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Are Good Credit Card Users Good Credit Card Customers?


Justin Fox has some further thoughts on the credit card industry. He's a good customer and, he thinks, a fairly profitable one.

it is possible that at $2.87 for every $100 charged, I'm not a profitable customer. It is possible that Citi has extended me credit in the hopes that some day, some glorious day, I'll rack up $8,000 in charges and then spend years to pay them off. But again, I'm dubious. I've been with Citi for a long time. They're pretty used to my spending — and bill-paying — habits. If they were losing so much money on me, why would they send me a new credit card, under the same terms, when my old one expired? More to the point, why would credit-card companies, in the aggregate, do business with the 42% of American households that pay off their balance each month?

There are two things to say on this. The first is that there's a good reason for credit card companies to want lots of users who aren't very profitable. Imagine a world in which 42 percent of households pay their bills and 58 percent miss the occasional payment. Now imagine that the credit card companies lose a bit of money on the 42 percent and make a lot of money on the 58 percent. They still need that 42 percent. The credit industry works best when everyone has a credit card. That only happens when most places take credit cards. And that requires not only huge volume, but also credit card penetration across different segments of society. Credit cards have to be the norm everywhere if everyone is going to have credit cards and that 58 percent is going to contain the maximum number of people.

That said, Justin probably is profitable. The credit card industry used to be about lending to responsible borrowers at reasonable rates. The companies can make a living doing that. But it turned but they could make a better living doing, well, this. Which suggests that if Justin were the only type of customer, then the industry would be somewhat less profitable than it is today. And that's a good thing!

Industries wax and wane over time. Profits can come at the cost of society. The defense industry makes more money during wars. That doesn't mean we should continually invade. Enron made lots of money while defrauding California. Doesn't mean their profits should be maintained. The credit card industry makes more money when unleashed on the financially ignorant and economically strapped. That doesn't mean it's a good thing. Profits can be bad!

Update: James Kwak has more.

(Photo credit: Mark Lennihan -- Associated Press)

By Ezra Klein  |  May 19, 2009; 5:37 PM ET
Categories:  Economic Policy  
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It is also important to remember that credit card companies charge businesses a fee to use their services, a percentage of every transaction & even the equipment used, this is where the money adds up even if the consumer pays off the balance monthly. In this way, every customer is "profitable."

Posted by: pichinose | May 19, 2009 6:33 PM | Report abuse

I'm shocked that Ezra Klein, of all people, can't figure this out. The reason credit card companies want people like Justin Fox, who always pays his bill in time and in full, is because they know that for some percentage of Justin Foxes, life will eventually go south, and they'll start racking up balances.

And why will some of their Justin Foxes' lives go south? Because they'll suddenly be faced with huge medical expenses. Sheesh.

Posted by: BobN1 | May 19, 2009 7:00 PM | Report abuse

Good link. BTW, I think that's a guest post by Barbara Kiviat (not Justin Fox)...

Posted by: bcamarda2 | May 19, 2009 9:49 PM | Report abuse

Ezra's argument makes no sense.

It might be true that the credit card *industry* as a whole benefits from high penetration. But there are lots of issuing banks. There is no reason for Bank X to want an unprofitable customers to sign up with them, rather than signing up with a competitor and letting Bank X free ride on the extra "credit card penetration."

Posted by: sideshowmel | May 20, 2009 1:53 AM | Report abuse

"Profits can be bad!"

I guess it's no surprise that someone who believes this would go to work for a newspaper.

Posted by: tomtildrum | May 20, 2009 5:52 AM | Report abuse

Ezra: that blog post you quote was written by Barbara Kiviat, not Justin Fox.

Posted by: jackfutey | May 20, 2009 9:13 AM | Report abuse

using the merchant fees to say that the issuers make big bucks on all consumers misses the costs to the credit card companies that those fees offset. Add into the equation the rewards (for example, AmEx has to BUY miles from delta to reward to its customers) that consumers often get for free or for a small fee, and it is clear that these companies make more money off those with lots of late fees and lots of interest...

not saying those fees should go away, but maybe eliminating retro-active interest rate hikes and requiring more disclosure in language people can understand isn't quite as damaging to the credit cards as they make it out to be...

and if it makes the "bad borrowers" less than profitable, then the issuers can decide not to extend credit to less "worthy" consumers... that's a better solution than gouging these people into bankruptcy

Posted by: tsweeney1 | May 20, 2009 9:48 AM | Report abuse

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