GMAC Credit Card Biz Breaks With BofA

by Robert Farago

Published: April 23rd, 2009

One of our Best and Brightest sent me a link (farago@ttac.com) to an article in The Charlotte Observer about GMAC’s move away from the Bank of America (BofA) and into the credit card business. As one of the few media commentators who knows enough not to report stories about which I don’t have a fucking clue, I pinged our man William C. Montgomery for some analysis. In addition to reviewing cars for TTAC, Bill works for a large credit card company. He knows his onions. While his reply reveals that there’s nothing untoward here, and TTAC’s core concern is GMAC’s car loan biz, I thought it sufficiently interesting to share with you, our highly informed (now more so) audience. Forgive the digression.

Let me tell you the state of the credit card industry right now. We expect the default rate this year to be about 15% (up from about 6% during normal years). This means that for every dollar we lend, only eight-five cents will get paid back. Plus, it costs us about another 6% to borrow the money, print and mail statements, maintain customer service call centers, etc. In other words, we’d need to be earning 21% in finance charges just to break even. On top of this, new credit card lending rules make it much harder to raise interest rates. In other words, no bank want’s to be in the credit card business right now. Just about every bank I know of is looking to unload their credit card receivables so that they can lesson their exposure to the sky high credit losses we are experiencing in the current economy.

So, I would speculate that BOA told GMAC that they did not intend to renew their contract to issue GMAC credit cards. GMAC probably tried to shop the portfolio to other banks and couldn’t find any credible takers. With no better options GMAC decided to take the portfolio in house (with what money, I don’t know). That may be why they’ve poached some of BOA’s credit card executives.

I wouldn’t think that there is anything scandalous about any of this. BOA private labeling cards for GMAC is standard industry practice, as is the purchase of auto loans mentioned in the article. Nothing in these transactions necessarily indicates any negligence or malfeasance on the part of GMAC or BOA executives. It just reflects the current state of our economy. And perhaps one more death knell for GMAC.

Robert Farago

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2 of 42 comments

Ronnie Schreiber on Apr 24, 2009
Ronnie, you won’t get annoying phone calls from creditors if you pay your bills on time. “If I feel generous, I’ll offer them 25 cents on the dollar.” Well, if I were a creditor and looking at a 75% (or more) default rate, I’d be annoying too. I'm just doing what the banks do with their own creditors, looking for a break. When a creditor turns something over to a collection agency that means they're willing to settle for 50 cents on the dollar (or less, depending how much the agency is paying for the paper). They're willing to take 50% from a collection agency, but if the same debtor offered them the same deal, they'd reject it. My friends who are physicians complain that they can no longer freebie friends and clergy. If the insurance companies find out that they've given someone a discount or free service, the companies will claim that that is the standard fee and will insist on the same discount. Likewise, if a creditor sends a bill to collection that means they've effectively set the value of that debt at 50% of face value. If the debt is worth only 50% of face value to a collection agency, well, then that's its real value. Why should I pay them more than the real value? Just because I borrowed more than that? Cars depreciate and so can debts. You can be as annoying as you want, just don't use my property to annoy me. Is this a double standard? After all, I'm using the credit card issuer's property, i.e. the money I borrowed from them. No, it's not a double standard. They voluntarily loaned me the money, knowing it was a risk. I, on the other hand, never gave them permission to use my property. If they want to discuss things with me, I'm happy to do so for $500 per phone call. If they don't like it they shouldn't offer folks like me credit cards.

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Balr14 on Apr 24, 2009

I've found this topic very interesting and informative. But, I'm having a difficult time understanding what point is served by lowering the credit limit and increasing the rate for good clients. I was recently notified my limit was being severely lowered and my rate was being raised on two credit cards. If I ever carry any balance, it's only for a month or two. So, I cancelled both cards. The credit card representatives said I shouldn't do that because it would affect my credit rating, but I didn't really care. I'm aware that lots of people, in similar positions as me, are doing exactly the same thing. It doesn't seem to make good business sense to lose a desirable part of you client base. Am I missing something?

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