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Comment by nemomarx | Hacker News Reader

Something I never entirely get about the credit card business is how they can offer deals without it being obvious they only make money if you make mistakes?

If it was a good deal for me, surely the bank loses some money on that?

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For those people who don't "make mistakes", the card issuers are still earning:

• part of the 2-3% added to every charge

• fees from promotional marketing, guided by the info in your purchase history, to those customers

• fees from related services the same customers may purchase from the same bank

Even when the high rewards cards marketed to conscientious low-credit-risk customers send back some of that 1-3% as "miles" or "points" or "cash back", the other information/marketing values about high-spending, reliable-paying customers remain interesting.

I always assumed banks made money on credit cards from the transaction fees. I think the interest rates are mostly there to scare you into paying your bill. It seems like once a CC balance gets out of control the bank's ability to recapture that money is limited since the card is unsecured.

I guess they make more money off the people that use a CC as as a temporary loan and always repay but customers with that risk profile are generally one step away from never paying it off.

FYI, latest Q-10 of American Express has Merchant Fees at approximately double the revenue from interest payments. At least there it is true.

[0]: https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1...

And the fees are basically pure profit while the interest payments have a huge cost and risk.

I worked in CC loan and processing for a period of time. Issuing cards is really a form of hedging. They make money on some and lose on others. The point is to win more than you lose. That's all. There are secondary and tertiary ways of making money off of the cards too. They can sell the pool of underperforming cards for a smaller sum of money, and they can write off losses to help with other ventures. Just a couple of examples.

nitpick: its not hedging, its risk diversification.

https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...

The pejorative term that credit card companies use for people who pay off the entire balance every month is "deadbeats". https://www.cnbc.com/select/credit-card-deadbeat/

I guess. Revolving credit is expensive for the bank to hold. They have to allocate a lot of capital to back the revolving unsecured debt compared to other secured loans. I think they'd rather just make money on the regular fees and not have to worry about people holding balances. By providing credit they can charge a higher transaction fee than a debit card so that's their value add. Retailers are willing to pay for that access to consumer credit.

That's why credit cards are so popular in America vs other countries. They can charge a transaction fee that actually makes a profit. If they are regulated to a low fee then they can't give cards to anyone but the highest of FICO scores because the debt itself is so risky.

The interest and fees on accounts that carry a balance are enormously lucrative for the banks.

I don't know.. Maybe in the good times. They are highly risky though and require a lot of capital backing that may not show up directly on the P&L.

https://www.reuters.com/business/finance/bank-america-profit...

I guess I could look more into the 10-K and see if that information is transparent to the public.

I mean, deadbeats are probably still worth it in the long run. Over a long enough horizon eventually a person who pays off their cards every month runs into an emergency that will put them in a situation where they get stuck in a debit trap, them the banks eat for free.

Meanwhile, if I don't pay off my balance, they ding my credit scores. Seems like they want to have their cake and eat it too.

This anecdote and using the word "deadbeat" is oft repeated but doesn't really have much basis in reality (even the article you linked doesn't cite any sources for the term). Credit card transaction fees generate revenue regardless of when you pay.

It is simple really, there are more suckers paying high credit card interest than there are people collecting credit card rewards. As someone who always pays your bill off every month any rewards you collect are essentially paid for by people with interest payments

Credit is basically mandatory to survive in the US today. Most live paycheck-to-paycheck, wages have been stagnant for decades, and prices have been increasing. Add in the fact that people are both exhausted from work and that there's fewer domestic "partnerships" that allow division of labor (however that might occur), you have more opportunities for slick marketing and financial jargon to make unappealing terms slide past people.

Even worse, in my opinion, is the proliferation of the buy now pay later schemes even apple are embracing

At least with layaway plans, you had delayed gratification.

Most of your specific points are false. In fact, the majority of Americans self-report that they have at least 3 months of emergency savings, and this is backed by savings account data.

Credit is necessary for some people, but the actual number is closer to 20% than 50%.

Got a source?

This article says 58% of Americans say they live paycheck-to-paycheck: https://www.cnbc.com/2024/04/09/most-of-americans-are-living...

This article mentions 78%: https://www.forbes.com/advisor/banking/living-paycheck-to-pa...

The definitions of "paycheck-to-paycheck" are different in different surveys.

For example, in the second one you linked the question asked was something like "How difficult would it be for you if your paycheck was delayed by one week?" and they took anybody who said more than "not difficult" as "living paycheck to paycheck". My definition is more strict.

I don't know what your definition is, because you didn't provide the requested source.

Here's another one showing more than 50%: https://www.prnewswire.com/news-releases/69-of-americans-in-...

There's another one I remember reading at some point (it was definitely older than these, but I don't remember where it was from) where the question was something along the lines of "do you use a credit card for monthly payments" with the assumption of a "yes" meaning they couldn't pay it otherwise and were paycheck-to-paycheck by necessity. It completely ignored the people who use credit cards for the protections or convenience.

The Forbes article linked above shows that 80% of Americans have $2,000 or less in savings. That's 80% of everyone, not just people living paycheck to paycheck.

That directly contradicts your claim that the majority has 3 months of emergency savings unless you're so out of touch to think that $2,000 is enough to last people 3 months.

These are self reported numbers, and contradict the numbers from the federal reserve, individual banks, and credit card companies. My main problem with the claim is this. If credit were required by the majority of people, how can it be the case that fewer than 50% of people maintain a balance on any card?

Just FYI, I recommend the Fed's "Report on the Economic Well-Being of U.S. Households" for metrics like this.

Some stats:

https://www.federalreserve.gov/publications/2024-economic-we...

> Eighty-two percent of adults had a credit card in 2023. They were nearly evenly split between the people who paid off their balances in each of the previous 12 months and people who carried balances from month to month at least once in the prior year. Just about one-quarter said they carried a balance most of the time during the prior 12 months.

> Fourteen percent of people used BNPL ["buy now, pay later", an alternative to credit cards] in the prior 12 months, up 2 percentage points from 2022.

https://www.federalreserve.gov/publications/2024-economic-we...

> Near the end of 2023, 72 percent of adults were at least doing okay financially, meaning they reported either "doing okay" financially (39 percent) or "living comfortably" (33 percent). The rest reported either "just getting by" (19 percent) or "finding it difficult to get by" (9 percent)... The 72 percent of adults doing at least okay financially was essentially unchanged from 2022 yet was down 6 percentage points from the recent high of 78 percent in 2021 (figure 1).

https://www.federalreserve.gov/publications/2024-economic-we...

> Table 17. Largest emergency expense individuals could handle right now using only savings

> under $100 (18%)

> $100–$499 (14%)

> $500–$999 (10%)

> $1,000–$1,999 (10%)

> over $2,000 (48%)

(Which I find this hard to reconcile with the following from the same page:)

> In 2023, 54 percent of adults said they had set aside money for three months of expenses in an emergency savings or "rainy day" fund—unchanged from 2022 but down from a high of 59 percent of adults in 2021.

I disagree with the statement that credit is basically mandatory. The issues you raised may be real, but borrowing money does not solve any of them, it just hides them. My experience is that credit cards are predatory and offer an easy alternative to basic fiscal responsibility: Living within your means (more humbly than you might want), knowing what expenses you should expect and planning for them.

Utility bills, rent, taxes are predictable. Even most car repairs should not be an emergency. If you buy a car, or know anyone that has ever owned a car, you can confidently know that you will have unexpected car-related expenses. It happens to everyone and it should not be a surprise. If you own a car, immediately start putting some money aside so that when you get a flat, or crack the windshield, or need a new bearing, it's not an emergency.

If you have children, teach them money management. It's one of the most valuable skills for adult life. Additionally, talk to your local school district about teaching financial literacy courses!

> My experience is that credit cards are predatory and offer an easy alternative to basic fiscal responsibility: Living within your means (more humbly than you might want), knowing what expenses you should expect and planning for them.

There's a wrinkle here: basic fiscal responsibility currently exists at odds with the reality most people need to exist within to be content.

30 years ago, a middle-aged person in the United States could generally (though not always) count upon financial progress, and this mirrored most of American history. Financial progress is a synonym for societal progress in many ways.

That's no longer the case. A middle-aged person today is less likely to own property, have adequate savings, be debt-free, etc. than their parents were.

Credit has become a way to numb the fact that more and more of the money never trickles down. The fact that it's available and so widely used points to a society that's looking for that easy alternative, but not to basic fiscal responsibility; instead, one to basic access to the value created by labor.

> basic fiscal responsibility currently exists at odds with the reality most people need to exist within to be content.

Thanks for pointing that out. There are expenses that have gone up significantly compared to the average income. At the same time, the bar for "contentment" has gone up significantly

I live in the Midwest. Many of these neighborhoods have homes in the 1200 sq ft range (111 m^2), with two bedrooms, maybe a third small one, one bathroom and a basement. Talking to older neighbors, it used to be normal for a family with five or more children to live in a house like this. Cars were simpler and more affordable. There was one phone line per household, not per person. There was no internet access or cable TV subscription. You mowed your lawn with a mechanical, human powered device.

There's nothing wrong with having a bedroom for each child, but is it necessary for contentment? Definitely not.

On the other hand: https://news.ycombinator.com/item?id=40680380

Ignore the story, look at the comments. The commenters aren't stupid, they've enough brains to master English grammar, I'm sure they know how many Americans live paycheck-to-paycheque.

I don't understand the attitude. It must be some sort of apples-plus-oranges addition that's very different from mine. I just don't get it.

Easy. There's a few customer profile: 1) People who will always pay it in full 2) People who incorrectly think they're 1) but wont pay in full for some reason 3) People that don't understand the cost of 20% APR 4) People that need the money and don't have a choice

Plus CC make money on transaction fees and sometimes annual fees.

There's multiple revenue stream for banks as it relates to credit card.

There's interchange, interest, annual fees and more.

It's a good deal for you and I.

But half of the population are of below average intelligence.

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