Why Credit Cards Are A Bad Business Model
I was canceling one of my credit cards the other day and the guy on the other end of the phone kept trying to woo me into another card from the same bank. I had held the card for over 14 years and paid on time every month so I’m not surprised that they were upset to lose my business and were trying to throw new deals at me to try to get me to stay with them. But the decision to change cards had been made months before so I respectfully declined all ofers and cancelled the card.
This got me thinking about the way credit cards work, how bad a business model it is and how the credit market has only itself to blame for the mess it’s in right now. The idea of a credit card is quite simple: instead of paying at the point of sale you run a tab with the credit card issuer and make one lump sum payment for everything pay once a month. Sounds easy enough. But what’s in it for the credit card company?
Over time people started to fall behind on their payments. “What’s the difference?” they thought. “I’m getting the benefit of the items I charged on the card so I don’t mind if I’ve got to pay interest and late fees when when I pay late.” The problem is that the next bill will include two months of charges and now it’s too big for them to pay in one shot. What follows is a cycle of continued charging while trying to pay off the debt they now owe the credit card company.
That is how the credit card companies make their money. They bet that the cardholder will fall behind on payments so they can charge interest and late fees. But that is flawed. If the cardholder can’t make any payments then it doesn’t make a difference how much interest or late fees they owe because they still can’t pay.
And that’s where we are now. Cardholders who are deeply in debt to credit card companies but can’t pay off their debt and credit card companies who can’t collect what they’re owed.
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