The "great" customers are the first to go

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A few weeks ago, a number of newspapers reported that consumers were receiving letters from their credit card providers, cutting their credit limits — and some reports suggest that as much as $2 trillion more may be cut in the next year and a half. Wesabe employee Debbie posted a Wesabe Groups thread about the topic, asking if anyone had had their own limit cut — and so far, that thread has 50 comments from Wesabeans about getting notices like these.

Reading everyone’s comments, I noticed a pattern…

“American Express cut the credit limit for a small business from $25K to about $2K. And the guy’s credit record was perfect…”

“it was only my banana republic card, but they cut my limit by half, and i have a very good payment history with them…”

“I just got an email from AMEX saying they’ve cut my limit by about $10,000 on my amex blue card…I have had a perfect history with them and been a loyal customer for years…”

“My GE Money Bank (Banana Republic/GAP) was cut from $1500 to $300! The account was in great standing…”

“They also cut my limit also by $15,000. I have been with them for over 10 years, paid over the minimum and on time and have never been over the limit…”

“My Sears card limit was lowered from approx $5,000 to $3,000. I have had the account open for 5+ years, never missed a payment, and never been late.”

It goes on like that. Do you see what I see?

One person after another reports that they are a “great” customer, that they pay over the minimum or pay off their full bill every month, that they’re never late, and that they’ve had the card for years — and still, their limit was cut. Why would they cut my limit when I’m such a “great” customer?

Well, that’s just it. If you pay off your bill and never carry a balance, you’re not a “great” customer to a credit card company. In fact, they refer to you as a “deadbeat.” If you’re never late, or never go over your limit, you’re never paying late or overlimit fees. If you don’t use your card, you’re not incurring interest charges. You’re the worst kind of customer: an unprofitable customer.

Credit card companies make up to one-third of their revenue from fees (known as “fee revenue.”) The best customers for credit card issuers are those that max out their limit, pay the minimum every month, go over limit from time to time (incurring more fees), and best of all, pay late (more fees) but do pay eventually. (A customer who goes bankrupt is less profitable.) They call such customers “revolvers,” and revolvers — those with perpetual, high balances — are where the money is. (For more on this, see the excellent Frontline/New York Times series, “Secret History of the Credit Card” — which was one of the inspirations for me to start Wesabe.)

So, whose credit limits are being cut, now that the economy is turning down? The limits of the deadbeats, the unprofitable customers. Debbie’s post doesn’t have a single response from a “revolver” about their limit being cut, and no wonder. The credit card companies need all the profit they can get.

And don’t we all. A limit cut may feel punitive, especially if you were counting on your credit cards as emergency resources. Think of it instead as a blessing in disguise — the profit they’re missing is money you’re keeping in your pocket. Being a “deadbeat” credit card customer is a great accomplishment — savor it, and frame that letter from your credit card company.

4 Responses to “The "great" customers are the first to go”

  1. Ben Says:

    While it’s true that credit card companies make their money of customers who are late and maintain balances, keep in mind the sheer amount of credit available. I’ve had aggregate credit limit increased by almost $20,000 over the last few years by non-consultative credit increases. Never asked, just saw a new, higher credit limit! This is as much a reflection of the customer base from which credit card companies make their money as it is the surplus of consumer credit.

  2. Renee Says:

    Actually, I carry (ied) a balance on all three of my Amex cards and my credit limits were reduced to just $100 above my balances. I had three late payments in my 9 year history with them- (which is why I also now have a 26% Apr) so they did get some fees and are making money from me. I had a great credit score (well over their 700 threshold they are now claiming you need- I pulled my report right after I got off the phone since they claimed it my Experian report- I wonder if Experian knows they are lying about them- but then again Experian is making a ton of money from all the new reports being pulled so then they are in colusion) but I also shopped at Costco which was my downfall. So between Saks and Costco, I am clearly not their ideal customer. I cancelled all my cards and will never use Amex again no matter how much crap they send me in the mail. They are unethical and they lie. And since they really want deadbeats- I am not going to pay them the rest of my balance- I will let them negotiate with me for about 50% of what I owe- since they have now dinged my score with their false credit to limit ratio. SELL AXP stock and let them burn!

  3. TFB Says:

    The credit card companies do make money from so-called deadbeats even if they don’t carry any balance, are never late or over the limit. They make money from the merchant fees. Not as much as they do from revolvers for sure, but not unprofitable, just less profitable. I agree with Ben. Credit limits are too high to begin with. On two of my cards, I usually use less than 10% of the limit. If they cut it in half, it won’t affect my ability to make purchases. So far they haven’t done anything yet.

  4. Gator Says:

    My credit card limits haven’t been decreased, but my Home Equity Line of Credit took a big hit. When I opened the account two years ago my credit limit was $120K. Earlier this year I received a notice from my lender WAMU, that my limit was being decreased to $90K due to the decline in home prices in my area. I’m okay with that, it makes sense to me. What irritates the heck out of me is they decreased my credit limit again and I don’t think I was notified. I probably was, but I don’t recall seeing anything on paper. Anyway, my limit is now $49,100. I still have room to borrow if necessary, but my utilization is now over 50% and that can have a negative impact on my credit score.

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