A few months ago, Clifford J. Dunbar of Bell Gardens wrote to an Arkansas bank offering a credit card with an annual interest rate well below the 19.8% that he was paying on his two California bank cards. He got an application--and promptly put it aside.
"I never followed up," said Dunbar, 49, a cartographer for the City of Los Angeles. "I put it aside and just didn't do it. Now, I think I should apply but
don't know where the application is."
Dunbar has lots of company in his desire to do something about the high rates he pays and in his procrastination. As the prime and other interest rates have tumbled in the past few years, consumer groups and members of Congress have succeeded in getting Americans riled up over the reluctance of many banks and savings and loans to lower their rates on Visas and MasterCards.
Like Dunbar, hundreds of thousands of card users have gone so far as to request information about lower rates or to write their card issuers to protest high rates. They have succeeded in getting a small but growing number of such institutions to cut rates, but generally the effort to force banks to establish rates more in line with the marketplace has made little headway.
"It's a movement with leaders and no army," said David Robertson, vice president for marketing of the Nilson Report, a credit-industry newsletter published twice a month in Santa Monica. "The average Joe loves credit cards . . . and will take a second, third and fourth (card). If it's at a lower rate, that's great."
Americans do, indeed, have a love affair with plastic. The nation's estimated 75 million bank-card holders carry a total of about 186 million Visas and MasterCards. And that's but a fraction of the more than 800 million credit cards in use nationwide carrying the names of department and specialty stores, telephone companies, airlines, gasoline companies and even consumer electronics marketers. A relatively new kid on the block with a bunch of muscle behind it is the Sears Discover card, with an annual rate of 19.8%.
Many of these companies, in particular banks and S&Ls;, bombard potential users with unsolicited application forms touting "pre-approved credit lines," "lower monthly payments" and special services. These are difficult to resist, consumer groups note.
"A lot of people feel lucky to get an application with a pre-approved credit line; it's effortless, no hassle," said John C. Pollock, editor and publisher of Bank Credit Card Observer, a newsletter published in Kendall Park, N.J.
Unless they read the fine print, most consumers probably aren't aware of the premium they pay for the convenience these cards afford. Annual interest rates of 21.9% are not uncommon, and the average rate paid on bank cards nationwide is well over 18%. In Los Angeles, where big lenders dominate the card business, rates are usually the second highest in the country (after San Francisco) and in May averaged 18.69%, according to Pollock.
Consumers must also be on the lookout for other variables. These include annual fees, which can range as high as $60, and grace periods on purchases. Many institutions have started doing away with grace periods of 25 or 30 days; without one, the meter starts running on interest charges as soon as a purchase is made.
(Banks and S&Ls; offer a dizzying array of choices on cards, but there is a rule of thumb: Generally, those consumers who pay off their card balances each month--perhaps one-third of cardholders--should seek out a bank with a low annual fee and a long grace period, whereas card users who revolve their accounts should look for a lower interest rate.)
Sometimes even the fine print is missing on card applications, and the most careful customer would be hard put to locate the terms on an application. A few months ago, Pollock's organization surveyed 100 bank-card applications and found that half did not mention the interest rate. "Imagine how many people would take out a mortgage or car loan without checking out the interest rates," Pollock said.
"And yet people are being asked to write away and sign up for (these cards)."
Not knowing your card rate or grace period can cost you plenty, said Robert K. Heady, publisher of the Bank Rate Monitor newsletter in North Palm Beach, Fla.
Consider a family that spends $2,000 on a 10-day vacation, all on a card with a 21% annual percentage rate and no grace period, he said. If the card is paid off at $500 a month plus any accrued interest, the family would shell out $87.50 in interest charges over four months.
"That's a hefty amount," Heady said. "But if they had a 15% card with a grace period, they could cut costs to just $25."
In California, legislation scheduled to take effect Oct. 1 will require lenders to disclose terms at the time they solicit a card application. Disclosure legislation is also pending before the U.S. Congress and about six other state legislatures.
In addition, Assemblyman Rusty Areias (D-Los Banos), who sponsored the California disclosure bill, also introduced legislation last December that would limit interest rates on bank cards to eight points over the six-month Treasury bill rate. "If it were in effect today, the rate would be 13.5%," said Mark Sektnan, an aide to Areias. The bill could come to a vote this month.
Other states--including Connecticut, Arkansas, Washington and Texas--already have flexible or fixed caps on rates.
Many banks have claimed that they would lose money under the rates proposed in California, but Sektnan is not sympathetic.
"Some banks do have large losses, but those are usually the result of an aggressive mail-solicitation program, so they have to bear some of the burden," he said. "Why should everybody pay for the cost of their marketing?"
With all the publicity about bank cards and movements in state and federal government to force institutions to disclose their terms up front, more people are becoming aware of their options, said Cindy Kamp, a spokeswoman for Bankcard Holders of America, a nonprofit consumer education group in Washington. The organization is one of several nationwide that offer lists of banks with low rates and fees.
"We've received 200,000 requests for lists of banks with low interest rates, so people really are interested, and in big numbers," she said.
At the top of many consumer lists of good deals in credit cards is People's Bank in Bridgeport, Conn. In June, 1986, it lowered its rate to 11.5% from 15.9% and has installed nine nationwide toll-free lines to handle requests for information.
The bank occasionally takes as many as 3,000 phone calls a day and so far this year has added 60,000 new accounts, bringing its total to about 170,000, according to Ronald T. Urquhart, vice president.
For the most part, Urquhart said, the new customers are people who tend to revolve their accounts, but others who pay off their balances each month have also responded. "They have written saying they're switching to us because they appreciate what we're doing for the consumer," he said. "They think it's great and aren't going to do business with a high-rate bank."
A few bigger banks are finally bowing to some of the pressure. First Interstate, whose 21% rate is one of the highest in the country, has started offering a card at a variable interest rate starting at 16.5% annually.
And Security Pacific National Bank, whose highest card rate is 20.4%, has a tiered pricing structure designed to give a break to better customers. With that program, the interest rate drops a point for each additional account at the bank.
Bank-card watchdogs foresee consumers benefiting from a recent decision by American Express to offer members of its program a revolving-credit card called Optima at a 13.5% annual rate and a yearly fee of $15. In the past, American Express has required cardholders to pay off their balances in full each month.
"More and more, we were finding a significant segment (of membership) wanted to be able to extend payment," said Nancy Muller, an American Express spokeswoman.
The company expects 2 million to 3 million members to apply for the card in its first year. Although the rate will initially stand at 13.5%, it will be based on the prime rate and will fluctuate twice a year.
Timed to make its debut in the busy summer vacation season, a prime time for credit cards, Optima may force some banks and S&Ls; to get more competitive, observers say.
"This will have more effect in successfully bringing card rates down than all the other pressure to date," said Heady of Bank Rate Monitor. "(I) would expect it eventually to move into the mass market and give heartfits to Visa and MasterCard."