Capital One's Multiple Card Strategy
The current issue of BusinessWeek has an interesting article on Capital One's credit card strategy, which seems to, at least in part, involve granting multiple credit cards to the same borrowers. Traditionally, a credit card company would evaluate the creditworthiness of a potential borrower, and assign a credit limit based on this creditworthiness. If, over time, the borrower paid his or her bills on time, the creditworthiness may increase and the limit would be raised.
Increasingly, however, certain credit card companies such as Capital One are choosing to instead grant the borrower additional cards rather than raise the limit on the existing card. It may seem counterintuitive, as this would increase the processing and administrative expenses for the credit card company, but on the other hand, there is much more opportunity for greater fee income from the borrower.
For example, compare the following two scenarios: i) you have one credit card with a limit of $1,500, and ii) you have five credit cards each with a $300 limit. You have the same borrowing capacity, but keeping track of each card could quickly become difficult. Every time you go over the limit on one card, or get confused on the payments and make a late one, the credit card company can charge you fees.
Although it is clear that the overwhelming majority of credit card borrowers have only one credit card from the same company, this practice does occur, and it is a practice that you should be aware of. It seems to be yet another method by which the credit card companies generate profits.
The moral of the story is this: since the ultimate solution of living a debt free life is usually not achievable in the short term, while you owe credit card companies, always try to minimize the number of cards you have outstanding, so that you decrease the chance of incurring expensive over-limit and other miscellaneous fees.
Increasingly, however, certain credit card companies such as Capital One are choosing to instead grant the borrower additional cards rather than raise the limit on the existing card. It may seem counterintuitive, as this would increase the processing and administrative expenses for the credit card company, but on the other hand, there is much more opportunity for greater fee income from the borrower.
For example, compare the following two scenarios: i) you have one credit card with a limit of $1,500, and ii) you have five credit cards each with a $300 limit. You have the same borrowing capacity, but keeping track of each card could quickly become difficult. Every time you go over the limit on one card, or get confused on the payments and make a late one, the credit card company can charge you fees.
Although it is clear that the overwhelming majority of credit card borrowers have only one credit card from the same company, this practice does occur, and it is a practice that you should be aware of. It seems to be yet another method by which the credit card companies generate profits.
The moral of the story is this: since the ultimate solution of living a debt free life is usually not achievable in the short term, while you owe credit card companies, always try to minimize the number of cards you have outstanding, so that you decrease the chance of incurring expensive over-limit and other miscellaneous fees.
