Credit Card Debt and Gurus
America’s obsession with credit cards and how Gurus are gaming the system.
Americans love credit cards. The financial freedom. The points. The ease of swiping and getting what you want. Yet Americans have very different behaviors when it comes to credit cards. This post explores the different segments of the credit card space, and dives deep on how Gurus are gaming the system.
Section 1: America’s Credit Card Debt Problem
Credit card balances hit $830 billion at the end of 2017. 70% of Americans have at least one card. That’s 173 million cardholders over the age of 18. This means the average cardholder has approximately $4,789 in credit card balances.
The average APR of credit cards is around 15%. Slap on top of that annual fees, late fees, cash withdrawal fees, the total cost of credit for the average cardholder is up to $1,000 a year. That’s a lot for a piece of plastic.
One could argue that credit cards are a great product that enable consumers with a line of credit necessary to overcome short term cash flow, and there is truth to this. That said, many Americans use revolving debt like a loan — a very expensive one.
Only 40% of Americans always pay off their credit card balances every month. These customers are what we typically call “transactors”. Out of the 60% that don’t (“revolvers”), half of these consistently only pay the minimum amount.
Splitting this by FICO score paints a tough picture of how segments use credit cards. The lower the FICO score, the more likely someone is to carry balance. While 34% of Americans are using credit cards well (and getting rewarded for it with high FICO scores), the majority of other segments have lower scores and higher rate of revolving balances.
Section 2: How Gurus are gaming the system
Let’s focus on the 34% for now. That is a large portion of the US population. By paying balances in full and having a Superprime credit score, this segment has one major upside on credit cards: rewards.
In fact, rewards has become a competitive battlefields to attract customers. More than half of the credit card mailings are for rewards cards, up from 20% 10 years ago. Bank competition to attract this lucrative customer segment has led lucrative offers being sent in the mail. Chase issued the infamous Chase Sapphire Reserve card with a sign up offer of 100,000 points worth more than $1,200 when redeemed on travel.
I know, what’s the catch right? Don’t worry, Banks will still make their money back in different ways:
- 25% of Superprime still carry a balance, remember? In fact, carrying a balance on your credit card easily wipes out any reward benefit you might earn.
- 50% of points go unused. That halves the cost to the banks. Use your points.
- Banks are betting you will buy other products with them beyond credit cards, such as a mortgage or a checking account. This is especially true with young millennials who have high lifetime value for the bank.
- They make money every time you swipe, charging the merchant for the service. Interchange fee ranges from 1–3% of transactions with rewards cards charging on the upper end of that spectrum. On $3.1 Trillion of credit card spending, that is close to $100 Billion in revenue.
Superprime Transactors should try to maximize their rewards and there are plenty of rewards to be had. How do they behave when it comes to these rewards?
Based on a recent survey I sent out to 100 of my peers, 4 sub segments appear:
As expected, every segment’s primary goal is to maximize rewards.
On average, Gurus earn $800+ a year more (almost 2x) on credit card rewards than other segments. They do so not by spending more (although they spend on average $300 more a month than other segments), but by taking advantage of credit card promotions.
To do so, Gurus apply twice as frequently for credit cards than Learners (3 credit card applications in the last 2 years compared to 1.5) and therefore have more cards (5 cards compared to 2.5 for Learners and 1.7 for Beginners). This also leads to higher FICO scores due to more lines of credit and higher total available credit. Out of the sample, Gurus had on average 800 FICO scores compared to 775 for Learners.
More credit. More rewards. Higher credit score. Why aren’t Learners and Beginners more like Gurus?
Turns out:
- Learners don’t want another card… but why?
- Beginners want another card… but then why don’t they get one?
Here are three hypothesis to why that is.
- Gurus understand the value of points and how to maximize rewards. Learners / Beginners don’t.
One of the biggest difference between Learners and Gurus is that Learners lists not knowing how to use points as one of their highest pain points compared to Gurus (their lowest). For Gurus, this is their lowest pain point. They clearly understand how to use their points effectively to maximize rewards.
In face, out of people who have more than 1 card, Gurus are more likely to alternate cards to maximize spending compared to Leaners and Beginners. They do so by using the card that gets them the most points given the category or ongoing promotion.
2. Gurus keep things simple. Learners / Beginners spin their wheels.
Mindshare of managing more than one credit card is top of mind for Learners and Beginners — 67% of them state that the hassle of dealing with more than 1 card is the main reason they are not considering applying for one, compared to only 50% for Gurus. There are two reasons as to why that could be:
They let personal finance apps do the work for them
Only 15% of Gurus use more than 1 source of managing their spending, compared to close 45% of Learners. Having only 1 application you rely on likely reduces the complexity of managing credit cards by centralizing the information. Regarding apps, Learners uses more spreadsheets compared the Gurus who use more “Personal Finance Management” (PFM) tools and credit card apps. This would also indicate that Gurus let apps do the work for them.
They manage their finances just enough to be in control
Gurus look at spending less frequently compared to Learners and Beginners. Yet, Gurus know how much they spend just enough to ensure they are in the green. Turns out the frequency at which you review your finances is not correlated with how much you feel in control. 25% of Beginners don’t know how much they spend even though 60% review their spending every week.
3. Gurus know how to gather information more effectively
Learners and Beginners don’t want to do the research required to know which card to take out and the impact that taking out cards have on your credit. When rating reasons limiting a consumer from taking out a credit card, Learners and Beginners were 2-3x more likely to say they “didn’t know which card was best for me” and they “didn’t know the effect on my credit score”.
This is likely related to the overload of information available on credit cards. Countless blogs and reddit communities have popped up giving recommendations on which credit cards to take out — still 30–40% of Learners and Beginners don’t know which card to take out.
Beginners also loathe the time it takes to apply and their odds of being approved, both of which should not be significant factors given:
- It takes less than 5 minutes to fill in a credit card application
- These are Superprime customers with few recent applications so they will likely be approved for most credit cards
That said, Gurus are more likely to list spending requirements as a limiting factor, which makes sense since if they take out 2–3 credit cards a year, they need to spend a significant amount to hit the promotion requirements.
Opportunities to help consumers become Gurus
To help Learners and Beginners become Gurus, businesses should focus on the following:
- Distill information of the value of an additional credit card to dollar figures to make this easier to understand. This includes rewards, rebates, perks, offers, etc.
- Tailor this information to the customer leveraging past spending behavior — turns out close to 100% of beginners rated this a 5 out of 5 need.
- Make transparent typically opaque information to the customer, such as approval odds, time to fill out an application, and the impact to one’s credit score.
- Make it easy for customers to use more than 1 card by building real time nudges on which card to use and account aggregation to manage spending across accounts.
Next post: Subprime revolvers (stay tuned)
Next we will take an in depth look at subprime revolvers, their challenges, and the opportunities in this space.
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