Comments on: Credit Card Debt Down; Bye Bye 0% Intro APRs http://www.askmrcreditcard.com/creditcardblog/credit-card-debt-down-bye-bye-0-intro-aprs/ Latest Credit Card News, Reviews and Information Thu, 09 Feb 2012 07:48:57 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Financial Samurai http://www.askmrcreditcard.com/creditcardblog/credit-card-debt-down-bye-bye-0-intro-aprs/comment-page-1/#comment-120348 Financial Samurai Tue, 13 Oct 2009 03:40:58 +0000 http://www.askmrcreditcard.com/creditcardblog/?p=8770#comment-120348 Bummer I loved the 0% option. You don't have to use it, but it's good to know we have it! Bummer I loved the 0% option. You don’t have to use it, but it’s good to know we have it!

]]> By: Credit Card Mosaic http://www.askmrcreditcard.com/creditcardblog/credit-card-debt-down-bye-bye-0-intro-aprs/comment-page-1/#comment-120342 Credit Card Mosaic Mon, 12 Oct 2009 16:03:31 +0000 http://www.askmrcreditcard.com/creditcardblog/?p=8770#comment-120342 "My theory is that the financing company actually offers the store free financing in the hope that the customer misses the final payment and gets assessed the penalty interest rate." This is half the equation. In any store financing relationship there are two ways to make the economics work. Income from the consumer and income from the retailer. The issuing bank does not do this for free for the retailer. Almost all (there are VERY FEW exceptions) retailers that engage in this type of financing activity pay a fee to the issuing bank and/or have a loss-sharing relationship with the issuer. This fee is the equivalent of interchange on a regular credit card but is different from client-to-client depending on the economics of the relationship and how much risk the issuer or retailer want. It can be as little as enough to pay for processing if the retailer can float the loan and bear the risk or extremely high (higher then an average credit card rate) if the offer is rich and the retailer wants none of the risk. As you stated previously there is money to be made in the individual who does not pay off the purchase in time. However, the risk (net credit loss and corresponding loan loss reserve builds) are super high (well north of the 10% that's being quoted for bank cards today) in these types of portfolios. This risk must be offset with a corresponding higher interest and fees once the offer terminates. So while, 25% may seem like a high rate - on a risk-adjusted basis it may be adequate or in the case right now in the economic environment not enough. In conclusion, there are two ways to make a retailer financing program work. 1. Income from the consumer 2. Income from the retailer “My theory is that the financing company actually offers the store free financing in the hope that the customer misses the final payment and gets assessed the penalty interest rate.”

This is half the equation.

In any store financing relationship there are two ways to make the economics work. Income from the consumer and income from the retailer.

The issuing bank does not do this for free for the retailer. Almost all (there are VERY FEW exceptions) retailers that engage in this type of financing activity pay a fee to the issuing bank and/or have a loss-sharing relationship with the issuer. This fee is the equivalent of interchange on a regular credit card but is different from client-to-client depending on the economics of the relationship and how much risk the issuer or retailer want. It can be as little as enough to pay for processing if the retailer can float the loan and bear the risk or extremely high (higher then an average credit card rate) if the offer is rich and the retailer wants none of the risk.

As you stated previously there is money to be made in the individual who does not pay off the purchase in time. However, the risk (net credit loss and corresponding loan loss reserve builds) are super high (well north of the 10% that’s being quoted for bank cards today) in these types of portfolios. This risk must be offset with a corresponding higher interest and fees once the offer terminates. So while, 25% may seem like a high rate – on a risk-adjusted basis it may be adequate or in the case right now in the economic environment not enough.

In conclusion, there are two ways to make a retailer financing program work.
1. Income from the consumer
2. Income from the retailer

]]> By: Credit Card Chaser http://www.askmrcreditcard.com/creditcardblog/credit-card-debt-down-bye-bye-0-intro-aprs/comment-page-1/#comment-120297 Credit Card Chaser Sat, 10 Oct 2009 06:07:05 +0000 http://www.askmrcreditcard.com/creditcardblog/?p=8770#comment-120297 You make a very good distinction between the 0% offers that come direct from the credit card companies and carry all kinds of charges and the much better offers that come from department stores, furniture stores, etc. I used a 0% interest for a year offer from Mattress firm one year ago and just paid off the balance in full a few days ago right on the year mark. The thing to watch out for though is just to make sure that if you use one of those offers that you keep track of when the first payment is due and then make sure to comply with the terms of the agreement so that you don't do something to forfeit the 0% offer. You make a very good distinction between the 0% offers that come direct from the credit card companies and carry all kinds of charges and the much better offers that come from department stores, furniture stores, etc. I used a 0% interest for a year offer from Mattress firm one year ago and just paid off the balance in full a few days ago right on the year mark. The thing to watch out for though is just to make sure that if you use one of those offers that you keep track of when the first payment is due and then make sure to comply with the terms of the agreement so that you don’t do something to forfeit the 0% offer.

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