Credit card biz shift: Penalties to perks

Credit cards

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Kai Ryssdal: This may be just another Monday for most of us. For credit card companies, it's a whole different day. Not necessarily in a good way for them, either. The overhaul legislation that Congress passed last spring went into effect this morning. It puts restrictions on a lot of the interest-rate increases and fees that consumers paid -- billions of dollars worth. That's on top of perhaps $150 billion that credit card companies have lost since the recession started when consumers stopped using their cards as much or just walked away from the balances due.

So the card card industry is catering to a new credit card user now, as Marketplace's Stacey Vanek-Smith reports.


STACEY VANEK-SMITH: Back in the credit card boom years, you know, a couple years ago, careless was king. Credit card companies built their business on customers who spent more than they had and didn't pay on time.

Robert Manning is the author of "Credit Card Nation."

ROBERT MANNING: In the bubble era, the best customer was somebody who could never repay their loans, they would just pay interest and fees forever.

Credit card companies took in more than $200 billion a year from those interest payments and fees. But now many of the customers who paid all those penalties are in financial trouble and defaulting on their debts. So card companies are turning their attention to the customers they used to ignore, like Washington, D.C. doctor Elad Sharon.

ELAD SHARON: I wasn't carrying a balance so I wasn't making any money for them. I just sort of thought that they didn't care about people like me.

They didn't, but now they do. Because people like Sharon, who use their cards responsibly, are about the only customers card companies have left. But they're not going to bring in much in the way of interest payments and late fees, so card companies are finding other ways to make money off of them says Ron Shevlin, a banking products analyst for the Aite Group.

RON SHEVLIN: The best customers for the credit card issuers are going to be people who pay the balances off every month but make a lot of use of the card on a regular basis. That's going to drive a lot of interchange revenue for the issuers.

Interchange fees are what merchants pay card companies every time you use your card. They added up to nearly $50 billion last year. To push that number higher, card companies are looking for ways to convince the credit savvy to swipe with abandon. So, Shevlin says, card companies will give more to get more.

SHEVLIN: People who make heavy use of the credit cards are doing that to run up their rewards points. So you see firms going back now and strengthening and bolstering the quality of their rewards programs. As they compete for new business, they're going to look at the rewards programs as the new battlefield.

Elad Sharon gets cash back every time he uses his card, so he pulls it out of his wallet for just about everything.

ELAD SHARON: My American Express Blue Cash Card, I use it so much that the blue box that they have is actually kind of fading.

American Express and Chase's new Sapphire card are tempting consumers to wear out their cards by offering cash back, flexible rewards that don't expire and extra service.

CREDIT CARD ADS: New Chase Sapphire, you call, we answer, no waiting. The new premier rewards gold card from American Express, the only charge cards that earns triple points on airfare, double points...

To appeal to more frugal consumers, Discover and Capital One are touting the practicality of their rewards.

DISCOVER CARD AD: Discover Card customers are getting 5 percent cash back bonus at grocery stores...

Card companies have also started attaching rewards to debit cards, like airline miles, cash back and flat-screen TVs. Card companies will also be rolling out hybrid cards that can tap all your accounts and work as a credit card.

By rewarding credit card customers now, banks are banking on being rewarded in the future, says "Credit Card Nation's" Robert Manning.

MANNING: Banks are hoping that when consumer confidence turns around, they'll be coming around for a car loan, buy a new house.

In other words, credit cards are the financial industry's new gateway for things like mortgage loans and investment products. Cards will help lock in the loyalty of responsible spenders like Elad Sharon, who pays nothing for his cash back AmEx, and gets a few hundreds dollars back every year.

SHARON: Actually, I always kind of felt guilty about the way that I used my credit card. I felt like I was getting all these benefits and, you know, poor American Express was basically paying for my easy lifestyle.

Don't worry. They'll think of some way you can make it up to them.

I'm Stacey Vanek-Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.

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