone in advance that you will be cutting their credit lines. But when you cut their lines close to their present balance, or even below their balance and charge an over-the-limit fee, that borders on being unethical.

The collateral damage in this case fell on folks with great credit!.

Give teaser rates, not increase their rates! – Many folks who have gotten low interest credit cards have seen their rates increase for no reason. Very often, rates have shot up to over 20%. This has the effect of doubling or even tripling minimum payments for card holders!

Moral of the story

Any relationship has to be 2-way – Any business relationship (or any relationship for that matter) has to be a win win for both parties for it to be sustainable. In all the previous examples, the relationship was lop sided. In many ways, you cannot blame consumers for taking advantage of deals being offered by credit card companies. Going forward, perhaps more credit cards will charge annual fees, or rewards will be cut back more. But I would not worry too much as a consumer. The credit card industry is still pretty competitive. There are still many good reward cards and programs around. Just remember when something is too good to be true, it usually is and does not last forever.

Just remember that when a business relationship is too one sided in your favor, eventually, it will come back to hurt you.

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I’m not sure of the point of this story, but I think it seems to be saying that the credit card companies are “poor” because some customers took advantage of offers.

I am not a credit-card insider, but somehow I doubt that the majority of people are systematically taking advantage of the gas rebates or balance transfers. Yes, there are probably some travelling salesmen who profit a couple of percent worth on their gas purchases but how many millions of dollars can one person really buy? I doubt if it’s enough to break a credit card company.

Second, yes there are 0% balance transfer experts, but these guys don’t cost the credit card company. The company doles these out in the hope that someone will miss a payment to jack them up to 19%. It’s hard to make much money as a consumer with 0% balance transfers anyway, and the money that is made comes from the previous lender not the new lender.

Credit card companies lend money at obscene rates. Both Visa and Mastercard currently have operating margins of 40-50%. Their transaction services might be worth the 2 or 3% they charge merchants. Credit card annual fees certainly are not worth anything because the services, like a 1% reward or rental car insurance are extremely cheap to buy through normal channels. Obviously 19% loans for buying dinners or gas is insanity, but a small interest rate for the convenience of advancing money would be fine.

There is no two way relationship with credit card companies. They set all the rules and customers just take them. Only the choices give customers any flexibility at all. Credit providers control the transactions, all the terms of the relationship, and they reserve all the freedoms to change terms.

by: The Financial Blogger | August 20th, 2009 (1:58 pm)

There is not much room to fool around with CC’s. I prefer simply using my card to pay day-to-day stuff (groceries, gas, transportation) and get my rewards from time to time!

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