Credit Card Issuers Drop Fees as a Lure

After years of competing primarily on the basis of name and reputation, an increasing number of credit card issuers are eliminating their up-front fees to attract new customers. Although annual interest rates remain high, those who pay off their balances every month have a greater opportunity to get their credit free.

This change comes thanks to American Telephone & Telegraph, which introduced a new realm of price competition in the industry last year with its “free for life” Universal card, industry experts said.

“AT&T; shook up the credit card industry in a way that I don’t think anybody could have predicted,” said Ken McEldowney, executive director of San Francisco-based Consumer Action. “It introduced price competition in an industry that previously competed only on image. I see that as being very positive to the consumer.”

The Universal card, launched last March, has attracted 4.6 million account holders, largely because AT&T; offered its credit card free of annual fees forever--provided that consumers use the card at least once a year.

Now 76 banks and thrifts offer no-fee cards--up from 54 last June, when AT&T;’s success became apparent, said Robert McKinley, publisher of RAM Research’s Bankcard Update, a newsletter in Frederick, Md.

More impressive still, McKinley said, is that big issuers such as Chase Manhattan and First Chicago are offering one-year “fee waivers” to some new customers, McKinley said.

“Major issuers are usually reluctant to offer cards with no fees,” McKinley added. “But right now most of them are soliciting at least some new customers with these no-fee deals.”

Moreover, some smaller issuers that still charge fees are willing to negotiate with current customers who want lower up-front costs, McKinley said.

The reason that AT&T; could cause this much activity is because the credit card market is saturated, experts said. Most Americans who want credit--and have the credit history to warrant getting it--have at least a few plastic cards in their wallet already. To get new business, credit card companies generally have to steal it from competitors.

And, because issuing credit cards is generally quite profitable, issuers are willing to wheel and deal a bit to at least retain their share.

But there are questions about whether the fee-slashing will last. AT&T; has promised to give out no-fee Universal cards only until March 26. Those who apply for credit after that, presumably, must pay some sort of up-front charge.

“My guess is these are temporary stop-gap measures that companies are taking now because they are scared,” McEldowney said. He thinks that these free deals may evaporate by year-end.

Moreover, credit card companies are not rushing to slash interest rates, which are--for most consumers--the biggest portion of their credit card tab.

Where the average consumer pays about $20 in annual fees, he or she pays close to $300 in annual interest charges, said David Robertson, vice president of the Nilson Report, a Santa Monica newsletter. That’s because the average consumer carries a $1,500 credit card balance, at interest rates ranging 18% to 20%.

People who carry large balances should be more concerned about the annual interest rate than the fee, Robertson added. But, by and large, they are still more sensitive to fees than rates, he said.

Why? Annual fees just irritate consumers, according to McKinley.

“It’s like paying admission to go to the 7-Eleven,” McKinley said. “You feel like you are getting gouged when you go in there anyway, so why should you have to pay to get in?”