One More Credit Card Secret

Here’s a follow-up to my recent article, “5 Things Your Card Company Doesn’t Want You To Know,” with one more rather weird reality about the modern credit card industry.

For the longest time, here’s a paradox I couldn’t get my head around: my company’s free credit card deals comparison tool, although very popular, is still not anywhere near as popular as it should be after three years of constant improvements — and this goes for my largest competitors’ deals comparison engines as well.

Given the fact that more than 180 million Americans use credit cards, and more than 500 million cards are in use globally, the popularity of such credit card offers engines would seemingly be much more popular, right?

After all, when you book airfare, you don’t typically wait for a targeted offer to arrive in the mail from an airline. Instead, you go on a comparison web site like Travelocity, Priceline, or Kayak.com and find the best flight for you, based on core convenience and cost factors within a set time range.

Despite this, card deals sites are still a niche service in the U.S., used mainly by the financially super-savvy, and “compulsive” deal hunters looking for the absolute most lucrative sign-up bonus or longest possible balance transfer. These sites are designed for credit aficionados, not the masses.

Every quarter, the big banks send more than 1 billion credit card offers in the mail to U.S. consumers. And those targeted offers still comprise the vast majority of credit card companies’ “recruitment” efforts for new customers.

Isn’t that odd?

Shouldn’t the banks be pouring money into their own comparison tools and online sign-up portals? Shouldn’t they be using social media and big online ad campaigns to attract customers to these tools?

The reason why they don’t: adverse selection.

As a Reuters blog post from 2010 explains, “Re: adverse selection, this reminds me of a story I heard years ago from a guy who started a company that marketed credit cards online. What he found was that when you set up a site and have people come to you, you get a really dangerous class of borrowers. This is why credit card companies don’t really make much effort to get people to go to their websites and apply. They would rather *offer* than let people ask. Because ultimately a paradox of lending is that the people who are more likely to repay are those who *don’t need the money*.”

This is one of the most perverse and paradoxical elements of the financial services industry: those who are most desperate for your product are also those most dangerous to lend to. Of course, I think this is gradually changing. In a few years’ time, it will seem ludicrously old-school that banks once routinely mailed billions of offers to attract new credit card clients with the right stats. Everyone will use a smartphone app, or a service like Credit Card Outlaw, to find the best offers based on their credit & usage profile.

But until then, count on receiving those brochures and glossy offer packets in your mailbox this summer.

David blogs about personal finance and bank deals at Credit Card Outlaw.

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