The Lopsided Credit Card Model

Image by Sumanth Garakarajula

Every time I travel by Delta I get some air miles, which is a reward for being loyal and profitable to them. If I buy stuff worth $50 from Kohl’s, they give me $10 in Kohl’s cash. Panda Express has given me some kind of a discount card, which I use to get 10% off on every meal. Discount Tires will rotate my car tires free for life because I bought them there.

So basically, the airline, retail, food, auto and I think most other industries give me a discount if I am loyal and profitable to them. The more money I make for them, the cheaper they make their services for me.

If you look at the credit card industry – it is the exact opposite of this.

The strongest criticism of the credit card regulation changes that were recently passed was that the credit card companies will have to cut back on their rewards program or charge an annual fee. This would hurt people who paid off their monthly balances and had good credit habits.

What is interesting is that no one defended the rule changes saying that they were fair, and that says a lot.

What they said was that if you don’t let us screw the people with bad credit habits, we won’t reward the people with the good ones.

The credit card model is such that it makes money off of people who spend a lot, don’t pay off their balances, take cash advances, forget making a payment etc. etc.

If you pay off balances in time, not run up too much credit and generally be good; your APR will go down. So, that means that if you don’t make much money for the credit card company, then they will reward you and allow you to make even lesser money for them.

On the other hand, if you run up a high balance that you don’t pay in full, take cash advances, hover close to your credit limit and other such things – your APR goes up.

So, if you make money for the credit card company, they will punish you by slapping higher interest and fee charges.

This is just the inherent nature of the credit card business and has generally worked well over the years. But, we must recognize that this is how it works and that you can’t use these arguments to say that you shouldn’t get rid of unfair rules that push troubled people deeper in the hole.

If you tell me that I won’t get 1% cash back because you can’t charge a penalty rate on someone else who defaulted on some other credit line, I won’t mind at all. In fact, I may just thank you for being nice all these years and say that it’s time to be nice to someone else.

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