Costs and Charge Offs

Costs and Charge Offs - [edit] Charge offsWhen a consumer...

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CostsCredit card issuers (banks) have several types of costs: [edit] Interest expensesBanks generally borrow the money they then lend to their customers. As they receive very low- interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 10% difference is the "net interest spread" and the 5% is the "interest expense". [edit] Operating costsThis is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses.
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Unformatted text preview: [edit] Charge offsWhen a consumer becomes severely delinquent on a debt (often at the point of six months without payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) A charge-off is considered to be "written off as uncollectable." To banks, bad debts and even fraud are simply part of the cost of doing business. However, the debt is still legally valid, and the creditor can attempt to collect the full amount for the time periods permitted under state law, which is usually 3 to 7 years. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is large (generally over $1500 $2000), there is the possibility of a lawsuit or arbitration....
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This note was uploaded on 02/29/2012 for the course ECON 4223 taught by Professor Johnp.willen during the Spring '12 term at UCLA.

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