Capital One Bank
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Capital One's Small Credit Limit Trap
by bhazelton on November 4, 2006 Business Week Magazine
The November 6, 2006 issue of Business Week magazine features an article about Capital One Financial’s credit card and sub-prime lending practices. The article cites several examples of cardholders who were able to get as many as six Capital One cards at one time and, all the while, continued to receive even more direct mail offers for more card offers from Capital One. Typically, the cards offered are for much smaller credit limits than normal ($300 for example) and as a result of the much smaller credit limits, many of these cardholders end up being socked with heavy late fees, over-limit fees, and penalty interest rate charges, making these cards a very expensive proposition for some cardholders.
How can this happen? Well, it’s really quite simple according to many credit and debt counseling experts in the field. Business Week outlines Capital One’s practice of offering multiple credit cards with small credit limits is done in an effort to maximize the income they receive from late fees instead of counting on interest or finance charges as the primary source of income on these products.
It works a little something like this … Capital One offers a card with a small credit limit to “sub-prime” borrowers who might be less sophisticated in their borrowing and credit practices than most borrowers. Sub-prime borrowers typically have a checkered credit history and have fewer options for borrowing than individuals who have a cleaner credit history. So typically, this type of cardholder will jump at the opportunity to acquire a credit card like this.
Here’s where it gets really interesting. Instead of offering a single card with a traditionally higher limit, Capital One will offer these cards to sub-prime borrowers that are much easier to acquire than traditional cards, but with much smaller credit limits attached. Capital One is betting that a cardholders with a small credit limit is much more likely to exceed their limit, and as a result, are much more likely to generate over-limit fees.
Even worse, Capital One encourages the use of multiple cards by continuing to offer additional card products on top of existing cards. Trying to manage several credit cards at once increases the likelihood that you’ll not only go over the limit to generate fees, but you’re also more than likely to miss a payment, which in turn generates even more fee income for Capital One in the form of late payment fees, adding insult to injury. Over-limit and late payment fees can add up very, very quickly, particularly for those with multiple cards.
Many of our FG readers have wondered about Capital One's small credit limits that generally don't get very large. This was a story printed in the November 6, 2006 Business Week Magazine that answers the question. As Capital One grows and absorbs more retail accounts where will we be...?
by bhazelton on November 4, 2006 Business Week Magazine
The November 6, 2006 issue of Business Week magazine features an article about Capital One Financial’s credit card and sub-prime lending practices. The article cites several examples of cardholders who were able to get as many as six Capital One cards at one time and, all the while, continued to receive even more direct mail offers for more card offers from Capital One. Typically, the cards offered are for much smaller credit limits than normal ($300 for example) and as a result of the much smaller credit limits, many of these cardholders end up being socked with heavy late fees, over-limit fees, and penalty interest rate charges, making these cards a very expensive proposition for some cardholders.
How can this happen? Well, it’s really quite simple according to many credit and debt counseling experts in the field. Business Week outlines Capital One’s practice of offering multiple credit cards with small credit limits is done in an effort to maximize the income they receive from late fees instead of counting on interest or finance charges as the primary source of income on these products.
It works a little something like this … Capital One offers a card with a small credit limit to “sub-prime” borrowers who might be less sophisticated in their borrowing and credit practices than most borrowers. Sub-prime borrowers typically have a checkered credit history and have fewer options for borrowing than individuals who have a cleaner credit history. So typically, this type of cardholder will jump at the opportunity to acquire a credit card like this.
Here’s where it gets really interesting. Instead of offering a single card with a traditionally higher limit, Capital One will offer these cards to sub-prime borrowers that are much easier to acquire than traditional cards, but with much smaller credit limits attached. Capital One is betting that a cardholders with a small credit limit is much more likely to exceed their limit, and as a result, are much more likely to generate over-limit fees.
Even worse, Capital One encourages the use of multiple cards by continuing to offer additional card products on top of existing cards. Trying to manage several credit cards at once increases the likelihood that you’ll not only go over the limit to generate fees, but you’re also more than likely to miss a payment, which in turn generates even more fee income for Capital One in the form of late payment fees, adding insult to injury. Over-limit and late payment fees can add up very, very quickly, particularly for those with multiple cards.
Many of our FG readers have wondered about Capital One's small credit limits that generally don't get very large. This was a story printed in the November 6, 2006 Business Week Magazine that answers the question. As Capital One grows and absorbs more retail accounts where will we be...?
