A well-thought-out, carefully executed business model provides small businesses and large corporations alike with the opportunity for success – and no one has that business model nailed down quite like a credit card company. Your credit card provider is prepared for the unexpected and has strategies in place to ensure that the company remains profitable, successfully collects its debts and attracts new customers without losing its current clients.
Like any business, a credit card company's goal is to make a profit. Fees and interest charges are two well-known profit-building techniques, but they aren't the only tools at a credit card company's disposal. One particularly profitable practice credit card companies employ is to charge merchants a small fee for each credit transaction. These fees rapidly add up. According to U.S. News & World Report, in 2009, credit card companies earned $35 billion in merchant fees alone. Selling credit-based products to consumers, such as credit insurance or credit monitoring, helps credit card companies drive profits up even further.
Credit card companies are always on the lookout for new customers. Each company has marketing strategies in place designed to get prospective customers' attention and convince them to apply for the card. Along with traditional advertising, credit card companies often offer special incentives to new customers, such as a temporary low interest rate, frequent-flyer miles or free balance transfers. A credit card company may also target you through the mail by using "pre-approved" credit offers to entice you into filling out a card application.
Customer Retention Strategies
Credit card companies place a strong emphasis on customer retention. The Database Marketing Institute notes that it costs a credit card company roughly $80 to acquire each new customer. Each new customer, in turn, brings the company an average of $120 in profits per year. Thus, retaining existing customers helps mitigate financial losses for the company. If you've ever tried to cancel a credit card, you've probably had firsthand experience with customer retention practices. If you call and attempt to cancel your account, the company will likely transfer your call to a member of a "save team" whose job it is to change your mind. For example, if you're canceling your credit card because the interest rate is too high, the customer retention representative may offer to lower your interest rate to a more manageable level if you agree to keep the account open.
Debt Collection Strategies
Not every card holder pays his bills promptly. Credit card companies utilize various debt collection strategies to recover unpaid balances and limit financial losses. Common collection strategies include requesting payment by phone, through the mail or via email. Should these efforts fail, the credit card company may transfer your account to an in-house or third-party collection agency. Some credit card companies even sue customers for unpaid balances. Each creditor's collection strategy differs, but the Neighborhood Economic Development Advocacy Project notes that your creditor is less likely to sue you if the unpaid balance you owe is less than $1,000.
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