In the News

Posted on February 20, 2008
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Financial institutions, including credit card companies, can have difficulty weathering slowdowns in the economy, just like we consumers can. Recessions force credit card companies to find stable ways of making money. According to the credit website lowcards.com, a British bank now owned by American company Citigroup could be setting a disturbing precedent.

Ameriprise financial advisor Jason Kirchmeier says credit cards companies have two main ways of making money.

“One being every time you swipe your credit card, the retailer pays a fee to them,” explains Kirchmeier. “The second and probably as profitable or more profitable way is for the consumer to not pay off those balances and pay those high interest rates.”

As wallets across America become more pinched, more people will start using credit cards for daily expenses. Things change at credit card companies, too. They start paying more attention to so-called high risk customers.

“They accumulate a lot of credit card debt, and then claim bankruptcy or something of that nature,” says Kirchmeier.

A British bank called Egg recently cancelled the accounts of more than 160,000 people for being high risk. But credit website lowcards.com says many of those people were actually responsible customers with accounts in good standing. They brought in money, but apparently not enough.

Kirchmeier notes, “The folks that pay off their credit card balances consistently don`t have the interest charges, but they generally also probably charge more frequently, especially the people that are after the membership rewards and the points.”

It`s almost like a Catch 22. Companies want people to pay on time, but they also want people to pay extra fees.

There`s no proof that companies in America are planning to cancel the accounts of people who pay off their cards, and even if that happens, financial advisors say you should always pay off as much debt as possible to help boost and maintain your credit score.

Here`s a breakdown of what goes into your credit score. 35% is based on your past payments, 30% is how much debt you currently have, 15% is how long you`ve had credit, 10% is the number of credit inquiries you`ve had in the past year, and the final 10% is tricky, but it`s based on the various types of credit that you may or may not have.

by Kevin Gribble

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