The Borrowers
Credit cards take swipes at stability
With consumer credit-card debt climbing, banks are shifting marketing strategies to get their plastic in the hands of more financially stable customers. Stacey Vanek-Smith reports.
Window sticker advertising Visa and MasterCard credit cards in San Francisco, Calif. (Justin Sullivan/Getty Images)
More on Spending
CORRECTION: This story incorrectly reported the cash-back rate on Visa's NestEggz Card. It's 1 percent.
TEXT OF STORY
KAI RYSSDAL: We have collectively racked up a $900 billion credit-card bill in this country.
Given the way the economy's going, it's not at all clear who's going to pay it. Millions of consumers don't have the cash to settle their debts. There's talk credit-card defaults might set off the next wave of the financial crisis. And that has left banks scrambling to reinvent the most profitable part of their business, and trying to convince people -- the ones who still have good credit, anyway -- that plastic can be their friend.
Marketplace's Stacey Vanek-Smith reports.
STACEY VANEK-SMITH: In midtown Manhattan, product manager Brad Weineke is buying a black-and-white cookie and a bottle of water with his credit card.
BRAD WEINEKE: My wife and I typically put pretty much everything but our rent on our credit card.
Weineke used to have a card that earned frequent-flier miles. Now he uses a cash-back card. So, every time he charges something, he gets a little bit of money back.
WEINEKE: I'm sure I just saved 2 cents.
And these days savings is sexy. And virtuous credit cards like Brad's are one way banks are re-pitching plastic now that debt is a four-letter word.
CREDIT CARD COMMERCIALS: "The Discover Motiva card. When you pay your bill on time, six months in a row, you get the next month's interest back as a cash reward." . . . "Your cash back appears each month on your statement -- automatically." . . . "So call now for the fee-free, Simply Cash business card."
Did you get that? The more you charge the better off you are? There's Visa's new NestEggz Card and Fidelity Investments' Retirement Rewards card. Both deposit 2 percent of what you spend into a retirement account. Charles Schwab's Invest First Card funnels 2 percent into a Schwab brokerage account. Company spokesman Richard Musci says the cards have been a success.
RICHARD MUSCI: The take-up rate has been tremendous. The volume of inquiries and customer accounts has greatly exceeded our expectations.
Credit cards have offered cash rewards before, but these new cards are attached to savings plans. And consumers can earn back roughly twice as much as they used to.
Ken Wilbur is a marketing professor at USC. He says credit-card companies are shifting towards these virtuous cards to attract more upscale and financially stable customers.
KEN WILBUR: The card companies move up-market and compete harder for those previously less profitable customers who had better credit and were less likely to carry a balance.
In other words, the customers they used to ignore, in favor of people who were less responsible with their credit. Remember, card companies pulled in a fortune in interest charges and late fees from people who spent more than they could afford to pay back. And, before the economy crumbled, no one was too young or too risky to qualify for a card.
CREDIT CARD COMMERCIALS: "There's no credit check. Everyone is eligiable to sign up. You don't even need a bank account." . . . "And a credit card for you! I love shopping! You never run out of money."
And if you did run out of money, you could tap your home-equity line to pay your credit-card bills. That's what many homeowners did for years. Then the housing market collapsed and those lines of credit dried up. That's left credit-card companies scrambling to save their business model.
Robert Manning is the author of Credit Card Nation.
ROBERT MANNING: The credit card is the most profitable line right now in the banking industry, and they need to squeeze it for everything they can get.
So, Manning says, credit cards are cutting back on benefits like free rental-car insurance and purchase protection, and they're charging fees for things that used to be free, like your rewards. They're also punishing risky customers with smaller credit lines and higher interest rates.
To figure out just who is a risky customer, Manning says card companies are hiring data mining consultants to identify cardholders who live in low-income neighborhoods, or shop at deep-discount stores. The thinking is, you're more likely to have more trouble paying your bills if you live in an area where foreclosures are rising or shop with people who are behind on their card payments.
MANNING: We're talking about risk assessment that's not based on your personal behavior, but now, you've gotta be blamed about the person in line in front or behind you, whether they're paying their bills on time. This is absolutely extraordinary and outrageous.
And likely to continue. As more people default on their credit cards, and as credit-card companies do whatever they can to make sure plastic keeps paying off.
I'm Stacey Vanek-Smith for Marketplace.
Comments
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From Aurora, CO, 04/17/2009
Last week I gave myself an early birthday present. I paid off the last of my non-mortgage debt. All of my loans are paid off. All of my credit cards (I have four cards: two store cards from Lowes and Kohls, a MasterCard and a Visa attached to my credit union account) are paid off in full. A renter with a long-term lease pays my mortgage each month(on a property I could not sell once I married and moved into my husband's much larger home), giving me some breathing room to stash cash in a savings account.
Now the game plan is to remain debt free. All amounts charged to a credit card need to be paid off within 15-20 days to avoid any service charges. They are only to be used in the case of something major (an appliance, a car or an internal organ) breaking down. And every penny that I would have spent on a monthly credit card payment goes into savings, where interest can work for me for a change, instead of against me.
I have reached an age where I do not have to have the latest and greatest, or dress in the trendiest fashions. Fiscal discipline is now the hottest thing on the block and carrying huge balances on one's credit cards seems like the height of folly (though to be fiar, many people have nothing else to rely on at the moment). The credit card companies push a particularly nasty form of debt and I'd grateful I'm free of it. Now I won't have to worry about losing my job in a few months when my company goes belly up, because there won't be any payments to make. Is my behavior, being thrifty and eschewing the now of credit card purchases in favor of packratting my paychecks at the heart of our continuing recession? Perhaps. But the assets I have are paid for. Assets floated on a credit card or a loan can't really be called 'ours' until we make the last payment. Its in this period, between the acquiring on credit and the last installment that most people run into trouble. An unexpected job loss, an illness, any disruption can spell doom for people in a society where a good credit score is often the ticket to preferrential treatment. And people like me, who used to make payments faithfully and use credit wisely, had an edge in the game.
In this latest twist, credit card companies have decided that no segment of the population deserves good terms. I was notified by one of my card companies (the one that appropriately uses marauders in its commercials) that my rates were going up to a 17% variable, due to 'market conditions'. Translation: because we were chowderheads and gave a great deal of credit to people with the responsibility level of a tumbleweed, zero understanding of how credit works and sketchy employment histories, we now have to treat our more responsible, credit-worthy customers as if they were potential felons. As a result, I am cancelling that card. Maybe not wise, considering how hard it is to get credit at all, but since I can no longer get credit at a reasonable rate for my score (nearly 800), I see little reason to keep something that will only harm me financially.
As far as the credit card companies are concerned, I have had enough of the game. the entire structure of the credit industry and the ratings agencies seem geared toward the goal of keeping people in a perpetual state of revolving debt payments. As of now, I will pay cash if possible, moderate my spending (if I spend at all) and avoid buying what I don't need. I will keep the card with my credit union and deprive the other company of my business for treating me poorly and failing to run their business properly. I refuse to be the financier for a number of other credit card holders who cannot make their payments. I'm already paying taxes in this year of the bailout - I see no reason why I need to do this for the credit card industry as well. Credit card reform legislation can't come quickly enough.
From Los Angeles, 02/04/2009
i agree with James Biggs' last statement "let the borrowers beware." if you don't want the privilege of using credit, then pay everything in cash. but if you decide to use credit, the banks can and will do what they want to their benefit. the problem i have with financial profiling is that it factors in elements that are based on chance. the guy behind me in line might be from a different city, and i might be from a different city, but we by chance shop at the same store in some random city because we both needed an emergency purchase. do number of purchases at a particular store then become factored in? at what point is this redlining, as Beth Hauck so rightfully stated? i just don't see how this can in anyway be a positive long-term solution to the credit crisis.
From MA, 02/03/2009
Denying credit to cardholders who live in low income neighborhoods or shop at deep discount stores is not just, as Manning put it, "outrageous." It's called redlining, and it's illegal as defined by the 1976 Discrimination Act.
From New Haven, CT, 02/03/2009
Hi Kai!
The debt lesson was hammered home long ago and yet, in the 80's, I had to have a personal "bailout".
Since that time I've used a credit card for convenience,overpaying the balance every month (at the bank, in person).
I do not use debit cards for two primary reasons: they are not as secure and you need to remember to deduct it in your checkbook.
Sincerely,
Chuck Gilbert
From VA, 02/03/2009
As to why banks are now offering "savings plans" let me offer three reasons not mentioned in the story (reasons that I am certain the banks have considered): - The main reason all banks offer savings plans: to gain access to a depositor's money so it can be used or lent by the bank for a higher rate (i.e. profit) - So that when a cardholder defaults on his payments, the bank has access to the depositor's cash to offset any losses - And as for systems the pay for one month's financing charges after six months of on-time payments, this system is predicated on the cardholder running a balance and NOT paying it off every month (and sneakily lures the holder into running a balance to gain the paltry one month bonus). I am surprised never to have heard any reports on these schemes mention these (or any other) hard profit motives; I am certain they are they among the primary motivators. Credit card banks often make extra money as casinos do: by presenting customers with seemingly simple deals whose hidden or complex details elude them; I suspect these are little different. Let the borrowers beware.
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