Monday, November 16, 2009

The Credit Card "Business"

By Mike Dorf

As various commentators have noted, the traditional business model of credit card companies is peculiar.  Here is how James Surowiecki described it in a May issue of the New Yorker:
Their best customers aren’t those who dutifully pay off 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 pay off their debts; if they did, there’d be no interest or fees to collect.
. . . The catch is that while revolvers are the companies’ best customers, they’re also more likely to default, which would make them the worst.