Are banks happy to have credit card debt paid off quickly, or do they want customers to incur long term debt? It is an argument that dates back to the creation of the credit card itself. And although it is impossible to determine the collective intent of so many independent corporations, there are some ways to approximate the answer.
The Banker’s Argument for Debt
The cynic would say that credit cards exist in order to encourage cardholders to accumulate long term debt. In fact, credit cards do make it very easy for consumers to spend more money than they have, requiring them to pay interest on their debt for as long as it takes to pay it off.
Furthermore, the interest rates charged by banks on credit card debt is high enough that banks make significant profits from their credit cards. Cardholders know that it is common to pay credit card interest rates that are several times as high as home, auto, or school loans. Over and over again, banks discover that their credit cards are the most consistently profitable products they offer. These facts come as no surprise to consumers who find their mailboxes stuffed with offers for new credit cards.
Some people adamantly claim that banks really want customers to be in debt. Their reasoning is that the merchant fees they receive from credit card use do not cover their costs or represent as much profit as interest payments. This view is only partially correct.
Banks do make significant profits from merchant fees, commonly referred to as swipe fees. Swipe fees typically comprise 2-4% of each transaction, which is a significant profit for card issuers. For example, if a cardholder charges $1,000, the bank may receive $30 in swipe fees. If the cardholder pays the bank in full 30 days later, it has received the equivalent of interest at 36% APR on its loan of $1,000 for 30 days. Furthermore, the card issuer that is being consistently paid in full each month has a much lower risk of default than it does from those who incur larger amounts of debt. Finally, cardholders who pay their balance in full tend to be higher income customers who have every incentive to charge as much as possible to their cards. These customers generate tremendous merchant fees, annual fees, and foreign transaction fees while posing little risk of default.
While banks will always enjoy making a profit on both merchant fees and interest payments, there is also a good argument to be made those who pay their balance in full are some of their best customers. Yet one thing is clear; cardholder will always be better off paying their balances in full and on time each month in order to eliminate the expense of paying interest on their credit card purchases.