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Credit > Credit Cards > Credit Card Industry Profits |
Credit Card Industry Profits The credit card industry is the most profitable one in the United States with annual earnings in the $30 billion range. Many people might be surprised to learn that a single credit card issuer -- MBNA -- earned 1.5 times more profit than McDonalds in 2004. Citibank, another major credit card issuer, earns more profit than both Microsoft and Walmart. How did the credit card industry become so profitable? With Americans charging 1.5 trillion dollars per year on their credit cards, one can understand why the industry is so profitable. Each time a credit card is used, a merchant pays a small fee. In addition, about half of all Americans habitually carry a balance on their high interest rate credit cards which is a nice cash cow for the credit card banks. The credit card industry really started to become profitable as a result of deregulation. The former governor of South Dakota, Bill Janklow, worked hard to deregulage the credit card industry in order to allow them to cheat the public. (Now you know why many credit card companies are based in South Dakota). In addition, the Supreme Court decision in the Smiley v. Citibank case. Their decision lifted fees on what credit card banks could charge. As a result, fees began to climb from a modest $5 to $10 to today's $29 to $39 fee for paying late or going over your credit limit. It is predicted that these fees will climb to $49 to $59 in the near future. This is not surprising, as these fees are the number one source of revenue for credit card banks, surpassing what they rake in each year in interest income. Credit card banks also use specific marketing tactics to increase their profits. The most widely used marketing tool is the zero percent introductory interest rate offer. The credit card industry knows that many people will accumulate quite amount of debt on the card while the rate is at zero percent. Then, when the introductory period ends and the interest rate increases to 17 or 19%, the credit card bank earns significantly more profit than it would if it had never offered the zero percent rate on the card in the first place. A second tactic used to increase profits is to require a minimum monthly payment of only 2% to encourage cardholders to continuously carry a balance so they can rake in more interest income. The good news is that the majority of Americans pay their cards off in full. But there are still too many consumers who carry a balance and regularly pay only the minimum each month. The credit card banks love these customers for obvious reasons. A third tactic used to increase profits is to insert a "universal default" clause in the credit card agreement. This clause, usually written in a manner that many attorneys cannot understand, gives the credit card issuer the right to raise your interest rate to an extremely high rate -- 28% or 30% -- if you miss a payment to them, to another creditor or your FICO credit score drops for any reason. For example, if you took out a home equity loan, your additional debt might lower your FICO score enough so that your credit card bank decides you are now a high risk customer, even if you have never missed a payment to them or any other creditor in the last 20 years. |
Credit > Credit Cards > Credit Card Industry Profits |
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