credit card business model

Matthew Yglesias » Home Page: "The credit card industry’s business model is basically a disaster waiting to happen. If people pay their bills in a timely manner, the credit card companies don’t make much money. And if people default on their bills, they lose money. So the correct strategy is to try to get people to carry heavy month-to-month balances that charge usurious interest rates without ever quite tipping over the brink into default. So far, it’s worked out pretty well for them, but Eric Dash and Andrew Martin observe that the happy days may soon be over:"

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour

"Meanwhile, it strikes me as a bit of a problem for neoclassical economics that if market interactions worked the way they say they do, the entire credit card industry would barely exist. People would understand the true cost of failing to pay off their full monthly balances and would almost never do so. And credit card companies would compete with one another to offer consumers a better deal on lending terms rather than competing to get more-and-more clever about tricking people into taking out loans that ill-serve their interests."