Found this classic post about what a Bank might think is an ideal customer.
My post yesterday about a Real Service for Chronic Over Spenders is, at best, naive. At worst, unlikely ever to happen. Why wouldn’t a bank run a service like this? The answer is simple. It does not make them any money.
The Ideal Bank Customer
Banks make money on:
- Customers who carry balances on their credit cards.
- Customers that use the over-draft service available to them.
- Folks with bad credit don’t get preferential interest rates.
- Consumers who do not carry the minimum balances in their bank accounts get free banking (and thus pay $25 a month in service fees)
- Debtors who do not pay back their loans quickly (i.e. they do not make overpayments)
This is an exciting paradigm for the Banks.
Banks must portray themselves as helpful, trustworthy, and someone who wants you to succeed in your financial journey, when in fact, anyone who does follow does not make the bank a lot of money. My friends have paid off their mortgages in 5 years instead of 25 years, saving themselves tens of thousands of dollars (but costing the bank thousands in lost interest earnings). Yet, the bank must publicly say that this is a good customer, even though they are bad for their business.
An ideal bank customer makes minimum payments on their debts (especially their credit cards), incurs many service fees (or penalties), and rarely talks to anyone in the bank about their issues. Reading that sentence, it seems to be an oxymoron in that it appears to be a description of a bad client, but if all you look at is the bottom line, banks will fight over getting these customers.
How do they fight over them? They offer interest-free credit cards (for the first six months), lower interest rates on loans (for the first year), and other attractive marketing gimmicks (free iPods even). These customers make banks much more money than someone caring about their debt load, and they keep meticulous records of every purchase and pay things off quickly.
Conclusions
This week I have let my imagination run a little wild on the problem of how to help people who spend too much or that are chronically in debt, but at the end of it, the answers are evident:
God helps those that helps themselves —Anonymous
The banks will help you, but be careful of the help you get —Big Cajun Man
It is like guns don’t kill people. People kill people argument the NRA uses, in an obtuse way of thinking. People get into debt trouble because they can’t control their spending and try to fix their spending issues with more debt, which the bank gladly obliges the financial death spiral (TM) begins.
Conclusion: Getting out of debt is hard work. Choose your tools to get out of debt carefully (unless you want to try out a prototype Financial Shock Collar, contact me).
One thing I noticed in the last ‘recession’ in the early ’80’s: banks and insurance companies continued to turn a profit all the way through. There’s a good reason for that, and your post explains it quite well. They provide us with services while fleecing us at the same time. BTW, have you noticed? Since then, a lot of banks have gotten into the insurance biz.