A newspaper article reported that GE Capital Corp. planned to charge a $25 fee to cardholders who pay off their monthly credit card bills in full.'’ Too many of its credit card customers paid in full each month and did not incur any finance charges, which averaged 17.1 percent of the unpaid monthly balance. GE Capital did obtain payments from merchants at rates of 3 to 5 percent of purchases, but those payments were insufficient to meet GE Capital’s profit objectives.

About 20 percent of GE Capital’s 5 million cardholders keep the cards only for emergency use. The company informed them and those who do not carry a balance (about 36 percent) that it would begin charging them $25 per year if they do not begin to carry a balance (and pay finance charges).

Credit-card research companies predicted that most credit-card issuers would charge such a penalty for little or no use and, furthermore, would find additional opportunities to charge fees. This comes after an era when issuers gave out cards to poor credit risks, shunned annual fees, and gave cash rebates to encourage the use of their cards. Cash rebates have been as high as $140 per year for customers who charge $10,000 per year. The problem is that issuers need interest income to generate profits and pay for all the incentives. GE Capital loses $65 a year for every customer who earns the maximum rebate but pays no finance charges.

Thus, firms are bringing back annual fees, calling them penalties for nonuse. GE Capital also plans to reduce interest rates to 11.9 percent for those who currently pay off their balances, hoping to motivate them to spend more and carry a balance.

Required In small groups, take the perspective of GE Capital Corp and prepare responses and a presentation that cover the following questions.

a. What are GE Capital’s goals and tangible objectives? Do you consider them fair? Explain.

b. From the article, identify the likely drivers of revenue and costs.

c. Develop a spreadsheet model that allows GE Capital’s managers to see the financial effects of alternative courses of action. Be prepared to demonstrate this model to the class