What is the REAL cost to a CC company

GSD4ME

Dear all

This is a question that has always been on my mind to ask someone but never knew who to ask or where! My apologies if the answer lies on the site somewhere but I can't get the search terms correct to find the answer.

What is the *REAL* cost to a credit card company of a user debt, especially since the BofE base rate is so low and has been for so long?

So for example, if I had a brand new credit card and bought goods on it on the 1st January for £1000 and took advantage of the full period before repayment (60 days?) how much does the CC company actually 'lose' before I start to repay the money?
Basically the question revolves around the bigger question "How can CC companies warrant charging 19% when the base rate is 0.5%?" So, allowing for delays in my payment reaching a credit card company, what should the APR be in an ideal world - assuming no profit to the CC company. As we leave in the real world, allowing profit to the CC company of "something" (an airy-fairy definition I know), what would be a realistic APR?

The next question is "why doesn't the government limit any sort of lending to base rate + (say) 5%"? However, that opens up cans of worms to do with politics, influence, banking and palm-greasing!

Many thanks

_Andy_

GSD4ME wrote: »

"How can CC companies warrant charging 19% when the base rate is 0.5%?" s

1) Base rate isn't relevant
2) They can charge what they like, in the same way that, say Tesco can charge what they like for bread regardless of the wholesale cost.

If you don't like the price/rate, go elsewhere.

opinions4u

GSD4ME wrote: »

What is the *REAL* cost to a credit card company of a user debt, especially since the BofE base rate is so low and has been for so long?

It varies. How many customers clear balance in full? How many pay interest? How many have debt written off? How much does it cost the lender to raise their funds (clue it's nothing to do with Bank of England base rate).

Basically the question revolves around the bigger question "How can CC companies warrant charging 19% when the base rate is 0.5%?"

Well if 50% of customers pay no interest and 10% of customers don't repay you have a loss making business.

So, allowing for delays in my payment reaching a credit card company, what should the APR be in an ideal world - assuming no profit to the CC company. As we leave in the real world, allowing profit to the CC company of "something" (an airy-fairy definition I know), what would be a realistic APR?

The market has a wide range of APRs that reflect risk. 0% to very high. Many banks have lost money on credit cards over the last few years.

The next question is "why doesn't the government limit any sort of lending to base rate + (say) 5%"? However, that opens up cans of worms to do with politics, influence, banking and palm-greasing!

Because such interference would inevitably lead to a less competitive market and exclude higher risk customers altogether.

reclusive46

Your forgetting the card issuer gets a percentage of each transaction.

opinions4u

reclusive46 wrote: »

Your forgetting the card issuer gets a percentage of each transaction.

Indeed they do. I'm sure they appreciate getting 2% of the spend from somebody who doesn't pay them back.

It's small fry in the great s heme of things.

RobTang

reclusive46 wrote: »

Your forgetting the card issuer gets a percentage of each transaction.

Not the issuer (ie the banks), the processor does (ie mastercard, visa, amex). Unfortunatly theres no real info how much of the fee goes to which company

zagfles

GSD4ME wrote: »

Dear all

This is a question that has always been on my mind to ask someone but never knew who to ask or where! My apologies if the answer lies on the site somewhere but I can't get the search terms correct to find the answer.

What is the *REAL* cost to a credit card company of a user debt, especially since the BofE base rate is so low and has been for so long?

Because it's not just the cost of the money that they need to consider. Every time they lend they take a risk of not getting their money back because the borrower does a runner, goes bankrupt, fraud, or the merchant the CC is used at goes bust (the CC company are jointly liable under the CCA so have to refund if the merchant goes bust).

So for example, if I had a brand new credit card and bought goods on it on the 1st January for £1000 and took advantage of the full period before repayment (60 days?) how much does the CC company actually 'lose' before I start to repay the money?

They don't lose anything provided nothing has gone wrong as above.

Basically the question revolves around the bigger question "How can CC companies warrant charging 19% when the base rate is 0.5%?" So, allowing for delays in my payment reaching a credit card company, what should the APR be in an ideal world - assuming no profit to the CC company. As we leave in the real world, allowing profit to the CC company of "something" (an airy-fairy definition I know), what would be a realistic APR?

The next question is "why doesn't the government limit any sort of lending to base rate + (say) 5%"? However, that opens up cans of worms to do with politics, influence, banking and palm-greasing!

Many thanks

Because then lenders would have to be very careful who they lend to. People without very good credit rating wouldn't be able to borrow, because the risk wouldn't be worth it. Also merchants who aren't financially sound may be refused card facilities.

zagfles

opinions4u wrote: »

Indeed they do. I'm sure they appreciate getting 2% of the spend from somebody who doesn't pay them back.

It's small fry in the great s heme of things.

It's not "small fry" at all, it's how they make most of their money. Something like 60-70% of people always pay in full and never pay any interest, the only money they make from these people is the merchant fees.

For the others they make a lot in interest but they also have a far bigger problem with bad debt.

jonesMUFCforever

RobTang wrote: »

Not the issuer (ie the banks), the processor does (ie mastercard, visa, amex). Unfortunatly theres no real info how much of the fee goes to which company

Mastercard and Visa are owned by the banks.

Buzby

jonesMUFCforever wrote: »

Mastercard and Visa are owned by the banks.

Afraid not - neither Visa OR MC is a bank. They are a funds processor, and affiliated banks sign up to offer their product as a franchisee (if you like) of the brand.

When Barclaycard introduced itself in the UK, it did so as an agency of the US BankAmericard. Visa Inc is still headquartered in California.

opinions4u

zagfles wrote: »

It's not "small fry" at all, it's how they make most of their money.

No it isn't. Interest income is several times higher. Interest margin is several times higher than transactional income margin.

Something like 60-70% of people always pay in full and never pay any interest

Marginally below 50% for a mainstream card book.

the only money they make from these people is the merchant fees.

And the cross-sale of other products.