GMAC Credit Card Biz Breaks With BofA
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.
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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?