Module 2 So MANY Credit Card Choices, So Little Time: How to Choose the Best Deal For YOU (printable version) Visa, MasterCard, Discover, American Express. WHAT'S THE DIFFERENCE? Citibank, Chase, MBNA, First USA, AT&T. Are they all the same? Besides the interest rate, what should you look for? With so many confusing economic terms and microscopic fine print, how do you choose--WISELY?!! Do you really think that Citicorp is going to tell you? Well, HELLO! This module is divided into two sections. Part One is for students without any debt on their credit cards. If you plan to use your credit card only for convenience or emergencies, read this section and examine the list of credit cards in Table 1. The key issues to be explained are the annual fee, grace period, rebates, and other membership benefits. If you currently have or expect to "carry" a debt on your credit card(s), you may wish to skip Part One and go directly to Part Two. This section examines the annual fee, different types of interest rates, and membership benefits as summarized in Tables 2-4. It also explains the most cost effective strategy for minimizing your credit card expenses. Depending upon your personal needs and economic situation, we will show you how to select credit cards that have the best combination of prices and services for you. Also, the worst. So, come on. Let's go find out the companies that rank as The Good, The Bad, & The Ugly. OVERVIEW: Plastic Money in the Credit Card Nation In the Credit Card Nation, people are divided into two groups: (1) those who pay off their credit card charges at the end of the month or "Convenience Users" and (2) those who pay high interest rates to finance their unpaid charges or "Revolvers." From the credit card companies' perspective, that is the banks such as Chase Manhattan or financial institutions like MBNA that offer you a credit card (Visa, MasterCard, Discover, American Express),1 this difference is crucial in determining how they make their profits and thus how they market their services. Approximately 40% of all Americans use their credit cards for convenience. They essentially receive a free loan and free member services. The only money that is made by the credit card industry from these customers is the approximately 1 1/2 to 2 1/2 percent transaction fee that is paid by merchants. More if you use the American Express charge card which is why merchants would prefer that you use cards like Visa and Discover. When you add the costs of customer service, account management, and processing purchases, credit card companies may actually lose money on some Convenience Users! That is why they call these customers "DEAD BEATS."2 And, for the majority with high credit card balances, it means that Revolvers are subsidizing Convenience Users by paying double-digit finance charges--enough to pay for the credit card services of both groups!3   1 (return to text) It's a financial jungle in the Credit Card Nation. Do you know that Visa and MasterCard are membership associations NOT real companies. That is, Visa and MasterCard are associations with thousands of different companies who all contribute membership dues to pay for super slick marketing campaigns, new processing technology (they don't use PCs to process your charges!), executive staff, lawyers, etc. You know, like the United Nations! Each member, within the general guidelines of the association, is free to establish their own account "terms" for credit card customers such as interest rate, car rental insurance, and cash advances. You get the picture. Hence, the Citibank Visa or the MBNA MasterCard. In comparison, American Express and Discover are not associations but corporate divisions; Discover was previously owned by Sears and is now a subsidiary of Morgan Stanley Dean Witter. To further complicate the credit card "jungle," there are also companies that offer credit cards that are not traditionally financial service companies such as AT&T (recently sold to Citicorp) and GE Capital Consumer Card. For an overview of these industry trends, see Joseph Nocera, A Piece of the Action, How the Middle Class Joined the Money Class, New York: Simon & Schuster (1994).. 2 (return to text) Convenience Users are "loss leaders" for the credit card companies. They hope that an unexpected emergency (car repairs), family expense (college tuition), personal crisis (divorce) will eventually lead to some "dead beats" becoming profitable "revolvers." Banks originally tried to charge Convenience Users an annual membership fee but this policy has been successfully resisted by many customers. In the meantime, the low inflation of the 1990s has reduced the cost of borrowing money for credit card companies which has led them to "carry" unprofitable accounts. When inflation rises, which will increase the cost of borrowing money and thus the losses on dead beat accounts, you can expect that more banks will impose a mandatory membership fee or simply not renew their unprofitable credit card accounts. 3 (return to text) For a more detailed discussion of the social inequality of consumer credit, you may wish to consult Robert D. Manning, Credit Card Nation, New York, Basic Books (forthcoming, 2000).   Copyright Newtonian Finances Ltd. © 2000-2024 (disclaimer)