Are Banks Giving Up on Credit Cards?

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Banks and credit cards
Banks have taken it on the chin over the past several years. But after suffering from a long spell of bad credit card loans during the recession, they are finally getting some positive results from their credit card divisions.

Those improvements in repayment have cut losses substantially, which will allow many banks to improve their earnings by drawing on relatively high loan-loss reserves. That's very good news for banks, which are continuing to struggle to generate profits. (The recent JPMorgan Chase (JPM) London Whale trading debacle is a dramatic example of the risks banks are taking to boost their bottom lines.)

With their success in cutting losses, you'd expect that those credit card companies would be racing to offer new cards to customers. Unfortunately for millions of Americans with improving but still shaky credit, most issuers are taking the opposite approach by continuing to shut many customers out.


Post-Crisis Card Games

In response to the financial crisis, as delinquency rates soared, banks canceled many card accounts, reduced credit lines on others, and were quick to write off losses. It worked. Now delinquency rates have reached extremely low levels -- the current rate is less than half what it was in early 2009.

This is the time when banks would typically reach out for more customers. New regulation, however, has given credit card issuers less latitude to charge high rates and fees on those with less-than-ideal credit, and many banks have apparently decided that those customers aren't worth the risk.

Instead, banks have targeted less-creditworthy customers for other products. In particular, prepaid cards represent a chance to serve a group of customers that hasn't had much access to traditional banking services. With the opportunity to charge higher fees than they can on other cards, banks are looking to expand their prepaid card business as an answer to credit- and debit-card regulation.

It's possible that when a stronger economic recovery emerges, banks will once again move more aggressively into the credit card market. But for now, card issuers are holding back -- and millions of potential customers could have to resort to less attractive alternatives.

Motley Fool contributor Dan Caplinger finds the ebb and flow of the credit card business fascinating. You can follow him on Twitter here. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of JPMorgan Chase.



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28 Comments

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janicedunkin

Anything over 6% is Usery! If you are paying 28% on a CC, you are nuts! You can go borrow money at payday loan cheaper than that!

July 12 2012 at 9:09 AM Report abuse rate up rate down Reply
zephyrhillsfla1

I closed my Chase- American Express -Citi Cards .. i only use my 1 Points Credit card to Get Cash Back
The others Can Kiss mY ass..

July 12 2012 at 8:04 AM Report abuse rate up rate down Reply
drdiaboloco

Funny, I don't pay 29.99% interest on any of my 3 Chase CC's, tbleecker. Those rates are usually for those who have proven themselves to be bad credit risks and are not typical for people who pay their bill on time. A rate more representative of "average" is 15%, which is easily found with any internet search. Anything over 23-24% percent is for customers with bad credit. There was a time in my deep dark past when I was paying 29.99%, but that's because I missed a bunch of payments and that was the penalty... but of course I didn't go on the internet and blame the bank, I knew it was my own fault.

And you may think "you showed THEM" by cancelling your cards, but what you did instead was whack your credit utilization ratio and slash your length of credit histories and almost certainly lowered your credit score. It's not a bad idea to cancel cards with annual fees (those fees being another sign, in most cases, that you're considered a bad credit risk), but take into account how long you've had those accounts open. It may be worth the $50/yr to keep your credit score up for your next big purchase, such as a car or a home (or even a credit check for an apartment lease).

July 12 2012 at 4:35 AM Report abuse rate up rate down Reply
tbleecker

I think this article has it backwards - it's customers who are giving up on credit cards. I paid mine off and cancelled several, particularly those from banks who have added an annual fee. Many banks are now charging as high as 29.99% interest. That's downright thievery in my view. Chase Bank is the all-time worst.

July 12 2012 at 12:59 AM Report abuse +3 rate up rate down Reply
Condley

When you read the comments below you can understand the problem. Our nation has become a collection of crazy Bozo's. Would you extend unsecured credit to any of these people? If you wouldn't take the risk, then why should the banks. Credit cards are not a source of "free money".

July 12 2012 at 12:20 AM Report abuse +2 rate up rate down Reply
nocstreet

Banks/credit card companys are not losing money. They just aren't making as much. In this recession/depression many businesses are taking it in the shorts. For all the people stuck with paying 20-30% interest rates all these years that has more then made up for the customer defaulting on what they owed on the credit card. The merchandise they bought has been paid for many times over.

July 12 2012 at 12:03 AM Report abuse +1 rate up rate down Reply
whamhammer

The disgustingly high availability of credit is one reason why prices have inflated over the last twenty or so years. Cut the amount of credit available to people, the less they can buy, demand is reduced. Supply needs to lower its price (or reduce production) to compensate. Easy credit, especially in the mortgage market, is what created a great deal of inflation to begin with. Lets get some deflation going to fix this problem, like the markets were trying to do in the first place before the government started messing with it.

July 11 2012 at 9:38 PM Report abuse +1 rate up rate down Reply
alstayl7

The cost of everything from cars to college is higher because of the ability of consumers to borrow. Imagine how cheap items would be at Walmart if credit cards no longer existed. It would be painful for a time, but ultimately, we would all be wealthier for it. Remeber, even if you do not use credit, the prices in the stores reflect the amounts that consumers armed with credit, not cash, can offer.

July 11 2012 at 7:27 PM Report abuse rate up rate down Reply
capenv

Ever wonder who is paying for your credit card rewards? The merchant. Merchants are charged a fee based on a percentage of total charge that can be over 5%. Example. If a customer makes a $1,000.00 purchase and pays for it with a corporate credit card, the merchant is charged a 5% ($50.00) transaction fee. If the merchants cost for the purchased product is $900.00, the credit card company makes $50.00, the merchant $50.00 instead of the merchants $100.00 profit if paid for by cash or check. The merchant just lowered his profit margin 50% the instant you pulled out your credit card. Think about the merchant the next time you use your credit card. I'm sorry but it's hard for me to feel sorry for the banks and credit card companies.

July 11 2012 at 6:43 PM Report abuse rate up rate down Reply
1 reply to capenv's comment
whamhammer

Its nowhere near that steep, but you are correct. We need to make our way back to a cash market.

July 11 2012 at 9:40 PM Report abuse rate up rate down Reply
2 replies to whamhammer's comment
rkbluett

So untill everyone uses cash, if I use my cc the increased price I pay has a portion of the cost rebated back to me, and if I time the purchase right I don't actually have to pay cash for 45 days. I increase my credit score that is used for figuring what I pay on loans, insurance, and the desirability of having me as a member. Sorry, cc's are a double edged sword that if used properly can offer many benefits.

July 12 2012 at 8:56 AM Report abuse rate up rate down
capenv

In my comment I said corportate credit card. Corporate cards have a higher default rate than personal credit cards thus the merchant is charged a higher processing rate of 5% or greater. I discovered this when checking my businesses bank credit card processing fees. Personal cards rates are charged less to process around 3 -3.5% depending on card incentives. As a merchant accepting credit cards, my processor never told me about this. The charges just kept rolling in. I've since stopped accepting credit cards. Cash or check only and my business hasn't suffered. Granted it's a convenience for my customers, but a convenience I pay heavily for.

July 13 2012 at 2:36 PM Report abuse rate up rate down
NKS55S

People who use credit cards and do not pay off the balance deserve what they get from high intrest rate cards making banks trillions in revenue from incompitent out of control over spenders. If people cant afford it they really do not need it they just want it no matter what . Competing with the Joneses will get people into debit poor farms and the banks laugh at those people.

July 11 2012 at 6:27 PM Report abuse +2 rate up rate down Reply
2 replies to NKS55S's comment
Darla and Simon

I would've agreed with you 100% about 5 years ago, but knowing so many families (mine included) who lost their jobs or were forced to close their small businesses due to the bad economy; in order to survive, many have tapped into their retirement $ and also use credit cards to pay bills and put food on the table. If someone is taking vacations or buying items they do not need (to keep up with the Joneses), then your point remains correct, but nowadays, there are many exceptions to being financial responsible.

July 11 2012 at 7:22 PM Report abuse rate up rate down Reply
ahtbooth

Does that mean that the incompitant and out of control banks who ruined our economy with bad investments should be held accountable too? Or is that just for the regular consumer? It's a rigged game, loser. Wake up.

July 11 2012 at 8:44 PM Report abuse +2 rate up rate down Reply
1 reply to ahtbooth's comment
whamhammer

It wasn't so rigged when people were spending 150% over the appraised values for homes, and then furnishing them and buying high dollar cars for their garages. Credit was forced to be too lax by the changes in the Community Reinvestment act in 1996. The sooner you come to realize that, the sooner you come to understand what messed up our economy.

July 11 2012 at 9:43 PM Report abuse rate up rate down