Premium credit cards: Golden goose or golden noose?
November 7, 2011
By: Curtis Arnold
Every year, the Office of the Comptroller of the Currency surveys the leaders of America's major banks to understand the overall lending landscape. This year's Survey of Credit Underwriting Practices marks the first time in four years that a majority of credit card issuers left their consumer lending requirements unchanged, instead of tightening them. In fact, 25 percent of bank officials surveyed reported easing their credit card approval guidelines over the past year.
The OCC's bank examiners reported a major shift in marketing strategy among credit card issuers since 2010. During the credit crunch of 2008 and 2009, credit card delinquency rates soared as high as 12 percent as Americans faced unexpected job losses. Having brought late payments back to historic norms, banks have targeted low-risk consumers with high incomes. Gold and platinum credit cards appeal to short-term borrowers who often use their accounts to float travel and business expenses. However, there's an even bigger behind-the-scenes reason why banks have cranked out record-breaking numbers of premium credit card applications.
Gold, platinum credit cards help banks stay stable
In testimony before Congress last summer, Acting Comptroller of the Currency John Walsh explained how recent changes to federal banking rules had changed the way lenders look at risk. Instead of maximizing leverage on risky loans and high consumer credit limits, banks must now show examiners how they intend to access capital during another financial crisis. Keeping cash on hand costs banks money, since the Federal Reserve imposes a surcharge on large cash holdings.
Platinum and gold credit cards give banks an easy escape from regulators' risk assessments and cash penalties. By targeting account holders likely to pay off most or all of their balances every 30 or 60 days, banks get to "float" significant amounts of their cash reserves through the country's merchant networks. Banks get praise for extending credit, while raising profits and reducing their cash management expenses.
Saving money and earning rewards
The first thing you'll likely notice when you inspect a platinum credit card application is the annual fee. Sometimes, banks waive the first year's fee to get you to take their cards for a spin at no risk. Lenders use high fees to weed out borrowers on shaky financial footing. It's impossible to justify a credit card fee of almost $500 if you're worried you might lose your job.
Even though annual fees generate some healthy profits for banks that let you float balances at zero percent interest, the best credit cards let you make that money back with some very special perks and rewards.
Golden goose…or golden noose?
Critics and watchdogs of the consumer lending industry warn that even a low-risk credit card opens the door to credit abuse and "fee harvesting." Some card holders would much rather swear off the potential rewards of premium credit cards rather than face the chance that they could lose control of their finances by falling into debt.
There's another danger of premium credit cards, especially for affluent customers with little motivation to micromanage their daily spending - identity theft. According to financial security expert Denise Richardson, author of the book "Give Me Back My Credit," a platinum card's large balance can mask smaller fraudulent charges that thieves can use to siphon cash from your bank account. Richardson discovered that her own credit card was harboring an identity thief who used the account to sign up for cable television service and even pay their bill.
Tips to stay safer
"At the absolute minimum, you should go over your statement, on paper or online, the day you get it," Richardson told CardRatings.com. "It's even smarter to use those online tools to check your transactions between statements. I spotted the fraudulent cable TV charge right away because I don't pay my cable bill with a credit card, so I knew it was either fraud or a mistake," Richardson said. Officials investigating recent credit card theft arrests in New York and Oklahoma told reporters that thieves often target premium cards because of the potential of a high credit limit and a lower likelihood of getting caught quickly.
According to banking industry analysts at Javelin Strategy & Research, premium credit card issuers can turn both of those drawbacks into potential consumer benefits. In a statement to reporters, Javelin founder James Van Dyke noted that banks can build loyalty with their best customers by increasing trust. "Banks need to work hand in hand with their customers to stay ahead of identity threats and implement the right security measures to best protect sensitive cardholder data," Van Dyke said. Making transaction alerts available quickly and clearly can protect you, while helping you avoid falling into your own spending traps.
About the Author
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of 'How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line' (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).