Pushed by rising interest rates in the economy and higher losses from delinquencies, credit card interest rates nationwide are beginning to rise, portending higher bills for consumers.
Two of the nation’s largest bank card marketers, Chase Manhattan Corp. and MNC Financial Corp., recently raised rates to be applied selectively to borrowers with poor payment histories. Chase’s rise totaled more than 2 percentage points, to 19.8% from 17.5%, while MNC’s went to 18.9% from 17.9%.
Analysts viewed the Chase and MNC moves as doubly significant because they signal a growing trend by bank cards issuers to charge different rates to different customers. Other Visa and MasterCard issuers may soon begin to charge higher rates for borrowers with lower balances, since those borrowers run up less interest charges and thus mean less profit to issuers, suggested John Love, publisher of Credit Card News, an industry newsletter in Chicago.
No major California institutions have joined in the latest round of rate hikes, analysts said. But several smaller firms nationwide--mostly those that have charged among the lowest rates in the country--have quietly hiked rates recently, said Bob Cassinelli, publisher of Credit Card Shopping Guide, a Corte Madera newsletter. For example, People’s Bank in Bridgeport, Conn., raised its rate to 13.5% from 12.5% in January.
Rates on variable-rate cards--usually pegged to banks’ prime interest rate--have also risen.
The impetus for rising card rates is the higher rates that issuers must pay to obtain funds to lend out, squeezing their profit margins. Short-term interest rates on Treasury bills and savings deposits have risen as much as 3 percentage points in the past few months.
Card issuers are also being squeezed by rising delinquency rates among borrowers, now totaling about 3% of total loans, about double the rate in the early 1980s, said Love of Credit Card News.
Marketing expenses are also rising, Love said. Less than 2% of solicitations for new cards result in consumers taking up the offers, Love said. That compares to a 5% rate in the early 1980s, he said.
Card issuers may try to recoup these higher costs in the form of higher annual fees. Some institutions, including State Street Bank in Boston, have raised annual fees recently, said Spencer Nilson, publisher of Nilson Report, a Santa Monica credit card newsletter.
Analysts expect more large issuers to follow soon by hiking rates, particularly now that Chase and MNC have broken the ice.
However, card issuers with already high rates are not likely to raise them for some time. These issuers--including many California banks and savings and loans--did not drop rates when other interest rates fell last year.