Financial Planning | Legislative / Regulatory

Good credit: It’s all about the bird seed

Credit It's all credit, all the time in the news these days.

Congress' bid to protect consumers by passing groundbreaking credit card reforms has put the credit industry squarely in the spotlight. Two stories in particular, though, have caught my eye.

The first comes from the New York Times' Andrew Martin, who reports that credit card companies, handcuffed by new restrictions on raising rates for risky borrowers, may try to make more money on their best customers -- the folks who pay their bills on time and in full. The time may soon come when cash-back incentives, frequent flier miles and other benefits disappear and annual fees reappear on the scene.

“It will be a different business,” Edward L. Yingling of the American Bankers Association, told Martin. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

My wife and I pay our bills in full each month, so that news is a little tough to swallow. Still, it makes a certain amount of sense. Card companies have been giving us this incredibly convenient tool -- ready access to credit -- and, in essence, paying us at the same time. I guess it was only a matter of time until the free ride ended.

The second story comes from NPR's Planet Money, which devoted a good chunk of its May 15, 2009 podcast to the data that credit card companies collect on each and every one of us. For instance:

The single best predictor for whether you will pay your credit bills on time is premium wild bird seed. People who buy it are much more likely to pay their credit bills in full and on time. Why? They feel a sense of responsibility -- to feed wild animals, for instance, and pay off their debts.

The worst predictors: Chrome skull accessories for your car and drinks at Sharx Pool Bar in Montreal. If you spend money on these things, the odds are pretty good that you'll default on your credit bills.

With access to that type of data, credit card companies are shifting their focus from extending credit to making sure they get paid. "Figuring out who responds to what type of persuasion -- which is all psychology -- makes a huge difference," says New York Times reporter Charles Duhigg.

This is fascinating stuff. Give it a listen when you get a chance, then check out these other financial literacy resources.


Bill Sheridan