Credit-Card Companies Become 'Deadbeats'

BOSTON (TheStreet) -- Many of us get at least one pre-approved credit-card offer in the mail each week.

The pace of those letters has slowed since the financial crisis hit as credit-card companies including Capital One(COF Quote) and Discover(DFS Quote) tighten lending standards to shield themselves from the risk of default from customers with marginal credit histories.

The credit-card business is a curious one. The companies consider customers who pay off their balance each month as "deadbeats," since they generate no fees from them, and those who carry a balance are the most highly valued because they rack up huge financing charges. Yet, the companies need those carrying a balance to make at least minimum payments. It's a fine line for credit-card companies, which can charge interest of as much as 30% a year.

The credit-card business can be lucrative, but, viewed through the framework of Michael Porter's five forces affecting competition, investing in those companies is too risky for the average investor, especially in times of a sluggish economy and high unemployment.

Degree of Rivalry

The level of competition in the credit-card industry can be viewed by watching TV. In one commercial break, you may see unwashed Vikings pitching Capital One cards, Ellen DeGeneres talking about her American Express(AXP Quote) card, and a MasterCard(MC Quote) spot sporting its touchy-feely "priceless" slogan. Those companies dish out big bucks for primetime exposure not only to entice new customers, but to get existing card members to choose their card when at the cash register.