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Updated on Friday, January 23, 2015
Capital One reported their earnings this week, revealing that Capital One Credit Cards continue to generate massive earnings. In 2014, the US credit card business generated $2.2 billion of after-tax earnings. Their numbers confirm the trend from other banks that we have reported earlier:
- Despite interest rates at a record low, don’t expect to see any reduction in the interest rates charged by your credit card company. Capital One’s yield held steady at 14.43% in Q414 (compared to 14.44% in Q413).
- People are spending more. Spending on Capital One cards increased 16% to $58 billion
- People are paying on time. The percentage of loans that are 30 days or more delinquent has declined from 3.43% to 3.27%
- Fees aren’t going away. When you include fees, Capital One is generating a shockingly high 17.29% net revenue margin.
What does this mean for consumers? We believe that there are 3 key items to remember:
- Credit cards remain incredibly expensive ways to borrow. Despite record-low interest rates, credit card interest rates remain in the high double-digits. And most contracts are structured as variable interest rates. So, when interest rates do increase, your credit card interest rate will increase as well. If you are in debt, you should never be paying the high purchase APRs offered by credit card companies. You can either take advantage of the promotional balance transfer offers (especially from a credit union), or take out a personal loan (from a new online lender).
- Interest rates are high, but late fees and penalty interest rates still pack a big punch. You can see in the Capital One earnings announcement that a significant portion of revenue is still generated from these penalties, which can apply if you are even just one day late. The best way to avoid these types of charges is to sign up for automatic payments. It can make a big difference.
- Banks love their credit card businesses – they can’t make this much money with any other product. Expect the marketing to continue, and your mailbox will be filled with offers. The “switching incentives” will only continue to increase. Capital One just recently extended their balance transfer offers by two months, and you can expect more of this. If you are a savvy consumer, you can take advantage of these promotional offers and save. But, the banks are counting on you making mistakes and paying high interest and fees – so buyer beware.