Debt Consolidation and Credit Card Counseling

Credit card companies profit from unpaid balances

The credit card industry is a strange business. One would think that, like any business, the industry would be happy to see their customers pay their bills. Cash flow, after all, is what keeps any company going. But the credit card industry is a little different from most. They like to lend money, but they like it even more if you don’t pay it back all at once Americans are starting to do that, and it’s making things tough for card issuing banks.

Borrowing against your credit card is not a particularly cheap way to get money. Interest rates on home loans are hovering in the 6% range, but interest rates on the plastic in your wallet average more than 17% annually. Obviously, if banks can borrow money at rates below 6% and lend it at rates that exceed 17%, they’ll make money. And they do. Lots of it. The problem is that as people start to repay their bills, the banks are making less money.

Part of that has to do with the fact that the Federal government passed a law in 2003 requiring the credit card companies to increase their minimum payment requirements. Previously, minimum payments were as low as 2% of the unpaid balance. That allowed customers to pay high interest payments for years without putting so much as a dent in the principal. At 2%, most people who paid only the minimum actually saw their balances increase after they made their payments. WIth the new regulations in place, the average payment is now 4%, which helps consumers pay off their balances sooner.

Another factor is the aggressive competition in the card business. Many banks are offering “teaser” interest rates that sometimes drop as low as 0% annually for new customers. This encourages people to open new accounts and transfer their balances. But customers have quickly learned that you can do that more than once and continue to borrow money for free. And thousands of others have discovered that taking out a home equity loan to pay off credit card debt is an even smarter move. Not only are the interest rates as low as half of what they were paying, but the interest is tax deductible, too.

All of this has put a dent in the profits of the big banks that issue these cards. Instead of making money on lending, they have had to get a bit more creative. Most banks have now increased their late fees, which run as high as $39 for a payment that’s even an hour late. And interest rates on accounts that pay late are quickly increased to higher levels - some as high as 30%.

Paying 30% to borrow money isn’t smart and Americans are quickly learning that. The cat and mouse game will probably continue, as the banks that issue these cards try to find ways to make more money while consumers try to find ways not to pay any more than they have to.

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