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.

When it comes to credit cards and fine print, there is usually plenty of room for confusion. It’s been seen in the fact that few cardholders really know what their card’s interest rate is. The majority of cardholders aren’t even aware of the Universal Default Policy, and what it means to their financial health.

Well, chances are good that few cardholders really understand their highly-touted credit card rewards as well. It would take a very savvy cardholder to understand the fine print on these rewards and learn how to play the system. There are often very specific restrictions on these, like spending levels that must be reached before rewards begin to accrue at the advertised level. There might also be expiration dates on the points, or specifications on how the points can be accrued and used. There might also be annual fees, negating any rewards benefits except for really big spenders. Furthermore, rewards payouts may not be automatic, but only available upon request.

Another thing that consumers might not recognize is that rewards programs are changing, and not for the better. Companies are cutting back and becoming much less generous (not that credit card rewards were all that special to begin with), largely because of the current economic times. According to the Associated Press, CardRatings.com data shows that the best cashback rewards card are American Express Blue Cash, Chase Freedom Visa, and Discover More. The best gas cards: Cash PerfectCard MasterCard, Discover Open Road, and Shell Platinum Select MasterCard.

Ultimately, as the Associated Press reports, the final conclusion is that credit card benefits like rewards programs may not outweigh negatives like unpredictable policies that are subject to change at any time and have the power to majorly mess up your FICO score. Namely, the fact that companies fluctuate interest rates and spending limits at will. And, as aforementioned, rewards programs are becoming even less enticing now. It’s something to think about next time you get that uber-tempting credit card offer in the mail. And if you do move forward with choosing a rewards card, choose carefully and consider all the variables.

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.