Home Savings’ Credit Card Rate Cut to 16%
Home Savings of America dropped its credit card interest rate to 16% from 20.4% Friday, placing it among the first major U.S. banking institutions to lower the rate in recent months and giving it one of the lowest rates among major institutions nationwide.
The surprisingly large drop by Los Angeles-based Home Savings, the nation’s largest savings and loan association, is likely to put pressure on other major institutions to lower their rates, particularly in California, which has among the highest average credit card rates in the nation.
While rates on auto and mortgage loans have declined in recent months along with other interest rates, credit card rates have hardly budged and, by some measures, have actually increased since January. Only a handful of banks and S&Ls;, mostly smaller ones, have lowered their rates, and such drops typically have been by only one or two percentage points, unlike Home’s 4.4-point drop.
The lack of declines has sparked a growing uproar among politicians and consumer groups, with several bills in Congress and state legislatures, including California’s, proposing to limit credit card rates or impose new requirements on card issuers to disclose rates and fees. Critics claim that banks are artificially propping up card rates, earning high profits in part to make up for losses on cards in the early 1980s, when general interest rates were high and they had to spend more to obtain deposits.
Meanwhile, thousands of consumers have been opening accounts with institutions offering lower rates--often looking outside their home states to do so.
“Until now, credit cardholders have not benefited from the overall decline in market interest rates,” Richard H. Deihl, Home Savings’ chairman and chief executive, said in a statement. “Our interest costs have come down over the past few months, and we feel it is fair and proper to pass those savings on to our credit card customers.”
It was not immediately clear whether Home Savings’ move will spur rate decreases at other major institutions. But a spokesman for one large California bank said, “Ultimately we’re going to have to lower . . . (the rates)” because of negative publicity and consumer pressure. “The disparity in rates is so immense right now.”
Others Hold Back
Spokesmen for Bank of America, Security Pacific National Bank, First Interstate Bank of California, Wells Fargo Bank, California Federal Savings, Imperial Savings and other major California banks and savings and loans said Friday that they had no immediate plans to lower their rates.
“It would be a price war, and I don’t think very many institutions would get into such a stupid thing just to match each other,” said H. Spencer Nilson, publisher of a Los Angeles-based newsletter tracking the credit card industry. “The only reason (to drop rates) would be to get publicity, and the No. 2 bank to do so wouldn’t get the publicity.”
Robert Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter, agreed, saying, “I doubt very seriously whether you will see a lemming-like rush by other California banks and thrifts to drop their rates.”
Bankers claim that the costs of administering credit cards have been rising and are far higher than for mortgage, auto and other loans. Losses on credit card operations, through fraud and non-payment, also have risen, they say.
Bankers also justify the high interest rates by saying that the cards are valuable for purposes other than for buying on credit--such as providing access to automatic teller machines and a means of identification.
A credit card rate cut last October by Manufacturers Hanover Trust Co. of New York, the nation’s fourth-largest bank and one of the first major institutions to cut its rate, was not matched by other major institutions. Cuts since then by other smaller institutions, including one last month by San Francisco’s Central Bank, also have not been matched.
Not a Major Player
Adding further to skepticism that institutions will drop their rates is the fact that Home Savings is not a major player in the credit card business. Despite its ranking as the nation’s largest S&L--having; recently surpassed Stockton-based American Savings & Loan--Home Savings ranks only about 140th in the nation among credit card issuers with about 120,000 cards, newsletter publisher Nilson said.
Average credit card rates for top banks and thrifts in five major cities actually have increased since the beginning of the year to 18.92% from 18.88%, Bank Rate Monitor’s Heady said. Los Angeles has among the highest rates nationally. As of May 7, rates averaged 20.01% among the city’s top 10 banks and S&Ls;, up from 19.83% at the end of 1985, Heady said.
Six California banks--Crocker National, First Interstate, Security Pacific, Barclays Bank of California, Lloyds Bank of California and Bank of America--are among the seven major banks with the highest credit card rates in the nation, according to Bank Credit Card Observer, an Iselin, N.J., newsletter. The publication reports that the nation’s lowest rates are in Arkansas, where rates, limited by state usury laws, are as low as 12%. Rates are relatively low in other states with usury laws, such as Texas, where some banks charge as low as 14.5%, and Washington, where the rates at some institutions are 15%.
Home Savings said its rate cut will apply to holders of its Visa and MasterCard accounts in California, Florida, New York, Illinois and Ohio. The S&L; requires that its credit card account holders have a savings or checking account, mortgage loan or some other type of banking relationship with Home Savings, spokeswoman Gayle Morris said.
A Home Savings customer with a $1,000 credit balance will save $44 a year, or about 22% of annual interest costs, as a result of the rate cut, Morris said. Home Savings is not changing its $18 annual credit card fee or any other terms on its cards, she said.
She said Home Savings’ move was intended simply to give its current customers a better rate and not to attract new accounts. “If we attract new customers as a result, that’s terrific, but that isn’t the reason,” she said.
Consumers have shown that they are willing to switch banks to get a lower rate. Last October’s cut by Manufacturers Hanover, to 17.8% from 19.8%, resulted in the bank attracting 750,000 new cardholders, a 27% increase, newsletter publisher Nilson said.
