Confused about where to invest your extra dollars so that you can get significant return on investment? You may think about investing in credit card companies. But, make sure you don’t invest borrowed amount in it. Credit card companies are good options only in case you have some extra money, though American consumers’ unwavering requirement and obsession to use credit cards ensures such companies’ potential to thrive as winners.
This is undoubtedly an ever-evolving niche; but even then one must gather in-depth information regarding credit card companies. Here is a brief discussion on different aspects related to investing in these companies.
What do Credit Card Companies Do?
First of all you need to understand what credit card business is meant for. It is basically about lending money to the borrowers. The companies provide credit for easy purchasing and also allow the borrowers to delay payments on purchased items. In a nutshell, it provides the consumers with the ability to buy an item even if they don’t have cash available. However, such credits are obviously charged with interests and not usually rendered to high risk borrowers. Also, they come with monthly minimum payment facility which is knowingly set low to encourage the consumers to carry on with debts for longer period of time and so pay more in interests. Since Search Engine Optimization (SEO) for finance industry is very much in vogue, credit card companies also do this for marketing of their products.
What Factors Affect Profitability?
The main factor which affects credit card market is how well the borrowers are doing fiscally. The stronger consumer confidence is the more purchases are expected. In other words, stronger consumer confidence results in more use of credit cards. On the other hand, when their confidence level grinds down, the credit card companies get badly impacted. Customers’ decision towards buying less indicates their reluctance towards using credit cards. The overall financial health of the country also plays important role in this regard.
What are the Other Factors?
There are some more factors that also can both accelerate and retard potential growth of such a business.
1. Regulations implemented by the government can impact escalation of the company. Thus, as an investor, you must keep a keen eye on government policies related to financial services sector and how they can impact credit card business.
2. You should also be careful about revolving credit which is a kind of credit that doesn’t have any particular number of payments. Credit card payments are one of the most appropriate examples of revolving credit. If the parameter goes in negative direction then it is evident that the consumer is not likely to make any big purchase using credit card and vice versa. As an investor, you must be watchful about both consumers’ and nation’s economic situations to have a clear idea about what you can expect from your chosen companies.
3. Late payers are another big challenge for these companies. To know about this, you need to be updated about Consumer Credit Delinquencies Bulletin that keeps track of all delinquencies depending on the outstanding dollars. Such delinquencies may require companies to cut on credit limits for their present customers and also make it hard for the fresh customers to get cards. As a result, it would impact the bottom line of the company and thus its profit margin.
4. Interest rate charged on the credit can be considered as an important company specific parameter to decide on a company’s financial health. During bad economic phase, they can slash the rate down to entice consumers to use their product, but that means less money to be generated from the credits taken by the consumers. And thus it would rather negatively impact the company’s bottom line. However, companies always put their best effort for marketing of financial products offered by them.
How to Invest in such a Company?
There are a number of means through which you can successfully invest in credit card companies and those may include exchange-traded funds or ETFs, mutual funds and stocks. Nevertheless, ETFs and mutual funds don’t directly invest in such companies; rather they invest in a diversified range of financial services companies like banks. On the other hand, stocks are the direct way of investing in these companies. However, it is always good to invest through ETFs and mutual funds as they have more ability to make profit through adequate diversification.
Jonny Pean is a reputed financial blogger. His write-ups include all financial niches.
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