Category Archives: Banking

Does It Really Matter Why Chase Revived the Free Balance Transfer Credit Card Market? Not Unless You’re an Investor

A free balance transfer credit card is just one of those deals that seems too good to be true, especially in the post-recession environment.  But go ahead and pinch yourself because it is real and you are not dreaming.  Consumers with above-average credit can indeed trade in their high regular interest rates for 0% introductory transfer rates without paying a thing.

If you’re surprised to hear that, you’re certainly not alone.  So-called free balance transfer credit cards were by all accounts dead and gone following the 2010 implementation of the Credit CARD Act.  This landmark law prohibits many of the predatory revenue streams that certain banks once relied upon to the dismay of consumers everywhere.  This includes the bait-and-switch tactic of using teaser rates to lure new customers before jacking up the finance charges once they had incurred a balance.

Absent the ability to raise rates at will, how can banks possibly make money off accounts that don’t charge any fees?

Such was the prevailing thought before Chase changed the game with its Slate Card.  You can avoid interest for 15 months with this card without having to pay an annual fee (many cards charge more than $100 a year) or the standard balance transfer fee of 2-4% of whatever debt you bring with you from another account.

The Slate Card’s value to consumers in our debt-reliant society is plain to see.  For example, the average household currently holds about $6,600 in credit card debt, on which they’re likely paying interest at a 17% clip (or higher).  Well, a credit card calculator will show you that by making $200 monthly payments, the Slate Card will save that average household nearly $1,700 in fees and finance charges while helping them pay off what they owe 7 months faster than they would with their original card.  The Slate Card also outperforms the average balance transfer credit card by some $1,100 and six months’ time.

While you might be inclined to send in an application before asking too many questions about how such a great deal can possibly be sustainable, this is an issue we’ve already given a bit of thought.  There are a few plausible rationales (addressed in further detail below), but the overarching notion is that banks these days are pulling out all the stops to bring the most dependable consumers into the fold.  With lessons about the importance of customers who can pay their bills even in the most financially turbulent times fresh in their minds, issuers are offering unprecedented sign-up perks – including initial rewards bonuses worth hundreds of dollars and 0% introductory rates for up to a year and a half – in the hopes of convincing people to switch their credit card allegiances.

With that in mind, Chase could conceivably be using the Slate as:

  • The Bait Needed to Hook & Cross-Sell Wealthy Consumers:  Chase obviously offers far more than just credit cards, and it would be shortsighted to assume that the Slate Card is part of such a narrowly-focused plan.  In other words, Slate’s flashy terms could just be a way for the bank to get its foot in the door with high-wealth individuals (who are most likely to have exemplary credit) before bringing more profitable products to this captive audience’s attention.  This is, of course, a risky strategy since consumers aren’t too brand loyal these days and most people simply use balance transfer credit cards as a one-off opportunity to get out of debt.

  • A Means of Influencing Investor Perception:  It’s common for investors to evaluate the strength of a bank’s credit card operations based on its outstanding balances as well as the default rates of its customers.  These metrics will typically give you a sense of how much business the bank does as well as how sophisticated its underwriting procedures are.

    The obvious exception is when a bank artificially increases its outstanding balances (thereby lowering default rates in the process) by offering a balance transfer deal that is too good to pass up, for example.  This isn’t necessarily what Chase is doing with the Slate Card, but the company’s leadership (and stock position) has been under fire in recent months, so it’s at least a possibility that’s worth considering.

At the end of the day, why Chase continues to offer the Slate Card won’t really matter to most consumers.  The ability to save heaps of money and get out from under the burden of debt is far more intriguing.  But if you’re considering any other investment in a bank like Chase that offers such a dubiously profitable product, you should certainly ask yourself why that might be before pulling the trigger on your trade.

 

Odysseas Papadimitriou, a former senior director in Capital One’s credit card division, is the founder and CEO of CardHub.com – a leading website that covers personal finance and helps consumers find the best credit cards and prepaid cards for their needs.

Britain’s high street banks launch new schemes to boost lending to SMEs

In the wake of new schemes to apparently make loans more accessible for SMEs, Vince Cable has hinted that these may not be the way to go.

Despite the seemingly good news for small to medium businesses, Cable suggesting recently at event organised by makeitcheaper.com that companies also explore other options such as Handelsbanken and Aldermore as they may be more SME-friendly.

What do these changes and statements mean for SMEs then?

The larger banks, such as Lloyds and RBS, have announced that they are now offering loans of between £250,000 and £25 million to smaller businesses which they think would be able to benefit from them.

It’s not a surprise to anyone that small businesses have been struggling; you only have to step into towns to see shop fronts boarded up and “closing down sale” signs seemingly everywhere. The credit crunch hit these smaller companies first, the ones who had little equity in reserve in the first place.

These loans seem like they could be a positive thing for struggling companies who need some extra cash flow in order to make more money. In which cases, it could – however it is not necessarily the right answer for all businesses, as Cable has pointed out.

Although some companies may just need a one-time loan so they are able to “speculate to accumulate”, it may be a bad decision for many.

While banks are promising up to two years before the capital is payable on their loan, this two-year period may not see a return on the investment of the loan so that the business may be worse off than before they took the loan out.

The answer may be in a smaller loan with repayments that would be more manageable. Some other banks are offering smaller loans, from £1,000, to any type of business. This size of loan could make all the difference to a small, struggling business.

Another option is to seek out a specialist company who assess a business and see the areas in which they could save money. Companies like Make It Cheaper will provide companies with an expert who will be able to suggest the best deals on things like cheaper business electricity, which could in turn end up saving them thousands a year.

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