The Boom May Be Slowing : Consumers Turning Wary Over Use of Credit Cards

Times Staff Writer

During the last year, Robert King has been offered numerous chances to go credit-card crazy. King, a substitute teacher in Berkeley, received five letters offering him pre-approved credit cards that together would have allowed him to borrow up to $20,000, twice his annual income.

King, however, declined the invitations and is instead trying to reduce the $1,400 debt on his current credit card. "I could have had a massive amount of credit if I wanted to," the 45-year-old King said.

King's experience is part of the evidence that the three-year-old boom in the number of credit cards may finally be slowing, possibly reflecting an overall slowdown in growth of consumer debt as Americans become more cautious about their finances.

Concerned about being overextended on debt and having enough credit cards already, Americans are responding to credit card solicitations at only half the rate they did three years ago, estimates Jerry D. Craft, chairman of the bank card division of the American Bankers Assn. Consumers also are increasingly wary of paying high interest rates and fees on credit cards, some experts argue.

Meanwhile, consumers are having increasing difficulty paying off credit card debt, with the result that there has been a 64% increase in bad debt write-offs on bank-issued credit cards nationwide compared to a year ago. The higher losses may be partly due to banks' aggressive mail solicitations of the last three years, which in some cases have resulted in banks offering cards to prison inmates, jobless teen-agers and even dogs and cats.

That and other factors are prompting some banks and other credit card issuers to reduce mass offerings of new cards, to be more selective to whom they offer cards, or to try new marketing tactics to win customers, such as offering merchant discounts with their cards.

"No question there will be less growth (in the number of cards) than in 1983 and 1984," said Bill Powar, vice president for strategic planning at Visa International. However, he added, growth will still far exceed the pace of the early 1980s.

'Using Self-Discipline'

"Consumers are using more self-discipline in their use of credit," said Craft, who also heads card operations at First National Bank of Atlanta.

The implications of this trend could affect more than just the credit card industry.

While only a fraction of total consumer purchases are made with credit cards, the slowdown in card proliferation could help slow consumer spending, which accounts for two-thirds of overall economic activity. That in turn could slow overall economic growth.

Consumer installment debt rose at a seasonally adjusted annual rate of 9% in April and 11.8% in the first three months of 1986, down sharply from the 18% rise for all of 1985, Federal Reserve Board data shows.

Many economists predict that growth in consumer borrowing will remain slow this year. Sandra Shaber, consumer economist for Chase Econometrics, an economic forecasting firm based in Bala Cynwyd, Pa., predicts that consumer debt for all of 1986 will rise only 11%.

Meanwhile, retail sales fell 0.1% in May, the third decline in the last four months. Some surveys show that consumers are becoming more cautious about their high debt loads.

Pent-up Demand Easing

"The normal pent-up demand (for goods and services) after a recession mostly has been satisfied already," Shaber said in explaining the borrowing and spending slowdown.

A slowdown in the credit card boom was perhaps inevitable, given its strength during the last three years.

In 1980 and 1981, the credit card business suffered a severe slump, thanks in part to credit controls imposed by President Jimmy Carter. Many banks and other institutions were losing money or suffering low profits on their credit card operations then because the interest rates they charged, usually around 20%, were not much higher than the interest rates they were paying for deposits. Processing, marketing and other expenses on the cards ate up much of the difference.

As a result, banks tightened credit standards and "it was very hard for consumers to get a card," said Fritz Elmendorf, a spokesman for the American Bankers Assn.

But since 1983, because of the economic recovery, easier credit conditions and aggressive marketing by issuers, the number of cards in circulation has soared. The number of Visa cards in the United States has grown 41% since the end of 1982, after growing only 3% between 1980 and 1982. Total borrowing volume for all general-purpose cards--Visa, MasterCard, American Express, Diners Club and Carte Blanche--totaled $176 billion in 1985, up 54% from 1983.

Decline Not Expected

No one expects a decline in the number of credit cards or a drop in credit card borrowing, owing to the growing incomes of members of the baby boom generation, who are entering their prime working and spending years. Also, the two largest bank-issued credit cards, MasterCard and Visa, are still enjoying continuing growth in number of cardholders, partly because more retailers and other businesses are accepting the cards.

In addition, high fees and interest charges make the profits from credit cards very high today, giving card issuers a strong incentive to seek more customers despite greater resistance.

Some banks consequently are marketing their cards as aggressively as ever. Manufacturers Hanover Trust Co., the nation's fourth largest credit card issuer, began sending out 8 million to 10 million card solicitations--its most aggressive marketing effort ever--last October after dropping its card interest rate to 17.8% from 19.8%, said Charles R. Walsh, head of the bank's card services division. The effort so far has resulted in nearly 1 million new accounts, a 30% increase, he said.

Credit card issuers can live easily and prosper even with a slower response rate, said H. Spencer Nilson, a Santa Monica analyst who tracks the credit card industry.

But for the industry as a whole, growth in the number of cards will be slower and harder to come by over the next few years, experts say.

Retail Offerings Slow

Already, the number of individual cards offered by department stores, gasoline firms, telephone companies and other merchants has slowed or stopped, Nilson said. The number of cards in circulation offered by retailers actually fell 4.2%, to 341 million, last year, he said.

Some consumers may have more debt than they can comfortably handle. Consumer debt as a percentage of disposable income has risen to a record 18.9%, up from the earlier record of 16.5% in 1979 and from a low of 13.9% during the last recession in 1982, said A. Gary Shilling, a New York economic consultant.

Many consumers also may be concerned about the high cost of maintaining credit card debts. While about one-third of cardholders pay off their bills during the grace period and thus pay no interest charges, those who keep running debts often complain about the interest charges.

"I've been trying to keep my borrowing down," said Patricia Nordin, a 36-year-old computer consultant in San Francisco. "I'm paying $30 to $40 a month on interest. That's absurd. I'm trying to keep current because it's just too expensive."

The average credit card interest rate among the largest banks nationwide was 18.82% last week, according to Bank Rate Monitor, a North Palm Beach, Fla., newsletter. That makes the cost of carrying $1,000 of credit card debt about $190 a year. Annual fees usually add another $15 to $30, said Robert Heady, publisher of the newsletter.

Use of Cards Curtailed

A recent nationwide survey by Opinion Research Corp., based in Princeton, N.J., showed that 47% of consumers said they are using credit cards less often, while only 13% said they were using cards more often. A similar survey two years ago showed only 33% saying they were using their cards less often.

Higher consumer borrowing may be a key reason for consumers' greater inability to pay off those debts. Losses from non-payment of credit card debt at banks nationwide totaled 2.82% of outstanding credit card loans as of the end of 1985 (the latest date for which figures are available), up from 1.72% at the end of 1984, according to Veribanc, a bank-research firm based in Wakefield, Mass.

At some banks, the loss rate has been even higher. Citibank, the nation's largest bank credit card issuer, charged off 4.40% of its credit card loans at the end of 1985, more than double the 1.72% a year earlier, according to Veribanc's data.

Consumers may also be nearing the saturation point for taking on new credit cards, some experts argue. Craft of the American Bankers Assn. estimates that the average American has been solicited five times in the last two years, and that the average cardholder now has seven credit cards, including two bank cards.

In the early 1980s he and other consumers "used to feel lucky to be chosen for a credit card," said John Pollock, editor of Bank Credit Card Observer, a newsletter based in Iselin, N.J. But now, because of the sheer volume of solicitations, "I get the feeling I'm being sold a used car."

Response Rate Down

Consequently, experts say, the consumer response rate to card solicitations is down sharply. Only 1.5% of consumers accept pre-approved cards now, down from more than 2% last year and as high as 4% in 1983, Craft said. Many industry officials say a 2% rate is the minimum to make a solicitation effort profitable, according to Elmendorf of the bankers group.

Rewards from mass mailings offering cards "have just about dried up and future growth will be much more costly," card expert Nilson said in a recent issue of his newsletter. Nilson said he expects the total number of card solicitations to fall between 25% and 30% this year from last.

Declining results from mass mailings have prompted some financial institutions to drop the solicitations. First National Bank of Atlanta, one of the nation's largest credit card issuers, dropped its mail solicitation marketing program last year, after the response rate on the mailings fell to well below 2% from more than 3%, Craft said.

Marine Midland Bank of New York last year dropped a mass-mail solicitation campaign in California after finding a sharp increase in delinquency rates that it attributes to unqualified people taking cards in that campaign. The bank has since tightened credit standards.

Some, such as San Diego-based Home Federal Savings, have sold or dropped their card operations entirely because of high losses or other problems. Others have decided not to get into the credit card business.

GM Rejects Concept

General Motors Acceptance Corp., the consumer-finance arm of General Motors Corp., for example, studied the possibility of issuing its own card but dropped the idea. "We're not sure another credit card is what the industry or the consumer needs," spokesman Charles Newcomer said.

Other card issuers, however, are resorting to new marketing tactics to spark interest in their cards, said Elwood Holstein Jr., executive director of the Bankcard Holders of America. These include offering their cards through membership in such groups as the AFL-CIO or the Automobile Club of America.

Sears, Roebuck & Co., which launched its new Discover card in January, offers with the card such things as access to a money market savings account, rebates on purchases through the card, merchant discounts, access to cash through automated teller machines and other features.

Sears has already garnered 1.4 million accounts--above its expectations--since launching the card. But it is finding the effort to be costly. It expects a $115-million after-tax loss this year on its new Discover card, because of the high marketing, operations support and other start-up costs.

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