When applying for a new credit card recently, I saw that different cards require different amounts of minimum annual household income.

In the link above, for example, a TD Drivers Reward visa requires a minimum household income of $12,000 while a TD Gold Elite visa requires $35,000. I certainly understand that the bank may be unwilling to extend you a credit limit of $100,000 with a household income of $12,000, but given that you could get either card and request, say, a $6000 credit limit, why the differences? Why not base credit limit on your household income, but leave type of credit card entirely to the customer?

  • If there's no material difference between the cards then why do you care? Just get the card with the lowest income requirement. If there is a material difference of some kind, giving you a reason to care, then you've answered the question for yourself. – Mike Scott Sep 16 '11 at 14:55
  • I care only academically. As you point out, it makes sense to pick the 'best' credit card available at my household income rate. Why the banks work the way they do is probably not relevant in that decision. – ChrisInEdmonton Sep 16 '11 at 15:41

Here's one reason that's being overlooked in answers so far. (@ChrisInEdmonton, this is for your comment on @Chad's answer.)

How do credit card companies make money? Sure, there's interest charges, but those are offset significantly by the cost of borrowing money, and by people defaulting on their debt / entering bankruptcy. The other way they make money is by processing transactions. They get a cut of whatever you buy.

If you're a high-income person, and you're going to process a lot of expenditures with this credit card, your business is worth more. They will be willing to bribe you with things like cash-back, frequent flier miles, and insurance on your auto rentals, so that they can be your #1 go-to card.

(This works in concert with the way that some credit card vendors with richer clientele overall - American Express - get to charge higher merchant fees for access to these customers' wallets. But that was mentioned in other answers.)

If you're not a high-income person, your business is worth less. If you go somewhere asking for credit, they're going to try and give you a card which will earn them the most money - which probably isn't the one where they give you back 50% of their transaction fee in rewards. It's a calculated risk, since they still have to compete against cash, debit cards, and all the other credit card companies, so they don't have you totally over a barrel, but you shouldn't expect as many freebies, either.

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While you're asking about a particular bank, I'll give my opinion of this in general. I think a $12,000 household income is pretty low to be given credit. The risk to the bank is certainly higher than if the income were at that $35,000 level. They can use this to differentiate what they offer for perks, and if they ever collateralize the debt of these cards, it's a clearly defined demographic.

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  • All banks I've seen offer a number of different cards with different income requirements. I agree on the $12,000 thing. Can you explain why a 'gold' visa card (with perks) with a $6000 credit limit would be higher risk for a bank than a 'regular' visa card with a $6000 limit (and no perks)? Interesting point about the collateralization, though. – ChrisInEdmonton Sep 16 '11 at 15:40
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    The $12K income family is higher risk to the bank. Right? The cards going to these people are deemed higher risk accounts. You may have misread my note, or my syntax was convoluted. It happens. – JTP - Apologise to Monica Sep 16 '11 at 16:15

I don't know, but I can guess. You'll notice the Elite card has higher rewards. A card might want to convince merchants that they represent high end buyers, and use that to negotiate higher merchant discounts.

Issuing bank: "Our 10 million card holders are sophisticated and have lots of discretionary income. If you don't agree to this rate, we'll terminate the contract and they will take their business elsewhere."

Merchant: "But it's twice the rate of everyone else! I'm sure these customers have other means of payment, and besides, how many of those card holders are actually using it?"

Issuing bank: "Our cardholders signal their interest in the benefits of cardholding by paying us an annual fee. If they didn't want one, they'd stop paying right? They clearly know they have one and our records indicate they use them regularly. We're pretty sure if you don't wise up they'll shop at your biggest competitor, another client of ours. pause Frankly, they already do."

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  • visa.ca/en/aboutcan/mediacentre/interchange/pdf/… (page 6) indicates that the interchange fees ARE indeed different depending on the type of the visa card. – ChrisInEdmonton Sep 16 '11 at 15:51
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    merchants don't have a choice. They either accept ALL visa cards, or accept NONE. They can't decline one card with a Visa (or MC or AMEX) logo, while accepting another. The rates they pay are to their own clearing service, which has nothing to do with the bank issuing cards. Basically what I'm saying is that this answer is plain wrong. – littleadv Sep 16 '11 at 19:50
  • Also, interchange fees are not merchant fees. Interchange fees are the fees that banks pay to each other when one clears the card issued by the other. These may be negotiated by the banks or regulated by Visa or the local authorities, but merchants and card holders are not sides here and are not directly affected (they're affected indirectly by fees that are supposed to compensate the interchange fees costs to the issuers and the clearer, of course). Note that the merchants don't pay different rates depending on the type of the card, but rather depending on the type of the transaction. – littleadv Sep 16 '11 at 19:54
  • "Issuing bank: the bank which issues the consumer's credit card. This is the bank a consumer is responsible for repaying after making a credit card purchase. The issuer's share of the merchant discount is known as the interchange fee." en.wikipedia.org/wiki/… – jldugger Sep 16 '11 at 21:42
  • If you don't pay based on the type of car, I'm curious then why you'd sue to be allowed to refuse them then: marketplace.publicradio.org/display/web/2010/10/04/… – jldugger Sep 16 '11 at 21:58

It is much simpler than any of that. People who make money have a greater capacity to pay their bills. Credit card companies make money off of people who can afford to pay several hundred dollars a month in interest charges. If you only make 500 a month you can not afford to pay 200 in interest. So their cost of doing business with you is higher. These cards are issued to make money. And they make their money off of people paying 12-29% interest on their 5k+ credit limits they have nearly maxed.

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  • This would seem to explain why they'd base the credit limit on your annual household income, but does not explain why they'd be unwilling to give you a 'gold elite' card with a $5000 credit limit while they ARE willing to give you a 'drivers reward' card with a $5000 credit limit, if your household income is $34,000. – ChrisInEdmonton Sep 16 '11 at 19:31

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