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#AllAboutIt!! Deadbeat

CA Study

DEFINITION of Deadbeat

Deadbeat is a slang term for a credit card user who pays off his or her balance in full and on time every month, thus avoiding the need to pay off interest that would have accrued on their accounts. A deadbeat, also called a “nonrevolver” or a “transactor,” gets this derogatory name by being a potentially less profitable customer for a credit card company than a revolver, or someone who carries a balance from month to month.

BREAKING DOWN Deadbeat

By not carrying a balance, a deadbeat does not incur any interest charges, and by paying on time, he or she does not incur any late fees. However, so-called deadbeats in the credit world also do not rack up bills they never pay, so they do not generate significant losses for credit card companies like true deadbeats, who do not pay their bills.

Ways Deadbeats Can Still Generate Revenue for Credit Card Companies

Why would a credit card company want a deadbeat as a customer if they do not earn interest or late fees from them? Because credit card companies still earn money from deadbeats. One way they earn money is that merchants pay about 3% of each credit card transaction in fees to the credit card company. So if a deadbeat charges $2,000 a month, even if he or she pays that balance in full and on time and does not give the credit card company the opportunity to charge 10% to 30% in annual interest, the credit card company is still earning $60 from that customer in the form of the 3% fees the merchant pays on the $2,000 in charges. Credit card companies can also make money from nonrevolvers by charging an annual fee for the privilege of using that card.

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Deadbeats usually feel as if they come out ahead by using a credit card over cash or a debit card. They use credit cards for the convenience and consumer protections they offer. They also use them for the grace period that lets them keep their cash in their bank accounts between the time they charge a purchase and the time the credit card bill is due. This grace period is usually about three weeks.

Another big draw to non revolvers are credit card rewards program. Since deadbeats do not carry a balance and do not pay any interest, a rewards card that offers 1% to 5% back on purchases means it’s possible for a deadbeat to make money from using a credit card, in contrast to the majority of consumers who pay money for the privilege of using credit.


Source:
Website: https://www.investopedia.com
Author Name: JULIA KAGAN
Link to Native Article: https://www.investopedia.com/terms/d/deadbeat.asp


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