Out Of Your Wallet

If look at the attractive advertisements published by the credit card companies luring prospective customers, you will never realize how deceptive they are. Irrespective of the credit card issuing companies, all such promotions endeavor their best to convince you that the plastic money offered by them were exclusively created for a brilliant and endearing person like you with the objective of providing you with fabulous service and instantaneous delight by fulfilling all your commendable as well as contemptible cravings. However, once you obtain a credit card, you know how misleading these advertisements can be. The credit cards do not exist because the issuing companies want to serve you expediently and delightfully, but they are there so that the companies issuing the credit cards are able to make big money at the cost of the consumers or card holders. If you look at it closely, you will realize that the banks and other companies are able to make huge earnings by selling credit cards to unsuspecting consumers. Actually, the credit card business is three to four-fold more lucrative and rewarding for the banks in comparison to the total proceeds from their all other operations combined. Frankly speaking, the banks usually collect 20 per cent interest from the card holders for using their plastic money, while pay a mere one per cent on the deposits. This single aspect is a clear indication of the huge profits earned by the banks issuing credit cards. Although it is true that the credit cards often provide valuable service to the card holders, it is always very expensive to use any plastic money.

Three key ways the card companies make big money

The house cut

Every time a credit card user makes any purchase with the card, the card companies receive a commission or cut on the price of the items bought. When a card holder makes any credit purchase, irrespective of whether it is a silk shirt, restaurant meal, or any other commodity, with the plastic money the store retains approximately 90 to 98 per cent of the total price of the items, while the credit card issuing companies take the remaining two to 10 per cent of the money as their share in the deal. Under any circumstances, this is an exorbitantly high commission earned by the credit card companies.

In the event of the consumer using a bank card to make credit purchases from a store, the commission is equally shared by the bank that has issued you the card and the bank where the store has its account. A small amount also goes to the Visa or the MasterCard organizations depending on the type of card used by the consumer.

On the other hand, if a consumer is using a travel and entertainment (T&E) card, in that case American Express, Diners Club or Carte Blanche retains the entire commission received from the store or where ever the card holder may have made a credit purchase. And in this case, the commission earned by the T&E card companies may even be as high as 10 per cent of the total price of items purchased by the consumer using their card. Compared to the bank cards, the T&E cards are more expensive for the merchants as they have to cough up a greater commission the T&E card companies.

In fact, the widespread use of credit cards has virtually led to a situation where the credit card companies are earning a commission or share of profit on nearly all items being bought across the United States. The commission earned by the credit card companies on every purchase made by the consumers using plastic money is the primary manner in which they make hefty profits at the cost of the consumers.

Annual fees

Another way through which the credit card companies make huge profits is the annual fees charged on the card holders for using their cards. However, this mode of making money is fading fast. The travel and entertainment (T&E) card companies have been charging annual fees from their customer for long, but have now raised the charges in this connection significantly. On the other hand, the store cards never had anything called the annual fees. Even the banks did not charge any annual fees from their customers till 1979, when former United States President Jimmy Carter directed the Federal Reserve Bank to exercise regulations on the amount of money the bankers were entitled to provide as loans to the credit card consumers. The objective behind the move was to bring down the unmanageable inflation rate by reducing the permissible amount of consumer loans to the credit card users.

The new regulations implemented by the Federal Reserve Bank actually forced the credit card companies and banks to tighten the leash on the credit card consumers. This move also did away with whatever little competition that existed among the different credit card companies, as now all of them were brought down to the same pedestal. However, the banks, that were working continuously to find new ways and means to enhance their profits, soon used these controls to their advantage by introducing the profitable annual fees on the credit cards and put the onus for this on the government. Although the credit card companies held the government for the additional taxation on the credit card users in the form of the annual fees, they did not give the money collected on this account from the customers to the government. Interestingly, they retained this extra profit and used a part of it for advertising to lure new and prospective credit card customers.

In fact, the move by the banks to introduce annual fees on their credit cards helped the travel and entertainment (T&E) card companies such as American Express and Diners Club to hike the annual fees on their respective credit cards. This was an added burden for the T&E card users because when the inexpensive bank cards began charging around $25 as annual fees from their customers, the annual fees of the costly or plush T&E cards went up several times more than the existing rates.

There are a number of credit card companies that don't charge annual fees from their customers directly. Instead, they have evolved a different way to collect the money and have named it transaction fee. Every time a consumer of these banks uses his or her card, a sum of 25 cents is added to the amount they spend on credit. Hence, if a consumer uses his or her credit card too often the transaction fee collected by these banks may eventually sum up to more than the usual annual fees charged by other banks. Some people are of the view that these banks have deliberately adopted the system of transaction fee so that they may earn more than the money they could have obtained as annual fees for using their cards. However, it is good news that this system appears to be fading away fast. The reason behind the early extinction of the transaction fee is that the consumers of these banks had begun to realize how their credit card providers were fleecing them in camouflage.

It is surprising to note that the yearly income of some credit card issuing banks is over $100 million only from the annual fees collected from their card users. In fact, a large part of this earning is spent on advertisements luring more customers to possess credit cards. For instance, if Citibank earns $100 million from annual fees alone, it is able to cover the expenses incurred in littering the pages of numerous magazines with Citibank Visa applications with the hope that these magazines, especially their applications, would be read by hundreds and thousands of people who would be stupid enough to submit an application for the most pricey Visa cards available in the market currently. In fact, the amount is also sufficient enough to meet the expenses of putting up four-colored billboards advertisements found at the counters of many stores around the globe. The amount is also enough to bear the costs of sending millions of trash applications in the mailboxes of people residing in the posh localities whom people marketing the credit cards consider to be wealthy and easy targets.

It is good news for the credit card users that the practice of charging annual fees seems to be withdrawing gradually. It may be mentioned here that when the AT&T Universal Card was launched in the early part of the 1990s, biggest USP of this credit card was 'no annual fee for life'. In fact, AT&T Universal Card was not the first credit card to omit the system of annual fee, as several smaller or cheaper cards had already done away with annual fees. However, AT&T Universal Card was certainly the first major credit card company to adopt the idea and push it through hard compelling many other card companies to follow suit. While the move by the AT&T Universal Card practically swept away annual fees from many credit card companies giving some respite to the credit card users, it also led to the introduction of many deceitful systems to fleece the consumers more. In fact, with the withdrawal of the annual fees, the banks were busy finding new ways to increase their profits and hence each adopted different measures to levy various other forms of fees on the credit card users.

Generally, it is very easy to comprehend annual fees. You may be willing to pay the annual fee to get a credit card or even decide to have a credit card that does not charge any annual fee. However, understanding the intricacies of other fees, such as late fees, penalty for spending beyond the permitted limit, fees for bounced cheques and so on, charged by the banks and credit card companies are not so easy. Ironically, while these fees are very popular with the banks and credit card companies as they help to swell their profits, they are a bane for the credit card users who view them as different mechanisms to fleece them. In fact, the credit card issuers love these fees because normally the consumers feel that they are at fault for spending beyond limit, paying their bills late or the bounced cheques and hence do not usually complain when they are charged exorbitantly for these trivial offences. Although the offences on the part of the credit card users are minor in nature and they do not cost the credit card companies much, huge pecuniary fines are imposed on the consumers only with a view to increase the profits of the banks and other card issuing authorities. For instance, if the cost for processing a bounced cheque is a mere 83 cents and the credit card company can impose a penalty of $25 on the consumer for this trivial offence, it is indeed a highly profitable business for the credit card issuers. Several studies conducted on the credit card industry from time to time also suggest that charging late fees and over limit fees on the consumers is also a great money-spinning business for the banks and credit card companies. Such fees charged by the credit card companies are not only debatable, but dubious too considering the fact that whenever a credit card user makes a late payment or goes beyond the permissible spending limit of his or her card, they are continuously charged interest at hefty rates.

Socko interest rates

The third and the most important money-spinning aspect that the credit card companies like the most is the extremely high rate of interest that the card user has to pay on the credit purchases if they fail to reimburse their bill in full within the stipulated grace period or what the credit card companies call 'free-ride period'. In fact, the credit card companies do not have a justified reason for charging such high rate of interests from the consumers for failing to pay their balance due in full in say 30 days from receiving their bills. That the card companies do not have a good reason for their atrocious actions is evident from the fact that when the banks pay a meager interest rate of one or two per cent on deposits or borrowing money from the savers, the credit card users are forced to cough up interest rates as high as 18 to 21 per cent! Therefore, there is little doubt that such a wide gap between paying interest on deposits and charging interests from 'defaulting' credit card users enable the banks to earn huge profits. Frankly speaking, the banks could have made sufficient profits even if they paid five per cent interest on deposits and charged the credit card users 10 per cent or lower interest rates.

Incidentally, the banks and credit card companies have been able to have their way and charge any rate of interest from the consumers simply because there is hardly any serious competition in the credit card business. It is really unfortunate that so far there is nothing such as genuine competition in the credit card industry. With little or no intervention by the government, the consumers have been left to fend for themselves or simply languish at the hands of the banks and credit card companies.

  • They Get Wild When You Don't Pay Interest Every Month: When a credit card user pays his or her balance due on their account regularly every month within the stipulated grace period when they don't have to pay any interest, the credit card companies call such consumers as 'free riders'. Since make regular payments within the grace period does not enable the credit card companies to charge any interest on the consumers and it harms their profitability, often the credit card companies nastily refer to such consumers as 'freeloaders' Even worse, when they are at their nastiest, these credit card companies also describe such 'disciplined' customers as 'leeches'.
    Actually, the banks and credit card companies loathe the 'free riders'. It is the secret dream of every credit card company executive that such free rides or grace periods will be done away with someday soon enabling them to make loads of money by charging the consumers. Thus, it appears that these credit card companies consider it to be your sacred duty to pay them hefty interests each time they use their cards to may any credit purchase. It is an irony indeed that when they wanted you to get their credit cards, the credit card companies assured you of free rides if you paid all your balance dues within the stipulated grace period that is within around 25 to 30 days from the day you received the bills from them. And now they get wild if you pay the balance due on your account timely and don't pay them any interest every month!
  • Fabulously Hefty Interest Rates Mean Great Profits: The amount of profit the credit companies earn only from the annual fees they get from their customers and the commissions from the stores for every charge made by the consumers using their cards is fabulous by any standard. The interest they receive in the form of late fee, beyond limit fee, bounced cheque fee, on cash advance and so on definitely makes marketing credit cards one of the most profitable and lucrative businesses existing anywhere. American Express is a card issuing company that makes it mandatory for its customers to clear their bills regularly every month and in turn charges comparatively lower interest amount from its customers who use the Amex card. Although American Express is doing fine with this arrangement, it would certainly like to change the things with a view to increase the profits. In fact, the Optima card launched by American Express allows its customers to carry the balance due on their account from one month to another in lieu of payment of a reasonably high interest on the amount carried over. Thus, the introduction of the Optima card by American Express may well be described as a moved by the company aimed at collecting more money in terms of interest from its customers and, thereby, multiply its profits.

What's in it for the merchants?

Many people often wonder why the stores and restaurants give a chunk of the income from their sales to the banks or the travel and entertainment (T&E) card companies. They also fail to understand why these stores and restaurants just cannot tell the credit card companies that they are not eager to accept their plastic money as in that case these stores and restaurants would not be required to pay the banks and card companies a share of their earnings. In fact, numerous top restaurants in France and Sweden, where people are very careful about spending their money, have already refused to accept credit cards issued by American Express. Explaining the reason behind the boycott of American Express cards, chefs of these restaurants in France and Sweden said that it became impossible to pay the hefty commissions charged by Amexco on every sale on the card and, at the same time, meet the expenses required to maintain the high quality of their restaurants. They could accept the American Express cards provided they hiked prices, but this was not feasible considering the fact that the prices of food were already quite high at their restaurants. In fact, in this case, American Express was eventually compelled to reduce its charges/ fees with a view to resolve the revolt by the chefs.

Despite the hefty commissions charged by the banks and credit card companies from the stores and restaurants on all sales made on their cards, generally the merchants are of the view that accepting credit cards is ultimately beneficial for them. They believe that accepting credit cards means more sales and that in turn leads to greater profits. While the merchants see their profitability in accepting credit cards, the banks and credit card companies have conducted numerous surveys and copious researches that demonstrate people having credit cards usually spend more money and faster too using the plastic money. Even the manager at any departmental store that accepts credit cards will confess that the volume of sales is more on credit cards compared to purchases made with cash. It is a fact that people who do not have credit cards and make cash purchases have a limited buying capacity since they can spend only what their wallets permit. On the other hand, with credit cards there is a lot of impulsive buying as people do not have to pay for their shopping or other expenditures immediately. Even the owner of a small store is in total agreement with this view. The views of such people is imperative as they are the ones who decided whether they will accept a credit card or not and eventually sign up their company with the people marketing credit cards.

The general opinion of the merchants is that they are selling more and making more profits by accepting credit cards than what they would have made without taking the plastic money. All this notwithstanding, there is a continuous conflict between the merchants and the credit card companies regarding that amount of commission that needs to be paid to the banks and travel and entertainment (T&E) card companies if the merchants accept the credit cards. When merchants accept credit cards they have to pay a cut or a fraction of their earnings on the total purchases made with the cards. The cut or commission paid by the merchants to the credit card companies on purchases made with their cards vary and may be anything between one and ten per cent of the total sales. Although the commission or the cut amount is negotiable, usually the credit card companies don't want the merchants, particularly the small store owners, to know about this aspect of their business. This is simply because the more amounts a card company is able to extract as commission from the merchants, the more their profitability. And if a small merchant is unaware of the fact that the commissions are negotiable or if they cannot press with the credit card companies for a smaller and more reasonable discount fee, it is only merrier for the banks and T&E card companies.

The banks and credit card companies are aware of the fact that they need to be flexible to some extent and negotiate the rates of the plastic money if they need to market them effectively and profitably. On the other hand, the big merchants are also aware that the credit cards rates are negotiable and they are also familiar with the ways to acquire relevant information to shop credit card rates. In such a scenario, the owners of small stores or restaurants need to be watchful of the fact that the commission they are required to pay the banks and travel and entertainment (T&E) card companies in order to accept their credit cards is always open to discussion and that no rate is fixed. In fact, the government should also force the credit card companies to provide complete information regarding the assortment of prices these companies charge the merchants to enable the smaller merchants to have the relevant data they require to bargain the rates with the card companies. Unfortunately, the government has taken little or no initiate at all in this regard allowing the banks and card companies to fleece the merchants, especially the smaller ones, as they rip-off the consumers.

Before we conclude this discussion, let us tell you that you, the consumer, is able to do lots in order to reduce the exorbitant fees charged by the banks and credit card companies from you on different pretexts. Today, the state of affairs in the credit card industry is such that even if a consumer wants to, he or she cannot shop for the plastic money that offers maximum benefits or suits their personal requirements. This is because the credit card companies have been making all endeavors to cautiously conceal all the shopping information required by the consumer. Frankly speaking, these companies have made it very hard for any consumer to access the requisite shopping information and in the event anyone succeeds in getting them, they will find it difficult to comprehend the information. Even if you call a card company for relevant information, you will find that most of the people who will attend your call are themselves ignorant about them. And though they are aware of the information, they would not like to disclose them to you. It is only a rare case when you will come across someone who will be able to provide you with the information, including the details regarding the cost of the card. Hence, the fact remains that in the absence of any relevant information, it is really difficult to shop for a credit card coherently. In other words, it is something next to impossible.

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