Credit Card Industry Profits

Since the Great Recession of 2008 and passage of the CARD Act in 2009, credit card industry profits have declined a little, but not that much.  In fact, profits in 2012 are beginning to rise as Americans return to using their credit cards in much the same way they did before the recession began in 2008.  And credit card issuers are beginning to issue more credit cards and loosen standards for acceptance.

Total earnings for the year 2011 for the entire credit card industry were $18.5 billion, which was up slightly from the 13.6 billion earned in 2010. 

How did the credit card industry become so profitable?  With Americans charging more than a trillion dollars each 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 or 3% to encourage cardholders to continuously carry a balance so they can rake in more interest income.
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Has passage of the CARD Act negatively impacted the credit card industries' profits?  A little bit, but not by much.  The credit card industry will always find loopholes to get around the Card Act.  The biggest loophole all of them have already jumped through is getting rid of fixed interest rate credit cards that prevented the credit card issuers from raising the interest rate at a moment's notice under the Card Act.  Now they are issuing only variable rate interest credit cards which are tied to the prime rate.  If a credit card has a variable rate, they can raise the interest rate much easier.

A second loophole they have found is to just raise interest rates on everyone across the board, which they have already done.  The low interest rate credit card is fast becoming history for many Americans.