What can we learn about the health of the economy from the terms offered by the market's best credit cards?
In general, when the economy is healthy (low unemployment, rising stock market, healthy consumer spending, etc.), credit card issuers also do well. Customers spend on their cards and (importantly) they pay their bills and pay
them on time. These two behaviors result in stronger earnings for card issuers (in general).
For consumer lines of banking, credit cards earn strong returns (relative to other loan products) and therefore banks/card issuers tend to invest more in growing their card businesses. That means bigger marketing budgets and more aggressive marketing programs. Again, generally speaking, card issuers all tend to perform relatively similarly (i.e., they are all doing well or they are all doing poorly) and therefore, when one issuer is aggressive, many will be aggressive, resulting in increased marketplace competition. Increased competition will lead to better terms for consumers (lower rates, longer intro rate offers, bigger cash/reward offers, etc.). And because customers are making regular on-time payments, you will not see increases in fees and rates for missed payments.
What percentage of people would you say have the best credit cards for their needs?
From a customer needs perspective, I tend to think of the card market in 3 basic groups: high spending transactors, revolvers and consciously uninvolved (customers who own and use a credit card but are consciously not looking
for the ‘best’ card for their needs). So for each of these 3 groups, I’d estimate (and this is just an educated guess):
- High spending transactors: 75%
- Revolvers: 25%
What tips do you have for someone trying to find the best credit card for their needs?
- Consciously Uninvolved: 10%
- Be honest with yourself about how you actually use your card. Don’t tell yourself that you pay the full balance every month when you actually don’t.
- Don’t rule out cards with annual fees. If you spend 15 minutes and calculate how much you spend (and therefore how much you would earn with a rewards card) and weigh that against the annual fee, you may come out ahead with a card with an annual fee.
- Read the important terms of the credit card offer. Believe it or not, credit card issuers are not trying to fool you or rip you off. It is not in their interest to intentionally create bad customer relationships. They disclose all of the terms of their offers and it is your responsibility to understand those terms before you “buy.”
How much is a market-leading credit card offer worth to a bank or credit union?
- Shop around. There are so many online tools and websites that can guide and help you make the right choice in a card (as long as you follow #1 above).
That’s difficult to quantify in terms of dollars. I can say that having a strong market-leading card product is very important and very valuable to a card issuer. I don’t think you need to look too much further to see the level of marketing investment that banks will put behind their flagship products. The amount of advertising dedicated to Chase, Capital One, American Express, Citi, Discover and Bank of America cards indicates how much those franchises are worth to them.
Credit cards offer banks a unique relationship with their customers. Unlike most other bank products, the credit card offers a daily point of interaction as customers pull the card out of their wallets. Cards offer an invaluable source of customer data which banks use to know and understand their customers and build valuable long-term relationships.
What would you say to someone who thinks the best credit card is no credit card at all?
That’s certainly a point of view that is in the market. However, I think of it as one borne of fear. People are afraid that they will get themselves into trouble using their cards (and this is a valid concern) and also that the banks are out to take advantage of them and treat them unfairly. In fact, in some regards, the banks have historically contributed to this problem. They have not always been as transparent in disclosing offer terms as they could have been.
However, I believe that a combination of regulation and an awareness that banks need to treat their customers fairly and build long-term relationships has been widely embraced by card issuers. But I honestly don't think you can convince someone who has concerns about the potential negative impacts of owning and using a credit card that they are wrong. I think that I would tell this person that they are potentially missing out on a great source of value. If their spending is under control and they pay their credit card bills in full every month, they can be accumulating rewards/ miles/ cashback that can be significant, depending on their level of spending. If they have a need to finance a purchase, vacation, medical bill, etc., there are many options out there to use a credit card to do so, at very low or no financing cost, which can very often be a better alternative than other financing vehicles.