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One of the things that comes as a shock to many people is the fact that most best credit card companies do not actually want you to pay off the card balance every month. You would think that companies considered their “best” customers to be those who use credit cards responsibly. However, this is not the case. Credit card companies actually prefer those who carry a balance from month to month. (The recent trend by credit card companies, shutting down “inactive” accounts, is one manifestation of the companies’ hatred of responsible credit card use.) The New Yorker’s James Surowiecki describes who the real “best” customers are for credit card companies, making it clear why responsible credit card use is no longer preferred by credit card companies:
Their best customers aren’t those who dutifully payoff their balance every month; instead, they’re the ones who charge a lot and pay only a little every month, carrying a sizable balance and racking up interest charges and late fees. These are the “revolvers,” and the credit-card business feeds on them. Credit-card companies don’t necessarily want revolvers to payoff their credit card debts; if they did, there’d be no interest or fees to collect. They want their loans to be, in the words of a banking regulator, “a perpetual earning asset.”
Indeed, the goal of credit card companies is to help you strike a delicate balance: Get in enough debt that you have to keep paying and it takes forever to pay it off (paying two or three or four times more than you borrowed in interest), but they don’t want you in so much debt that you finally actually fold.
And it’s not just the credit card companies. Our entire economy is debt-based, running on this sort of consumerism that has the American people in debt — but hopefully able to keep their heads above water. The fact that such a situation is not ultimately sustainable is part of what has brought on the financial crisis and the recession.
March 23, 2009 at 7:27 pm
[...] as credit card issuers start closing accounts of those who are responsible with their credit is that issuers don’t actually want you to pay off your balance every month and use your card only occasionally. I was asked about this recently: “I don’t [...]
March 28, 2009 at 1:05 pm
[...] that banks want you to overdraft your checking account is like saying that credit card companies don’t want you to pay off your balances. It makes sense, but it’s not terribly obvious. Mainly because we think that banks would like [...]
April 6, 2009 at 6:06 pm
[...] is true that part of the reason we’re in this mess is to do with the fact that credit card companies encourage us to be in debt. But we also have to take responsibility for our choices. Perhaps it’s time strive to bring [...]
April 7, 2009 at 8:27 pm
[...] Dave over at My Two Dollars delves into the credit score aspect of Orman’s advice in great detail. He pointed out that many companies are closing credit card accounts that have reached a balance of $0 and that are inactive. This means that you can have your credit score dinged by having less available credit. And it also means something else: Folks who thought that their credit cards could serve as a supplemental emergency fund during the recession are in for a rude awakening if their credit accounts are closed by companies who aren’t interested in how responsible they are. [...]
April 17, 2009 at 12:48 am
[...] doesn’t mean I’m not going to get a smack down from the credit card issuer. In fact, my responsible credit card use is more likely to get me a smack down, since credit card issuers aren’t making much off of [...]