Too often, when talk about undeserved credit card rate hikes, a few of our readers will justify the credit card company’s actions by pointing out that other readers are, in pure business terms, bad customers!
No one ever seems to say this when doing business with other companies. We never see comments like, ‘You’re a bad customer if you don’t go over your minutes’ or ‘You’re hurting the bank by not not using your overdraft’.
If you’re a consumer, this is the worst way to visualize your business relationship with your credit card company and we will explain why!
The main problem with this way of thinking, (other than that it’s incorrect!), is that it frames the relationship in terms that favour the credit card company over you. By giving the credit card company all the power, it minimizes your value, and could actually make it harder for you to stand up for yourself when negotiating with them.
To begin with, let’s address this myth:
- ‘When you pay your balance in full every month, you lose the credit card company money.’
This is false.
The credit card company doesn’t get to charge you interest of course, but it still earns merchant transaction fees every time you use your credit card somewhere. It’s in the company’s interest that you use the card frequently, whether you carry a balance on it or not.
-Reclaim your credit card fees
Read: 7 reasons why you should use your credit card for everything
- ‘The company has to raise rates to try to make money off of you.’
This is only partly true.
If you carry a balance, then any rate hike is going to generate extra money; but the company knows that it runs the risk of you closing your account and freezing the balance, thus limiting any potential future revenue.
If you’re one of those no-balance people, there’s probably another, long-term reason for the rate hike. After all, if you don’t carry a balance, no interest rate is going to generate extra money. The company might be trying to increase its potential payout if you start carrying a balance one day, but remember that they have a detailed view of your payment history; if it’s obvious you never carry a balance, then a 5% or 50% interest rate is going to earn them the same amount: zero!
So why would a company hike the rate on no-balance customers?
Maybe it’s simply in their interest to carry more high-rate accounts than low-rate ones, and this is the perfect economic environment to slide a chunk of accounts over to the high-rate range under the simple excuse of ‘market conditions.’ Maybe it’s really not as personal as you might think, but simply a consequence of decreased competition for your business. Credit companies know they aren’t going to have to fight as hard to keep customers, so why not make the terms more favourable for you while they’ve got the chance? If you ever do start carrying a balance, they’ll be glad they did.
If a company really wants to guarantee extra profits from all its customers, including the prompt-paying ones, the only way to do it is to charge a fee of some sort. They can invent an annual fee, for example, or create new fees for transfers or special uses of the card (like obtaining cash advances). Or they can play really dirty, and drastically reduce your credit limit to increase the odds that you’ll generate over-the-limit fees!
Another reason is that due to the economic downturn, the chance of you losing your job is now much higher. Losing a job means that you’ll be tempted to use your credit card to help you get over the worst of it and you won’t pay off your full balance. So, credit card companies put up their rates in anticipation that it happens.
Read: Egg raises card rates by 5%
Read: Credit card companies promise to treat us better
- ‘You’re not a good customer if you’re not generating the maximum revenue possible for your customer profile.’
Yeah, right!
Look, you’re certainly not an ideal customer, but if you were actively losing the company money, it would simply stop doing business with you.
Credit card companies are adjusting agreements to be more in their favour because, quite simply, they can right now!
If there’s not a lot of demand for your business (as in our current economic climate), any smart credit card company is going to downgrade its terms accordingly. After all, they aren’t going to have to compete as strongly to attract new customers or keep their existing ones. The idea that ‘no one is lending or accepting new credit card applications‘ is so popular right now that it works in companies’ favour, by making you think you’re powerless to negotiate for more favourable terms.
So remember…
…although it may be harder to negotiate these days, and although credit card companies may be less willing to budge on terms, you shouldn’t think of yourself as a ‘bad customer‘ who deserves what you get.
It’s self-defeating, and it’s how the credit card companies would prefer you think!
-Reclaim your credit card fees
-Get a better deal on your credit card
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February 26th, 2009 at 10:59 am
Funny you should mention credit cards playing dirty…. just had a letter from Citibank advising me that because i have not used my Citi account card for a while they are reducing my credit limit from many thousands to just £250 !!!!
so much for paying up on time and keeping good credit.
February 26th, 2009 at 11:59 am
mbna, card also reduces credit limits for custumers not using they cards for at least once a month, my wifes went from £4000, to, £2,200, recently
February 26th, 2009 at 7:09 pm
I have recently had my limit reduced as I always pay in full so I phoned the credit card company up (who is also my bank) to close my account and also transfer my other accounts to another bank and they re-instated my previous limit.
I am still going to transfer my current account as I no longer want to do business long term with a bank that can treat me like that. Their loss and anothers gain. I am aware of who belongs to who so I am transferring to another group. Business accounts and savings alike.
February 26th, 2009 at 7:28 pm
They’re all at it. I have a Sainsburys card and a Bank of Scotland Gold (both Bank of Scotland actually). Sainsburys conduct a ‘review’ of my account almost every other month and reduce the limit by a couple of hundred pounds. Now BoS have got in on the act. I paid several thousand pounds from my savings to the card to take advantage of a reduced interest balance transfer offer. Before I had a chance to do the transfer… you guessed it… they dropped my limit by a bit more than the amount I paid off.
February 26th, 2009 at 8:43 pm
just payed £10000 balance in full . my credit limit was £10000 +received a letter my credit limit is now £300 i have informed the company to close my account i surely dont need them.
February 27th, 2009 at 9:11 am
I believe the reason why all credit cards are being reviewed and in a lot of cases
credit reduced is because of new Banking regulations.By this i mean in the passed
credit card companies could offer you what ever they liked without having to actually
have the money themselves.Under the new rules i believe they must actually hold the
money themselves before they offer,hence credit limits are being reduced
March 12th, 2009 at 9:24 am
the co-op bank did the same to us . they took over our credit card account from northen rock and droped our limit from £11,000 to £500 without tell us , so our next statement showed we were over our limit to which they have charged us . We have since cut up the card and working to pay off the balance . We havent put a single transaction on the card for over a year and have decided now we can live with out it. once the balance is cleared we will be closing the account and staying well clear of cards in the future.
May 14th, 2009 at 1:46 pm
I can see why the credit card companies are cutting the limits, as if people want to borrow sums long term then the way to do this is via a personal loan, but for goodness sake, these are the very companies who encouraged everyone to borrow large amounts over long periods from them. For them to then just reduce a limit from five to three figures ie 11k to 500 as J says, without any attempt to allow the customer to pay it off over time is just a crass attempt to either push them into default or bankrupt them, either way it’s pretty disgusting behaviour.