Anyone who likes manipulation must love credit cards.
For the past few years, credit cards were one of the biggest profit center of the banks that gave them out. I could write a whole book on how banks could manipulate customers via credit cards, but let me just list my favorite banking manipulations:
- Low minimum payments: The monthly minimum amount that your card company asks for is usually only slightly more than that month’s worth of interest. As a result, if you’re foolish enough to just pay the monthly minimum, you are essentially just paying interest – you’re not actually reducing the balance. To put it in some numbers, if you had $1,000 on a credit card and paid off the minimum amount every month, it would take you… 152 months (or more than 12 years!) to pay off that balance. In that time, you would have given the credit card company more than you borrowed (around $1,100) in interest alone. And don’t kid yourself – up to 1/3 of cardholders pay the minimum amount on their cards at least some months of the year.
- Games with APR: so you think you know your card’s interest rate, do you? Most cards’ interest rate hover around 18% (the good ones, anyway). But most cards also have a hidden rate, the Penalty rate, that is buried in the card’s agreement. The credit card company can charge the user the Penalty rate (which is closer to 20-35%) whenever some conditions are triggered: skipping a payment, a late payment, or even (amusingly enough) being late on some other, non related payment. So, if a consumer is late on a payment for a dishwasher, for example, his credit card interest could double overnight. And banks do not need to disclose the change to the user – he’d have to work it out himself.
- Dual-cycle: This is one of my favorite all-time manipulative tricks. The core idea of a credit card payment is that you pay interest on the outstanding balance. But some cards calculate the balance in interesting ways. In dual-cycle balance cards, for example, the balance is calculated over two cycles (two months) instead of one. So if you have a balance of $1000 in January and pay $990 on Jan. 30th, your balance would be $10. But a dual-cycle card would charge you February’s interest rate on $500 of balance, because your balance in January was $1000.
- Creative fees: You would expect banks to charge fees for many things card-related – after all, they have your credit card number right there, and fees can conveniently be charged right on it! So banks learned to charge fees for late payments (just after they hike the rate to Penalty levels), or for skipping payments. Those were relatively reasonable, but as banks learned the power of fees they started to create them for all sorts of things: foreign transactions, cash advances, even reward redemption. Then they got more creative still – paper statement fees ($1/month), penalty fees for NOT using your credit card ($75/year), or even early payment fees (if you pay your balance before you get a statement). These kind of fees are always manipulative (they’re hidden, they are usually small, and they are designed to affect a lot of people) but credit cards are the second most sophisticated user of these types of fees.
- Amusing due dates: Pay your bill on time is sage advice for credit card holders. Of course, that becomes harder to do as banks started to manipulate the due dates. Several years ago, most statements were due at the end of the month. Then banks systems allowed them to create due dates that were basically driven by the day the user got his card. But soon banks started to experiment with due dates that were more manipulative – dates that fell on week-ends, for example, which made payments on that date effectively impossible, changing the due date every month (to ‘catch’ consumers who paid every month at a set date), or even creating a due date such as the 10th of the month, but writing in the small print that the due date was the 10th of the month at 2:00am (i.e. an effective 9th of the month date that would make a lot of cardholders late, subjecting them to late fees and penalty APRs).
- Differential rates: okay, one last one. Credit cards can have different rates: a 0% interest rate on balance transfers, for example, followed by a 19% rate for purchases and 23% for cash advances. If you pay off the whole balance, then there is no issue, but if your balance from all three of these activities is higher than your payment, then the credit card company has to decide how it will allocate the payment. As a rule, credit card companies always used to allocate payment to the cheapest debt (lowest interest rate) first, leaving all the high interest debt intact. Someone who transferred a $2000 balance to a card, for example, and then bought $500 worth of merchandise would have a balance of $2,500. If she paid off $1,000 of that, the bank would allocated the $1,000 to the balance transfer (at 0%), and calculate their 19% interest charge on the full $500 of new purchases. As an aside, banks can play with this order-of-payments mathematics in quite a sophisticated manner, but that is the subject of another post
There are plenty of other tricks that credit card companies can use – some to avoid usury laws, some such as setting up minimal interest payments, and others, but that is not the purpose of this post. Over the years, the credit card industry got a lot of bad press for these practices, and finally a new law was passed this summer to prevent a lot of these practices. The CARD act passed despite a lot of lobbying from the banks, and provided for a fair bit of new protections for credit card holders. It made it harder to levy and create fees, especially random ones like the more recent ones. It provided for more disclosure to consumers, and made it harder to use some of the manipulations highlighted above. It also protected students and young people, who are usually some of the less-savvy credit card users.
So banks had a dilemma. There were still many, many ways to make money on credit cards, but capping fees and such would severely eat into the bank’s profits. So what is a bank to do?
Well, they turned to “Professional” cards, or “corporate” card. Banks used to issue these to small business owners and senior executives at large corporations. They were basically credit cards but without some of the manipulative tricks I mentioned above. The reason was simple – the average balance of a credit card is $3,000, which is enough to make real money to the bank but small enough so that some of these tricks don’t trigger a strong response from consumers. But a small business owner or a CEO could charge $20,000 a month on his credit card, and they would notice even a small increase in interest charges, never mind a doubling of the APR. So banks always issued some professional cards to those types of users.
After the CARD act was passed, though, the banks noticed that professional cards were not included in the legislation. Since they are credit cards in all but name, banks began to market them aggressively to their credit-card customers (after adding most of the penalties and tricks used above, of course). One market research company reported that applications for professional cards went up 256% this year compared to last, as banks begin the painful migration of millions of credit card users to “professional” cards.
These new cards sound good – Business Platinum Card, for example, but they also carry all the tricks of their predecessors. For example, an MBNA Business Platinum Card’s APR can convert to Penalty APR if the holder is late twice (by 3 days) within a whole year. The CARD act makes it impossible to charge this kind of penalty on normal credit cards, but professional cards carry no such protection.
As the WSJ reports, those professional cards applications used to be targeted at owners and CEOs – so they asked for the business name, the revenues, etc… The new professional cards ask applicants a single question – ticking a box that says “I am a business professional with business expenses.”
This is a good example of the natural life cycle of a corporate manipulation. If a manipulation or a set of manipulations is too successful, it tends to attract government scrutiny. Often, that threat can be eliminated or mitigated through lobbying and other efforts, but once in a while the government will ban or regulate the manipulation. And then, of course, the manipulators have to find new tools in their arsenals to respond. So expect a lot more offers from your local bank for their “professional” card over the next few years…