Sneaky Credit Card Tactics to Maximize Profits
Today’s post is a guest article from Vik Tantry at Kanjoh. Vik has a new blog that takes a video-focused approach to teaching financial concepts. I hope you enjoy it. [-SM]
For a long time, the credit card industry has profited from charging extraordinarily high interest rates to consumers. But most people aren’t aware of the specific tactics used to target these consumers. Using client segmentation and marketing techniques, credit card companies can determine which consumers are most profitable, and then focus on retaining these consumers.
Capital One was actually founded by using these techniques. Back in the late 1980s, credit cards were becoming increasingly popular. The founders of Capital One started looking at consumer data, and found three distinct groups:
- Those who paid their bills on time
- Those who made the minimum payment, but always keep a significant outstanding balance
- Those who constantly defaulted on their credit
Of these three categories, only the second one was profitable. Capital One couldn’t make any money off of consumers who paid their bills on time. They also lost money on the third group. But the second group was a gold mine. These were the people who could just make ends meet, but were unable to pay more than the minimum payments. As a result, they were prime targets for exorbitant interest rates.
Once Capital One figured this out, they created a targeted marketing plan. They used tactics such as low introductory rates, with steep increases in subsequent years. The plan was very successful, and soon other credit card companies were copying their strategies. Unsuspecting consumers were encouraged to meet the minimum payment, without blatant warning of the high interest rates to follow.
The recently passed credit card legislation may help reduce this, but it will not prevent credit card companies from trying to make a profit. Capital One and its competitors will continue to use tactics to find profitable consumers. Just remember, what’s profitable for them is a loss for you.
This blog is all about Finance, Fitness, Fashion & Fun - the sum of my life. If you like what you've read, feel free to subscribe via (feed reader) or (email) to follow along.
Yep, that’s why they invented MERCHANT FEES. My Amex makes plenty of money off me, even with the rewards and the bill paid on time.
Thank you for the posting…Now I just need to get rid of my credit card debt. Your posting reminds me of Dave Ramsey illustration of the credit card company with these hugh builds and us (individual in credit debt) with small homes, because we are given all of our money to them.
I’m with dogatemyfinances, the only $$ the credit cards make off of me are merchant fees.
It’s interesting that Capitol One started this. After I got over my fear of credit cards that was the first card I got. They kept sending me offers and I realized that I needed to have at least one personal card (I had a corporate one). I think it was because they knew I was in the profitable bunch.
Capital One is one of many companies that use crazy tactics for profit, remember Providian-accepting payments, depositing the check, but not crediting the account, thus making the payment late
I think everyone should watch -Frontline: Secret History of the Credit Card
Credit card companies are sneaky like that, and they will look for loopholes (fine print stuff, too) in order to lead them to increase their profits through underhanded measures. I think that the best insurance for not dealing with these kinds of things is to restrict card purchases to the use of a debit card with bank protection against fraud.
Jerry
Hello all,
This is Vik, the guest author of this post – thanks so much for all of your insightful comments. MoneyMonk brings up an excellent suggestion – the Secret History of the Credit Card is a fantastic piece that everyone should watch.
Thanks for reading!
Vik