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401k and Personal Finance Business

My view on Credit Cards: from both sides

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(Update 23Apr09) It seems Obama administration is going to make credit card more consumer friendly (marketWatch). So are they going to socialize the credit card: I mean, you and me (i.e., honest guys) pay the credit cards on time each month, will bail out the deadbeats, after we bailed out the Wall Street ??? We know the credit card companies (the wall street) are not charities. This thing looks more like dumber and dumber.

(Original) Yesterday I mentioned credit card when talking about recurring revenue. Credit card is the live blood of our consumer society. Like commerical paper for business, we (consumers) use (more precisely borrow from) credit card for our daily purchases. At the end of each billing period, we either pay off the whole balance or pay the minimum payment (not recommended from personal finance perspective, but so many people do this nowadays. The customers who carry balance (and pay >10% interest) also contribute the profit of credit card companies. But it appears now credit card companies started to upset their best customrers, amid the credit crisis.

Business
American Express (NYSE: AXP) and Citibank (NYSE: C) pay customer to go away

JP Morgan Chase (NYSE: JPM) charged monthly fee to customers, then gave refund under pressure from NY AG Cuomo (CNN Money story).

Last but not least, B of A (NYSE: BAC) raises interest and minimum payment for accounts with balance. Actually all credit cards do this (Card issuers: raise interest for everyone). JPM raised my minimum payment from 2% of balance to 5% of balance recently.

The main reason credit card do this is not to upset their best customers, but rather as the unemployment rises, credit card default also rises, the card companies need to raise the rate to offset the rising default. As we all know, card companies are not in the business of charity, they lend so that they can make money (from us 🙂

Consumer
My tips: separate the cash bonus card (the card one pays off each month) from balance transfer card (hopefully low interest). For me I learned this lesson back in 2000. Also pay miminum payment for the BT card which has a low interest rate until it paid off. This is mostly to raise more cash in this uncertain economy. Acutally Suze Orman, the famous conservative personal finance author recently also recommend “pay minimum”, while I have done this already for years. Here is Suze’s original word:

“If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can”

Big picture
I don’t expect the credit card to ease credit in the near term. As the economy continues in recession, one interesting phoenomena is now every card don’t want to be the last guy to hold hot potato: means they cut credit limit to card members to avoid they hold the last balance transfer from other cards.

Read this Meredith Whitney WSJ 031109 article: Credit card the next credit crunch, if you have some 20 minutes to spend.

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