Why Are Customers Who Carry a Balance So Valuable?
Understand the core financial principles that make credit card customers who don't pay in full a cornerstone of issuer value.
When a customer “carries a balance” on a credit card, it means they have not paid their entire statement balance by the due date. This results in the outstanding amount being carried over to the next billing cycle, where it becomes subject to interest charges. This practice significantly influences the business model of credit card companies. Their profitability is deeply connected to the consistent revenue from these revolving balances, allowing them to generate income beyond transaction processing fees.
Interest Charges
Interest charges are the most significant source of revenue from customers who carry a balance. Credit card companies apply an Annual Percentage Rate (APR) to the outstanding amount, which determines the cost of borrowing. This APR is converted into a Daily Periodic Rate (DPR) by dividing it by 365 days, and this daily rate is then applied to the average daily balance. For example, a $1,000 balance with a 20.09% APR would accrue approximately $0.55 in interest on the first day interest begins charging.
Interest typically begins to accrue on unpaid balances after the grace period, the time between the statement date and the payment due date, usually 21 to 25 days. If the full statement balance is not paid by the due date, interest is generally charged on the entire unpaid portion, including new purchases made during the grace period. This daily interest accrual means interest is added to the principal balance each day, and subsequent calculations are based on this new, higher balance.
This is known as compound interest, where interest is earned not only on the initial principal but also on accumulated interest. Over time, this compounding effect can lead to a rapid increase in outstanding debt, making it more challenging for customers to pay off balances. This consistent stream of interest income from revolving balances is a primary driver of profitability for credit card issuers, accounting for a substantial portion of the credit card industry’s total income in recent years.
Fee Generation
Beyond interest, customers carrying balances often incur various fees, contributing to the issuer’s revenue. Late payment fees are common when a minimum payment is not made by the due date. Historically, these fees could average around $32, but recent Consumer Financial Protection Bureau (CFPB) regulations have capped most late fees at $8 for larger issuers, aiming to reduce consumer costs. Smaller issuers might still charge higher amounts if they can demonstrate higher collection costs.
Cash advance fees are another source of income, charged when a cardholder withdraws cash against their credit limit. These fees typically range from 3% to 5% of the amount borrowed, or a flat fee like $10, whichever is greater. Unlike purchases, cash advances usually do not have a grace period, meaning interest begins to accrue immediately from the transaction date, often at a higher APR than for purchases.
Annual fees are also levied by some credit card companies, typically once a year, for the privilege of using certain cards. These fees, which can range from around $50 to several hundred dollars for premium cards, help offset the cost of enhanced rewards programs, travel perks, or other services offered to cardholders. While not all cards have annual fees, those that do contribute a predictable revenue stream to the issuer. Other fees, such as over-limit fees, are charged if a balance exceeds the credit limit, though these require cardholder consent to be charged.
Long-Term Strategic Value
Customers who consistently carry a balance offer significant long-term strategic value to credit card companies beyond immediate interest and fee generation. These customers, often called ‘revolvers,’ provide a stable and predictable revenue stream, crucial for the financial planning and profitability of issuers. Their consistent debt accumulation ensures reliable income, unlike ‘transactors’ who pay balances in full and primarily contribute through interchange fees. Revolvers generate approximately 85% to 90% of issuers’ revenues net of rewards.
Maintaining these relationships enhances customer retention and lifetime value, as a customer carrying a balance over time becomes a sustained source of income. This stability allows companies to forecast earnings and manage portfolios effectively. Ongoing engagement also provides valuable data insights into spending habits, payment behaviors, and financial needs.
Analyzing this data enables credit card companies to refine targeted marketing, develop new financial products, and cross-sell other services, such as personal loans or mortgages. This consistent interaction and resulting data form a feedback loop supporting continuous improvement in product offerings and customer engagement strategies. Customers who carry a balance are not just sources of immediate income but also integral to the long-term growth and strategic positioning of credit card companies.