The Business of Credit Cards – Part II
Monetization Strategy #3: Finance Charges
Finance charges. This term, vague as it may sound, is the source of perhaps more profits than the other two strategies put together. Finance charges include all the little fees, charges, fines, and penalties for borrowing money, including the dreaded interest payments. To put it bluntly, if you carry a balance, finance charges are where the credit card companies are going to hit you the hardest and for the most cash by far. Let’s take a look at an example to help us understand this:
Gene the hardcore biker has just finished getting his jaw put back together after taking a baseball bat to the face from his inebriated friend, Chuck. The medical bills total $3,000.
“No problem.” Says Gene as he pulls out his Chase credit card and charges the bill. “I’ll just pay it off over time.” Little does Gene know that he has just consigned himself to a form of financial bondage for the next few years of his life! Using a simplified calculation, it is possible to determine how much Gene really pays for that $3,000 medical bill.
Assume that Gene’s card charges a painful 18% interest rate – that’s a $45 monthly profit for the credit card company for each month that Gene carries his balance (not including the increased profits as this interest is capitalized). “Big deal” you might say. Well, allow me to paint a broader picture for you to help put things in perspective. Let’s assume, as is projected by some estimates, that the United States has $1,000,000,000,000 in credit card debt. At 18% interest, how much do credit card companies make per month on that debt? Do the math and you’ll figure out where these credit card companies get all the money to afford to keep sending you prequalified junk mail.
$15 billion dollars. Per month.
Mean Gene the biker is just one hard working part of one colossal piece of profitable pie. Your debt, like it or not, is what keeps many of these companies afloat! What exactly does this mean to you and me, though? It means that it is in the best interests of credit card companies to get you into debt and to keep you there. This can actually lead to interesting situations where those who are carrying a high balance are treated like royalty by credit card companies; not because they actually like you, but because they like the incredible amount of money that you’re earning them on a monthly basis. On the other side of the coin, if you are the type of customer who pays off their balance each month on a regular basis, expect no mercy if you miss a deadline for your payments. Don’t believe me? Check out 10 Confessions of a Chase Customer Service Rep for an enlightening view of the twisted reality of credit card customer care.
Ultimately, between all of these monetization strategies, it is fairly clear which one is simultaneously the most degrading for cardholders and empowering for card issuers. When all is said and done, the only thing we can do to stop the juggernaut of credit card companies is to pay off those cards and keep them paid off!
Related posts:
- An Introduction to Business Credit Cards
- The Business of Credit Cards – Part I
- Pissed About Credit Card Business Practices? Take Action
- Credit cards on your keyring?
- Banks don’t want our business anymore…
