Banks should set higher standards for issuing credit cards
Money Watch Many people, myself included, are quick to point a finger at the banks for their role in driving the cost of credit cards so high.
We're less apt to look in the mirror. But two kinds of customers -- to keep it simple, I'll call them good customers and bad ones -- also add to the cost most people have to pay to make their purchases with plastic.
The perverse effect of too many bad customers is easy to understand -- and to deal with.
The problem is that when deadbeats don't pay their bills, the cost of their default falls to those who do pay our debts.
It is unrealistic to expect irresponsible spenders to identify themselves in advance and not apply for a credit card. So the course of action for banks is obvious: Simply stop doling out so many cards. Set a higher standard of credit-worthiness for a card to be issued.
The problem of extra costs generated by "good customers" is more subtle and dicier to deal with. So let me give you a specific example of the kind of customer I mean: It's me, and the many others like me.
I have three credit cards in my wallet, and I'm willing to bet at least two -- possibly all three -- generate more costs than income for the companies that issued them. And if I'm not paying the full cost of services I consume, you can be sure that cost is being passed on to other customers who use the same kinds of cards.
How do I fail to pay my share?
In the case of two of these cards -- American Express and my back-up Visa -- the problem (for the issuer, although not for me) is that I hardly ever use them, and when I do it's usually for a piddling sum. So these cards generate all the costs -- a thick envelope with a new Amex card arrived just today, and I get monthly statements to remind me my balance is "nil". But they generate next to nothing in merchant fees and/or interest billed to me to cover these fixed costs.
The problem (again, for the issuer, but not me) with the other card is very different, and I don't know enough about the cost of running a credit card company to know if it's a money-loser for the bank that issued it. But it's certainly not a cash cow.
I use this card a lot -- for almost everything I buy, because I collect the frequent flyer miles it provides -- so it does generate a fair bit in merchant fees. And the annual fee is nearly $200.
But through the simple expedient of paying the bill in full each month, I don't pay any interest -- which, with sky-high rates, must be a huge money-generator for credit card issuers.
A lot of people use cards in these ways. Most thoughtful users pay in full every month, if not always, then at least as often as they can.
Several friends have secondary cards they use exclusively for Internet purchases -- and they don't make very many of such transactions. My editor maintains a separate card just for gasoline, as a way of tracking expenses. And so on.
I like to see people get good deals and manage their finances wisely, so I'm loath to discourage these kinds of practices. But looking at the broader perspective of the debate about credit card use in Canada -- the question of whether government should cap credit card interest rates and fees, for example -- it's important to acknowledge that banks aren't the only ones who drive up the costs.
Money Watch Many people, myself included, are quick to point a finger at the banks for their role in driving the cost of credit cards so high.
We're less apt to look in the mirror. But two kinds of customers -- to keep it simple, I'll call them good customers and bad ones -- also add to the cost most people have to pay to make their purchases with plastic.
The perverse effect of too many bad customers is easy to understand -- and to deal with.
The problem is that when deadbeats don't pay their bills, the cost of their default falls to those who do pay our debts.
It is unrealistic to expect irresponsible spenders to identify themselves in advance and not apply for a credit card. So the course of action for banks is obvious: Simply stop doling out so many cards. Set a higher standard of credit-worthiness for a card to be issued.
The problem of extra costs generated by "good customers" is more subtle and dicier to deal with. So let me give you a specific example of the kind of customer I mean: It's me, and the many others like me.
I have three credit cards in my wallet, and I'm willing to bet at least two -- possibly all three -- generate more costs than income for the companies that issued them. And if I'm not paying the full cost of services I consume, you can be sure that cost is being passed on to other customers who use the same kinds of cards.
How do I fail to pay my share?
In the case of two of these cards -- American Express and my back-up Visa -- the problem (for the issuer, although not for me) is that I hardly ever use them, and when I do it's usually for a piddling sum. So these cards generate all the costs -- a thick envelope with a new Amex card arrived just today, and I get monthly statements to remind me my balance is "nil". But they generate next to nothing in merchant fees and/or interest billed to me to cover these fixed costs.
The problem (again, for the issuer, but not me) with the other card is very different, and I don't know enough about the cost of running a credit card company to know if it's a money-loser for the bank that issued it. But it's certainly not a cash cow.
I use this card a lot -- for almost everything I buy, because I collect the frequent flyer miles it provides -- so it does generate a fair bit in merchant fees. And the annual fee is nearly $200.
But through the simple expedient of paying the bill in full each month, I don't pay any interest -- which, with sky-high rates, must be a huge money-generator for credit card issuers.
A lot of people use cards in these ways. Most thoughtful users pay in full every month, if not always, then at least as often as they can.
Several friends have secondary cards they use exclusively for Internet purchases -- and they don't make very many of such transactions. My editor maintains a separate card just for gasoline, as a way of tracking expenses. And so on.
I like to see people get good deals and manage their finances wisely, so I'm loath to discourage these kinds of practices. But looking at the broader perspective of the debate about credit card use in Canada -- the question of whether government should cap credit card interest rates and fees, for example -- it's important to acknowledge that banks aren't the only ones who drive up the costs.
