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Wealthy people are more profitable for them. Who would you rather have as a customer, someone who puts $3,000/month on their cars (warning you a nice 2% or so o

Wealthy people are more profitable for them. Who would you rather have as a customer, someone who puts $3,000/month on their cars (warning you a nice 2% or so of that) and always pays, or someone who puts $500/month on the card and is likely to go into default due to overspending or losing their job or an illness in the family or something? There’s no conspiracy here, any more than there’s a conspiracy behind the large discount you can get if you buy a year’s supply of toilet paper at once.

blang 8y ago
I'm pretty sure the opposite is true for credit card companies. The wealthy tend to pay down the balance before interest is even charged, while the poor tend to carry balances forever paying mostly interest while getting hit with other fees. It is true, however, that wealthy people carry much less risk for them so they may have similar expected values (this is just a guess)
- mikeash 8y ago
  You’d expect for them to hit an equilibrium where the expected values are similar. You’re absolutely right that a poor person who carries a balance forever and pays a ton of interest is extremely valuable, but that’s countered by people who stop paying altogether. It’s the same reason a wealthy person (or rather, a person with good credit, which I’m sure correlates strongly with wealth) can get a better interest rate on a mortgage or car loan.
- segmondy 8y ago
  I think his point is that wealthy people spend more, so the card brands can charge more interest to the merchants. If you spend $20,000 and Amex charges 5% that's $1000 in fees. But a poor person who spent $500 only earns them $25 in fees to the merchant. Now it's true that the poor person if they can't pay might pay 20% interest, but the real money maker for the card brands is not the late payment fees but the processing fees which is the gist of the lawsuit and the article.
- foobarchu 8y ago
  I question whether the interest is worth more than the merchant fees they get from wealthy people using the card constantly. If one poor person is paying, say, 11% interest on their $500 balance for a year, then the company makes a few hundred bucks on the interest. If a wealthier person spends $50k (admittedly random number I made up, its going to vary vastly for different card-holders, and probably in the millions for many) with their card over the course of the year but pays it all off immediately, they've made between 1k and 1.5k risk-free on the 2-3% merchant fees, and the customer will probably continue to use that card.
Broken_Hippo 8y ago
You have the basics correct, but not where they make the profit from. Someone spending $3,000/month on a card and paying it off winds up paying little to no interest. However, they do get to make a good deal off of the fees. Like the article says, the fees make the cards a lot of money. That person putting $500 per month on the card likely isn't poor either unless they are paying most of their expenses with it and paying the card off each month. Again, they get some fees. With a limit high enough for $500 a month without paying it off, they aren't as high risk - after all, that is at least a $6,000 limit. That's a full 20% of a 30k/year income, after all. These folks are in a middle ground. The company can make some of their money off of transaction fees, but will try to make up for it through interest rates, which won't be all that horrible. The actual poor person has a credit limit of $500-$1000. They aren't spending enough for the company to make much from fees, so they try to make it up in interest.

blang 8y ago

I'm pretty sure the opposite is true for credit card companies. The wealthy tend to pay down the balance before interest is even charged, while the poor tend to carry balances forever paying mostly interest while getting hit with other fees. It is true, however, that wealthy people carry much less risk for them so they may have similar expected values (this is just a guess)

mikeash 8y ago
You’d expect for them to hit an equilibrium where the expected values are similar. You’re absolutely right that a poor person who carries a balance forever and pays a ton of interest is extremely valuable, but that’s countered by people who stop paying altogether. It’s the same reason a wealthy person (or rather, a person with good credit, which I’m sure correlates strongly with wealth) can get a better interest rate on a mortgage or car loan.
segmondy 8y ago
I think his point is that wealthy people spend more, so the card brands can charge more interest to the merchants. If you spend $20,000 and Amex charges 5% that's $1000 in fees. But a poor person who spent $500 only earns them $25 in fees to the merchant. Now it's true that the poor person if they can't pay might pay 20% interest, but the real money maker for the card brands is not the late payment fees but the processing fees which is the gist of the lawsuit and the article.
foobarchu 8y ago
I question whether the interest is worth more than the merchant fees they get from wealthy people using the card constantly. If one poor person is paying, say, 11% interest on their $500 balance for a year, then the company makes a few hundred bucks on the interest. If a wealthier person spends $50k (admittedly random number I made up, its going to vary vastly for different card-holders, and probably in the millions for many) with their card over the course of the year but pays it all off immediately, they've made between 1k and 1.5k risk-free on the 2-3% merchant fees, and the customer will probably continue to use that card.

Broken_Hippo 8y ago

You have the basics correct, but not where they make the profit from. Someone spending $3,000/month on a card and paying it off winds up paying little to no interest. However, they do get to make a good deal off of the fees. Like the article says, the fees make the cards a lot of money. That person putting $500 per month on the card likely isn't poor either unless they are paying most of their expenses with it and paying the card off each month. Again, they get some fees. With a limit high enough for $500 a month without paying it off, they aren't as high risk - after all, that is at least a $6,000 limit. That's a full 20% of a 30k/year income, after all. These folks are in a middle ground. The company can make some of their money off of transaction fees, but will try to make up for it through interest rates, which won't be all that horrible. The actual poor person has a credit limit of $500-$1000. They aren't spending enough for the company to make much from fees, so they try to make it up in interest.