The topic of credit cards is one that elicits varied responses from individuals based on their personal experiences with them. In my opinion, there are many good things about credit cards. Others, however, feel the opposite. Like them or not, credit cards are a part of mainstream society and they are here to stay.
Most people only look at credit cards from the consumer’s perspective, and not from the perspective of the credit card company. When you look at credit card users from another perspective, things change and you can learn about people’s habits, hopefully, including your own. And understanding your credit card habits is an important thing to do.
In my opinion, there are 5 main types of Credit Card users:
- Max Payers – pay in full on-time, every time. While credit card companies don’t make as much money from Max Payers as they do from other customers, they are still profitable customers to have around. Credit card companies charge stores around 3% for each transaction, so even when they are paying Max Payers a 1% cash back reward, the credit card companies are still making money. Max Payers are also important to the credit card companies because it allows them to lend out more money. Think about this for a second – if credit card holders didn’t pay the money back regularly, the credit card companies would have less money to lend.
- Revolvers – always carry debt. These are the favorite customers of credit card companies. These customers only make the minimum payment or slightly more, and often stretch their payments out for years. Their debt may be large or small, but it is rarely paid off in full. On the occasion when the credit card does get completely paid off, this type of credit card user will usually make new charges. The interest rates and fees these users pay are the bread and butter of the credit card industry.
- Deadbeats – never pay, nor have any intention of paying. These are the credit card companies’ least favorite type of customer. Deadbeats are what keep interest rates and fees high for everyone else. Some of these cards are obtained fraudulently, or by people who make a game out of signing up for every card they can so they can get a free t-shirt, store discount, or other small reward. Deadbeats are bad for credit card companies, and they are bad for the other consumers. Don’t be a deadbeat.
- The Arbitragers – game the system to make money from 0% balance transfers. This is something that has only been around for a few years, and some people have turned this into an art form – literally borrowing over $100,000 from various credit card companies and earning money from the interest. Many credit card companies have recently cracked down on this practice by reducing the amount of 0% balance transfer offers, or by implementing high fees to transfer the balances. However, there are still enough companies doing it to make it profitable to people who know what they are doing.
- The Reformed Credit Card User, or, the Non-User. These are former credit card users who, for one reason or another, have decided to stop using credit cards altogether – including for emergencies. Usually, reformed credit card users have had previous problems with credit card debt and have decided the best way for them to stay out of credit card debt is to stop using their credit cards. The credit card companies miss these customers dearly because they usually came from the Revolvers group. Credit card companies often try enticing these former customers with special incentives to bring them back.
Credit card company’s perspective: The goal of credit card companies is to add more Revolvers and Max Payers to their books. These two groups of customers are the most profitable customers to have. In fact, credit card companies make so much money from these two groups that they will gladly give away t-shirts, store discounts, and pay commissions to “bribe” people to sign up for credit cards. They know that enough people will eventually fall into the Revolvers category to allow them to write off the less profitable customers such as the Deadbeats and Arbitragers.
Which type of credit card user am I? I am a Max Payer. You better believe that if a charge goes on my card, I have the cash to pay for the item in full. If I don’t have the cash, I don’t use the card. It is as simple as that. Which type of credit card user are you?
Tomorrow, I will write about these same types of credit card customers form the customer perspective.
Note: The names for the first three types of credit card users came from a presentation on problem-solving that was given by Barry Nalebuff, a professor at Yale School of Management. In this presentation, Barry briefly used an example of the credit card industry and how they attract new customers. Based on my personal observations of the credit card industry, I expanded the list to 5 types of users and filled in the blanks.