Credit Card Debt Management

Wall Street analysts are dubbing MasterCard (MA) and Visa (V) shares “recession-proof stocks.” It’s no secret that these two companies have shown a solid performance. Despite the roller coaster stock market, especially in the financial sector, these two stocks have remained relatively stable.

Visa has already more than doubled its IPO price of $44 a share in mid-March of this year. Its IPO also enjoyed a record-setting take of $17.86 billion, first place in the history of U.S. domestic IPOs and third place among IPOs worldwide.

MasterCard, more veteran to the stock market scene than Visa, has been floating near or above the $300/share mark for a while. The company has $2.66 billion in cash and $229 million in debt, according to StreetSpeculator.com. The site further points out that Visa’s cash is more than twice that of MasterCard and the debt is less than half.

But what makes these two companies such buoyant choices in the violent sea of stock turmoil? No liabilities. Aside from legal disputes, something they’ve both just experienced, these two companies cannot be touched by the bad debt wreaking havoc on so many banks and other credit card companies like Discover, Capital One and American Express. Visa and MasterCard are safe because they do not make loans, they merely facilitate loans and purchase transactions. Their profit does not come from late fees and interest charges imposed on card-carrying consumers. They instead derive profit from fees imposed on banks who use their logo on cards and merchants who allow customers to pay for goods or services with their card.

It makes for a very “cash cow” stock choice, as StreetSpeculator.com puts it. July 31 is quarterly earnings report day for both companies — if profits exceed forecasts, the share values will likely soar and it could be a good day for stockholders indeed.

Are you upside down in a loan you can’t afford? If it’s an auto, education, or mortgage loan (or even a utility bill!) you struggle to pay each month, there’s hope. Though not ideal, at least it’s good to know that options exist. ChargeSmart is the latest company to offer consumers the option to pay such bills with a credit card.

In the past, mortgage loans have been particularly difficult (impossible) to pay with credit cards, but ChargeSmart makes it possible through a third-party arrangement. The banks are not affiliated with, nor do they endorse, ChargeSmart, and it may be for good reason. The habit of putting living expenses on the credit card — even if it’s to reap credit card rewards — is a highly treacherous path.

High-balance credit cards can mean high interest rates, higher payments, higher cost of living and higher risk of default. There will inevitably be those ChargeSmart customers who are not doing this to reap rewards, but because they have to. They cannot afford to pay their electric bill, mortgage payment, car loan, etc. Where will those consumers find money to pay off their credit card bills each month? A HELOC? It gives new meaning to a revolving line of credit.

ChargeSmart is particularly dangerous because it adds fees onto each transaction, a flat rate plus a percentage of the payment processed. As MSNBC pointed out, CardIt — ChargeSmart’s like-minded predecessor discussed on this blog previously — is now out of business. We’ll see how long ChargeSmart will float. For consumers trying to stay afloat, it’s probably best not to hitch onto ChargeSmart’s raft. Pick up a second job, sell stuff, eat out less, take public transportation, rent out part of your house — do whatever you must to increase income and decrease cost of living. And that’s truly smart.

The committee of they says there’s no such thing as bad press, and they may just be right, given the fact that MasterCard was picked Thursday to join the S&P 500 and S&P 100 indexes starting July 17. The news comes on the heels of reports that MasterCard will pay a $1.8 billion settlement after American Express accused the company of engaging in unfair competitive practices. And the day that bombshell news broke in late June, MasterCard shares rose while AmEx shares dropped. Go figure.

Seemingly unstoppable, MasterCard shares are still going strong. Apparently, much stronger than General Motors Co., which MasterCard is replacing on the S&P 100 (thus far, no reason given for the GM snub). MasterCard’s sudden elevation to the Big Boys Club is hardly a surprise. It’s stock is like the Google of the financial services sector, hovering around $250-$300 over the past couple months while Visa, American Express and Discover shares stand at only $75, $50 and $14, respectively. And to think that MasterCard’s May 2006 IPO debuted just under $40, amidst widespread skepticism.

So what does all this S&P hype mean for the already-stable MasterCard stock? More than likely, it means really, really good things. According to The Economic Times:

Shares of companies joining the S&P 500 often rise because many portfolio managers try to track the index, and are required to buy shares of companies that enter it.

It also means it’s probably a really, really good time to jump on board before the MasterCard madness peaks, even if you weren’t lucky enough to get in on the ground floor.