American Demographics

Credit-card mania – credit-card marketing

Credit-card mania – credit-card marketing – includes related articles on business-to-business marketing and on the Asian American credit-card market

Tibbett L. Speer

The mountains of credit-card offers in Americans’ mailboxes won’t disappear any time soon. As competition for consumers’ attention has grown, credit-card marketing has become more complex and expensive. But the returns are still well worth the effort.

When her pre-approced Visa Card offer arrived in the mail, Molly McDermott of Great Falls, Virginia, betrayed little emotion. In her whole life she’d never owned a credit card. Then again, the shaggy, 140-pound Newfoundland had never needed one.

Molly’s owner, Susan Fish, didn’t want any more credit cards. Try telling that to the direct mailers who bombarded her with offers. In a gesture of annoyance, Fish subscribed to a magazine in MOlly’s name, figuring that at least she would learn who sold her name and address to whom. The Visa offer appeared soon after. “I think everybody should sign up their dogs, cats, whatever,” says Fish. “We’re all inundated with junk mail.”

She’s right. Nearly three in four U.S. households receive at least oe credit-card offer every month. Some receive many more. Card issuers fired off a total of 2.7 billion offers in 1995, more than in 1992 and 1993 combined, according to Behavioral Analysis Inc., a marketing consulting and research firm in Tarrytown, New York.

In 1992, 2.8 percent of the 960 million offers sent out hit their mark, meaning the recipients actually applied for cards. By 1995, the response rate had halved. Just 1.4 percent of jaded, card-saturated targets took the bait. Fortunately for issuers, this lower rate still represented more potential customers than ever because of the enormity of the mailings themselves. Profitable accounts, ones that will charge up balances revolve them, are still there; it’s just a matter of uncovering them.

In the “old days,” banks issuing credit cards merely sought customers who would pay their bills. Now, they are looking for customers who not only pay up, but do so profitably. They are also facing a staggering amount of competition from other card issuers. To succeed in the classic marketing task of locating, enticing, and retaining customers entails an intimate knowledge of credit-using Americans–where they live, what they do, and how they use credit cards.


By the end of 1995, the wild-and-woolly credit-card industry oversaw about 400 million bank credit cards in the U.S., or 1.6 cards in force for every man, woman, and child, according to CardTrak, a bank-card tracking publication of RAM Research Group of Frederick, MAryland. The business has come a long way from 1980 when just 120 million Americans owned any major bank card.

The staid bankers of yesteryear would have fallen from their swivel chairs if they could have seen where their ideas would lead. “Today, people who run credit-card products with a bank-credit mentality are getting lunch eaten,” says Bruce Brittain, president of Brittain Associates, Inc., an Atlanta-based marketing research firm that specializes in financial services. “Credit is still part of the deal, but just part of it.”

Those early bankers eyeballed their customer lists for people with stainless credit histories and sent them cards. By today’s high-tech database standards, that’s akin to a surgeon who wields a dull-edged mastodon bone. It’s also nolonger legal. Now we must ask before we receive.

As the concept of credit gained acceptance, methods of assessing credit risk improved. The pioneer in the field of credit scoring–that is, using mathematics to predict who’ll pay the money back–is Fair, Isaac and Co., Inc., of San Rafael, California. The company remains a leader, and its expertise extends far beyond the original parameters. “Risk prediction became revenue prediction, and that evolved into response prediction,” says Michael Rapaport, senior project manager.

Barely ten years ago, credit-card issuers still targeted customers based mostly on credit-bureau information about whether they’d fallen delinquent in the past. The databases had increased, but the precision hadn’t. Fair, Isaac developed a model that featured five major predictors instead of one. Prior credit performance was there, of course, but so was current indebtedness, length of time of established credit, extent of pursuit of new credit, and current available credit. It dramatically improved issuers’ abilities to determine who merited which type of offer. For example, those who scored more than 700 points through the model’s rating system got pre-approved offers, while some of those with lower scores got offers with less-generous terms.

Issuers soon realized it wasn’t good enough simply to have non-delinquent customers. They neede to find the most profitable customers. In credit-card terms, this means people who pay their balances eventually,but not right away, incurring finance charges. To a lesser extent, it also means those who use their cards frequently, generating lots of small “interchange” fees. Using most of the same credit data, Fair, Isaac studied a pool of 12 million cardholders to derive the best revenue-generating predictors. It learned that certain predictors were more crucial to this endeavor than to the task of finding credit-worthy customers. For example, current credit status revealed more, and past performance revealed less.

It wasn’t long before card issuers were looking for ways to understand which potential customers were the best bet for particular kinds of offers. At this point, demographic and attitudinal information came into the picture. “Marketers started out with a few credit predictors” Rapaport says. “Now they incorporate hundreds of variables into the models.”

“There is nothing permanent except change, writes Visa International leader Edmund Jensen in the firm’s 1996 annual report. Visa’s president and chief executive officer is quoting the Greek philosopher Heraclitus to describe his industry’s metamorphoses. The move toward micromarketing means that card issuers want to know you personally. As long as consumers are honest about the information they provide, the credit-card offers they receive should fit better-than the ones they used to get.

Just as targeting tactics have evolved, so have the hooks used to land customers. Most cards originally came with an annual fee of $20 or more. Then fee-free cards became the trend. Today, most card offers are without fees, according to Lisa Itzkowitz, marketing director at Behavioral Analysis. In contrast, pre-approved offers have tapered off slightly, because, as Itzkowitz says, “They can offer practically anything if it’s not pre-approved.”

Gold cards, featuring $5,000 minimum credit lines and other benefits, were widely peddled to wealthier people as a status product. That worked for a while, but the concept became so over-promoted that it lost its premium cachet, Itzkowitz says. Teaser rates, those initial low interest rates that jump several points after a few months, remain popular.

One successful tactic that accounts for one-fifth of offers today is the co-brand concept linking credit cards with other businesses. When users charge purchases, they obtain benefits such as frequent flyer miles, discounts on long-distance phone calls, and points toward rebates on cars. Afffinity cards are a related concept that identifies the user with an organization, place, hobby, or even family surname.

Targeting a mailing to people who might want a Frank Sinatra affinity card requires top-notch expertise in precision marketing. Upstart MBNA Corporation, based in Wilmington, Delaware, has seemingly mastered the method. The company offers thousands of different cards. It nabbed 6 million accounts in 1995 and another 4 million in the first half of 1996. With $25 billion in Visa and MasterCard loans outstanding, MBNA ranked second only to Citicorp in bank-card lending at the end of 1995. Among its more than 4,300 endorsements, parceled out by a sales and marketing force divided into ten business sectors, are the National Football League, the Association of Trial Lawyers of America, and the Sierra Club.

Estimates vary of how much credit-card companies pay to acquire new business. The industry publication CardTrak cites figures of $35 to $125 per account. Gary Gordon, a credit-card company analyst at PaineWebber Inc. in New York City, says some companies mention costs of $70 to $80 per account, although he doubts that this includes the impacts of loss-leading teaser interest rates.

Still, it’s been a great business so far. The independent issuers Gordon tracks, which are newer firms not affiliated with traditional banks, rake in return-on-equity fihures of 25 percent to 30 percent. That’s nearly twice that of a traditional bank’s overall business, but probably much less than such banks’ credit-card sector, Gordon says.


Faced with a blizzard of offers, consumers have rushed to acquire plastic and the potential debt it offers. “We’re talking about almost doubling average balances outstanding in six years,” marvels Ed Hickey, director of research services at Claritas, Inc. in Arlington, Virginia. The market information firm reports that total outstanding credit-card debt per user household grew from an average of $1,263 in 1990 to $2,287 in 1995. Youngsters piled it on with enthusiasm. The average outstanding balance for households headed by some under age 25 grew from $885 to $1,721. Householders aged 45 to 54 hit the highest total of all age groups, climbing from $1,479 to $2,791.

Card ownership is now so widespread that about 75 percent of U.S. householdsown at least one general-purpose bank card. The average cardholder has three to four bank cards and a total of eight to ten credit cards, according to the McLean, Virginia-based consumer group Bankcard Holders of America. The average revolving debt per bank card was $1,900 at the end of 1995, up from $1,750 a year earlier. More than two-thirds of cardholders carry a balance month to month. Those people’s average revolving bank-card debt in 1995 was $3,900. New cardholders are likelier to revolve balances and charge more dollars than are veteran cardholders. In fact, new users are four times likelier than tebured ones to transfer balances.

The U. S. consumer debt load has climbed at a rate of about 20 percent per year for the past three years. As of May 1996, U.S. credit-card balances stood at $444 billion, reports the Federal Reserve. Meanwhile, credit-card delinquencies are up 40 percent since 1994 and recently hovered around a 15-year high. Some observers worry, along with Congressman Joseph Kennedy of Massachusetts, who has been quoted as saying,”the irresponsible and rabid marketing of credit cards…could result in a crisis for our banking system and the overall economy.”

Away from the gloom and doom, some happy cardholders are watching the marketing frenzy and turning it to their own advantage. Customer loyalty has been going, going, gone, shattered by the nonstop barrage of offers. One study showed that cardholders stopped charging purchases on 25 percent of cards in the past year, although that didn’t rule out the possibility that they continued to carry a balance on them. Gary Gordon of PaineWebber makes good use of now prevalent and convenient balance-transfer offers. It took him five minutes to switch his credit-card balance to a new account with a lower interest rate.

Other savvy customers are even more aggressive. “We take all the advantages and pay nothing,’ boasts psychotherapist Sophia Reinders of Tiburon, California. She and her husband, journalist Paul Peterzell, charge nearly every purchase they make on a Visa Card co-branded with United Airlines. For each dollar they charge, they receive a free frequent-flyer mile. at about $3,000 or more in charges each month, the miles add up and the couple enjoys free trips to China and Europe. “We put on that card every gallon of gas, every shirt I take to the laundry, and every morsel of food we buy, whether at a restaurant or a market,’ says Peterzell. All this activity doesn’t help the card issuer much. The couple pays the bill in full every month.

Customers like these are not ideal. And although millions of other Americans are taking on the debt that Reinders and Peterzell shun-in fact, because of it-some experts see a shakeout ahead. “It becomes a zero-sum game,’ says Gordon, estimating that more than two dozen aggressive issuers are trying to post annual growth rates of more than 20 percent each. That’s four times the annual growth of U.S. consumer income. “To get market share in the U.S., basically you’ve got to steal it,’ says Brittain. “It’s getting harder to find the right product for the right person,’ acknowledges Rapaport of Fair, Isaac. “A lot of people have already found it.”

In an effort to get more people to try their product and stick with it, credit-card issuers now offer incentives for revolving balances and are developing relationships with a wider range of merchants than ever before. You can charge everything from your groceries to your dental work. The mail remains the industry’s marketing mainstay, but some offer online credit-card applications through various banks and Internet sites. This provides consumers-especially young ones-with an alternative to the scary bank and imposing credit officer of yesteryear. Applicants in a few places can key information into an interactive video kiosk and talk to a friendly onscreen banker.

Without a rainbow beckoning over the horizon, credit-card issuers couldn’t summon the energy (or dollars) to maintain their competitive and innovative strategies. There is indeed a pot of gold at the end of the rainbow. It consists of the estimated 80 percent of all consumer payments in the U.S. made with something other than a credit card. Trillions of dollars flow here, and credit-card companies want more of them to pass through their hands. This means that, among other things, our mailboxes will continue to see plenty of action.


(selected characteristics of bank-credit-card holders, 1995)

regular any Gold

regular Master Sears American Gold


Visa Card Discover Express Visa Card

Average age 44.4

Average household

income $51,900 $52,000 $52,800 $73,400 $60,900


Percent of card-

owning households


Two or more full-time

earners 41.2% 40.1% 40.6% 48.0% 38.7% 39.2%

Householder with

college degree 42.8 42.0 37.1 59.3 47.1 53.0



householder 36.7 36.4 36.8 54.0 40.4 43.1


householder 16.7 17.9 18.7 10.6 21.8 22.8

Homeowners 72.5 74.4 78.7 75.5 82.2 84.3

In home ten or

or more years 32.8 35.9 38.1 30.3 38.1 40.4

Net worth of


or more 15.2 15.7 18.4 24.7 24.3 28.7

Source: Claritas Inc., Arlington, VA

American Express cardholders are the youngest and have the highest

incomes, while those with Gold MasterCards are the oldest and have

the greatest net worth.


(total credit-card charges in billions of dollars and charges per

resident, ranked by charges per resident, 1995)

total per capita

rank state charges charges

1 D.C. $3.1 $5,600

2 Alaska 3.2 5,300

3 Vermont 2.9 5,000

4 South Dakota 3.0 4,100

5 New Hampshire 4.5 3,900

6 Maryland 18.1 3,600

7 Hawaii 4.2 3,500

8 New York 63.4 3,500

9 Delaware 2.5 3,500

10 California 109.8 3,500

47 Kentucky 6.2 1,600

48 Iowa 4.5 1,600

49 Alabama 6.3 1,500

50 Mississippi 3.8 1,400

51 North Dakota 0.9 1,400

Source: (arc Management Information Services and (ensue


People in D.C rack up four times more charges than people

in North Dakota and Mississippi.

Asian Americans are still worthwhile credit customers. For one thing, the frequent use they make of their cards racks up transaction fees. And although 84 percent rate “no fee” as a very important factor in choosing a credit card they are less emphatic about it than the 92 percent of Hispanics who value fee-free cards. And since they are less likely than others to incur finance charges, they are less swayed by interest rates. Only 69 percent of Asian Americans cite low rates as very important in choosing a credit card, compared with 91 percent of Hispanics, 80 percent of blacks, and 75 percent of whites.

Market Segment Research & Consulting of Miami conducted a nationally representative survey of race and ethnic groups in 1996 that covered a variety of social, economic, and consumer topics. Contact president Gary Berman at (305) 669-3900 for more information.



CardTrak is published by RAM Research Group, P.O. Box 1700, Frederick, MD 21702; telephone (301) 695-4660. For more information about credit-card customers and their credit behavoir, contact Claritas Inc. at 1525 Wilson Boulevard, Suite 1000, Arlington, VA 22209-2411; telephone (800) 284-4868. Bankcard Holders of America is a nonprofit consumer group that offers statistical and other information. Contact them at 6862 Elm Street, Mclean, VA 22101; telephone (703) 917-9805.

Tibbett L. Speer is a contributing writer of Amenran Demographics and freelance writer in Washington, D. C She owns one major credit card and her husband owns another. Her dog and rat have none.

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