A friend went formally bankrupt. OK, maybe I should say “acquaintance” because I find I’m not all that sympathetic to her plight, largely because she seems so smug about it.
Assuming that she had a lot of credit card debt forgiven, who has paid for this? Well, I know that ultimately it’s the consumers who pay in the form of higher prices, but who pays immediately? I’ve been assuming it’s the credit card company, since they’ve already paid the merchants for her charges, but maybe I’m wrong. Do they go back to the merchants and say, “We didn’t get paid, so you need to pay us back”?
If a customer pays for an item with a bad check, it’s the merchant who gets hosed. Merchants pay credit card companies for their services and now I understand can charge that back to the consumer. If they are getting protection from some losses, isn’t it often worth their while to pay the credit card company fee? Or do they get hosed if a customer (through bankruptcy and I guess whatever other reasons there are) doesn’t pay? Or is the amount the merchant pays a lot more than their actual losses would be if they were paid instead by bad check?
Credit card companies only go back to the merchant in certain situations. The most common (in my experience) is when a card holder contests a charge.
In a bankruptcy, though, no one is contesting the validity of the charges, just whether or not the debtor remains liable. In that scenario, it’s the credit card company eating the loss. They make up for that via the rates and fees they charge. In fact, many people who go into bankruptcy have already paid back the principal of their charges - they may only owe money because of fees and interest that have accrued over the years. So the credit card company is often looking at lower profit, not an outright loss.
I think I know what you are trying to get at here, but a credit card doesn’t work like a car loan, where you have a principal amount that goes down each month. It is revolving credit. I think you mean that someone may have originally charged, say, $5,000, and since then they have made payments of, say, $6,000, but still have $1,000 in accrued interest, which can get charged off. While this is true, you have to remember a couple of things.
Once the credit card holder in this situation makes payments of $5,000, every single dollar after that isn’t profit. The bank had to pay for the money it originally lent out, as well as many other costs.
The situation you reference isn’t really typical. The vast majority of losses for a credit card company do not come from the extended interest payments of a borrower who already paid much of the original loan. Much, much more typical is the customer who charges a bunch of stuff, and has paid relatively little on it. On most accounts that are charged off, the bank is losing quite a bit of money.
As to the OP’s questions, the previous posts are correct that the bank does not go back to the merchants. That isn’t even an option.The bank eats the loss. OP is also correct that this is eventually paid by the consumers. Losses are just another item on the P&L. If you look at a card company, they will pay a couple percent for the cost of the money; they will pay maybe 5% for their salaries, marketing expenses, systems costs, etc. So this all comes to maybe 7% or 8%. Then they have their losses. If their losses are pretty low, say 4%, then their total expenses are around 11% or 12%, and they can make a pretty decent return for the bank by charging an average interest rate of around 16% or 17%. On the other hand, if their losses are 7%, they aren’t going to make any money at all if they only charge an average of 15% on their cards, so they will charge 20% or 21% in order to get a decent return. Of course, this is also influenced by what the market will bear, but losses will definitely drive the interest rates to some extent.
It’s the CC company that extended the debt, so they’re the ones liable, not the businesses who were paid by CC. Of course, they pass these debts to their customers.
CC companies can fine tune their losses to a fairly precise degree through their application process. BKs are built into the system and don’t necessarily influence the rates their other customers pay. (Although they often use bankrupcies as an excuse for raising rates.) Offering credit to riskier borrowers can increase higher returns at the same time in guarantees higher individual losses.
The issuing bank. Visa and MasterCard provide products and services to banks, and banks extend credit to consumers. When you don’t pay the bill, it’s the bank that comes after you.
Others have answered the question, but it’s the main reason why CC companies charge an average of a 21% interest rate when a home loan is 4%. It’s riskier. They know that X% of people will default and be judgment proof or declare bankruptcy.
It is a loss to them, but it’s built into their business model. Some guy at JP Morgan Chase isn’t losing his job because the OP’s friend didn’t pay her bill.