Merchant Cards Masquerading as Credit Cards

Hi,
I ran across a mailer today, addressed to a 19 yr old, that I would like to share. First, let me describe the mailer as best I can. Attached on the top right hand corner is a card designed to look like a credit card. The only difference between a credit card and the attached card is that there is no magnetic strip. The mailer insert then goes on to describe the following:

Congratulations, your card has arrived. Call immediately to activate this card. Credit purchase limit: $6,500.00. Cash on demand approved: yes. Interest rate: none. No cash deposit required for security. By calling to activate your card today we'll offset our standard member card activation fee of $200.00 by giving you $200.00 in credit.

The above is what is described on the front page of the insert. On the back of the mailer is quite a bit of interesting small print such as:

The activation fee for the card is $199.00, the annual membership fee is $198.00, and the user is encouraged to purchase the "security guard feature" for $99.00. The customer is encouraged to sign up for rush processing which prioritizes the order for $29.99. This card may only be used for merchandise contained in the card issuer's catalogs. A more detailed description is given about the "cash on demand" advertised on the front of the mailer. Without getting into too much detail, the best way to describe the program for cash on demand is that the card issuer is allied with a payday loan company.

Let's examine some of the reasons a company would issue large amounts of credit by mail forgoing normal credit qualifying procedures:

The bulk of the merchandise in the catalog is clothing and/or shoes. The mark-up in these areas is usually a minimum of 500% and may go as high as 1200%. Let's look at a sample mailing of 10,000 cards. As the target audience is young people who would be attracted by the mailing, for discussion's sake, let's take a conservative estimate that out of 10,000 cards, 1,000 cards are activated.
Immediate cash flow to the card issuer:
$199.+$198.+$99.=$496.x1,000=
$496,000.
Let's assume that 1,000 cards utilize their $6,500. credit limit.
$6,500.x1,000=
$6,500,000. (6.5mil per 1,000!)
Due to the high risk of the borrowers, let's assume 25% of the card holders go delinquent on their cards for a total of $1,625,000. Let's assume the remaining card holders pay off their balances which would total $4,875,000. Now to calculate the profit of the card holder using this scenario, we need to make a conservative assumption that the merchandise is marked up 500%. That would put the cost of goods sold at $1,300,000. To calculate the card issuer's profit, let's take the $4,875,00 of the card holders who pay off their balance, subtract the cost of goods of $1,300,000 which equals $3,575,000 plus the instant cash flow of $496,000 from the various fees, for a total of $4,710,000 plus a very conservative estimate of a minimum of $400,000. from the collection effort on the 25% of accounts that were delinquent. This leaves the profit on issuing these so called credit cards in the neighborhood of $4,470,000. The ramifications of these merchant cards being sent to young people today are as follows:

1) They will ruin their credit before they even get a chance to establish credit.
2) In order to use their cards, they will only buy from the catalogs. They will not learn the frugal habits of comparison shopping for price and quality.
3) Due to the excessive credit limit, they will buy far more than they could afford to purchase on a cash basis.
4) A large percentage of card holders will enter the world of payday loans through the "cash on demand" feature of these merchant cards. There is neither time or space on this blog to list all the reasons why that is not a good idea.

It is important for young people to be aware that these types of cards exist and to be warned to steer clear from them.

Until later,
Alan