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.