Interesting article that highlights the risks that many of the credit card companies are facing. Their default rate is skyrocketing and they are having to retrench and stop lending additional money to try to preserve capital.
People have been talking about the next wave of defaults being in credit cards. Apparently Advanta is one of the first to start drastic measures. Other companies have been lowering limits and canceling some customers but I think Advanta might be the first to quit lending to all their cardholders.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_FhoI2A4ZsM
I don’t get how credit card companies are making money at all. I ran through an excel sheet that lends 1000 people 10000 each, and then defaults one of those people each month for 15 years. Everyone pays just 3% of the balance each month and the company was charging 19% interest.
At the end of it, the company has received $18,298,862.06 in payments, $635,159.34 has defaulted and they are still owed $573,446.74.
If that same company had taken that 10 million and earned just 5% interest in something safe over 15 years, they would have had $20,789,281 . . .
12 people each year out of 1000 represents a 1.2% default rate (maybe 1.5% if you do it each year overall). According to Capital One in this article http://money.aol.ca/article/capital-one-credit-card-defaults-rise-shares-fall/597515/ . . . “U.S. credit card default rate rises to 9.33 percent”
No wonder they make most of their money off fees and service charges.
They also make 3%? or so on the purchases, I believe.
True, but isn’t that Mastercard/Visa, and not the individual bank? I’m not sure how the fee structure all pans out. Plus, I’m thinking I may have done that wrong now. If I default 12 people per year for 15 years then the total default rate ends up at 18% . . . So I’m thinking 9% would be one every two months rather than one a month in my scenario.
I’m sure the bank gets commission off of the discount rate charged to the merchant since the bank is able to offer the rewards. It would make less sense to me otherwise.