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Sunday, February 03, 2008 3:30 AM

Citigroup's Strange New Definition Of "High Risk"

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Leave it to Citigroup (C), the bank that has gotten virtually nothing right for years, to come up with strange definition of "higher than acceptable risk".

The Times Online is reporting Prudent customers risk losing credit cards.

CREDIT card customers who pay off their balance each month are as much risk from being cut off by their lender as those that have lost control of their spiraling debts. Credit checking agencies say banks are beginning to weed out customers with faultless borrowing histories because they can make little profit on them.

It comes as credit card company Egg was accused of withdrawing cards from some of its most responsible customers as part of a cull of those said to have a "higher than acceptable risk profile".

The lender, part of US investment bank Citigroup, wrote to 161,000 customers - 7% of its total base - last week to warn them their cards would be withdrawn in 35 days. They can still repay balances over time.

Royal Bank of Scotland, which has 11m credit cards in use under brands including Natwest, Mint and Tesco Personal Finance, said: "The credit card is there for people to use as they want. We don't want customers that aren't managing their credit card."

Credit card providers have become more discerning about who they accept as new customers in recent years. Two years ago only about one in three of applicants for new cards were declined. That figure has since risen to nearly 50%. Barclaycard now turns down more applicants than it accepts.
Citigroup Only Wants Patsies

If those customers are profitable, it is dumb to cancel their cards. If they are unprofitable, then perhaps Citigroup should have instituted an annual fee to cover the costs.

Here's the deal. As long as customers are charging something, Citibank should be collecting a fee from the merchant for each transaction. If the merchant fees do not cover processing costs, then perhaps Citigroup has yet another problem to address (transaction processing costs are out of line with industry averages).

In contrast to Citigroup, the Royal Bank of Scotland "does not want customers who aren't managing their credit card."

Citigroup seems to have decided that it would rather have no money than some money from those customers it just turned away. Who cares if their customers are the "ideal patsies" or not as long as they are profitable? Well, I guess Citigroup does. This is yet another poor decision in a long line of poor decisions by Citigroup.

Take The Mirror Test

Look in the mirror and ask yourself if you have a Citicard and routinely carry a balance on it. If you answer yes to both questions, then Citigroup considers you a patsy. And you are a patsy.

By the way, this same mirror test applies to Visa, MasterCard (MA), and Discover Card (DFS) as well. Those who routinely carry a balance on any card are patsies. Those who carry balances on cards with two-cycle billing are double patsies. For more on the two cycle billing ripoff, please see Read the Fine Print On Credit Cards.

Note: Visa and MasterCard make money on fees, they do not hold credit card debt. It is not Visa or MasterCard that will be in trouble if consumers default. Rather it is those taking the risk by holding the debt.

Refuse To Pay High Interest Rates

In the truth is stranger than fiction department, here is an Open Letter to WaMu from someone refusing to pay their VISA card due to the 26% interest rate imposed on someone with allegedly perfect credit.
Dear WaMu executives:

I am hereby informing you that I stopped paying my $8,000 WaMu VISA card. It SHOULD be illegal to charge a 26% interest rate for any credit card debt and I’m hoping that this Open Letter will draw the legislators’ attention to your vile business practices.
While I sympathize with the idea that a 26% interest rates amounts to usury, the correct response would have been to pay the card off and move the account elsewhere. If that person's credit was perfect before, it sure is not perfect now. Ruining your credit over a matter of principle is simply not a good move. Nor is carrying an $8,000 balance in the first place. The way to avoid high interest rates is simple. Don't carry a balance.

Back to Citigroup. I have worked at banks, lots of banks, for lots of years. I know this story full well. Two years from now, Citigroup is likely to get the bright idea to win back customers it recently lost no matter how much it costs. This assumes of course, that Citigroup is still in one piece. With decisions like this one, they won't be.

Mike "Mish" Shedlock
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