A Crescendo of Concern Over Credit Card Rates : Banking: AT&T; becomes the first major issuer to respond to the President’s call for lower rates. The Senate also acts.
The anger over credit card rates that has been building for months finally exploded this week.
Consumer groups and members of Congress complain that credit card rates are exorbitant at a time when other interest rates are in a virtual free fall, comparing the reluctance of issuers to drop rates to cartel-like behavior.
Late Wednesday, the Senate approved legislation that would put a cap on credit card interest rates; AT&T;, operator of the nation’s third-largest bank credit card program, dropped the interest rate it charges customers by a full percentage point. Those actions dovetail on a call for lower rates Tuesday by President Bush, who argued that it will help stimulate consumer spending and boost confidence.
“We’ve never seen so much outrage over high interest rates as we are seeing now. Every other interest rate is dropping to an all-time low, and credit card rates are simply not budging,” said Gerri Detweiler, director of education for the Bankcard Holders of America, a credit card consumer group in Herndon, Va.
Rates on credit cards nationwide now average 18.22%, with the average for the top 10 bank credit cards at 19.28%, according to RAM Research USA, a Frederick, Md., firm that tracks rates. The benchmark prime rate, now at 7.5%, has dropped 2.5 percentage points this year, but credit card rates have hardly moved.
At the same time, the cost of money for banks has dropped dramatically--rates on one-year certificates of deposit are a little more than 5% and about 6.5% for five-year CDs. Banks can borrow from the Federal Reserve at 4.5%, and are charged under 5% when they borrow overnight from other banks.
The lower cost of funds has widened to record levels the “spread” between the interest banks make on credit cards and what they pay depositors, making credit cards one of the few lucrative lines of business now for many banks.
In the past, banks have successfully resisted calls to lower rates. Bankers have long argued that their credit card costs contain hidden expenses such as delinquencies, fraud, postage, investments in technology and various services that mask the real costs they incur in offering consumers the cards. According to the American Bankers Assn., the amount banks pay for deposits and other sources of funds represents only 45% of total credit card costs.
Moreover, consumers rarely switch cards to get a better rate or a break on an annual fee.
Some credit card experts believe that banks will face increasing pressure from customers and that credit card holders appear more ripe than ever to switch to competing cards.
The soft economy has made people more eager to cut their debt and interest costs, although many cash-strapped people are adding on credit card debt to meet payments. Credit card interest has now been completely eliminated as a tax deduction. And aggressive marketing by non-bank card firms such as American Telephone & Telegraph is prompting more consumers to abandon long-held cards for newer ones offering lower interest rates or a break on annual fees.
“What is different now is the consumer is part of the equation. They are sending signals that they will start voting with their credit cards,” said Robert B. McKinley, publisher of RAM Research.
There are subtle signs that more banks may ease rates soon, either by switching to variable rates or by offering more credit-worthy customers better rates, which some banks are already doing. First Chicago Corp., for example, is now offering its most credit-worthy customers a 14.4% rate.
The political backlash and allegations of price gouging clearly worry bankers. The Senate legislation, approved 74-19 as part of a larger legislation that shores up the insolvent Federal Deposit Insurance Corp., was included in an amendment sponsored by Sen. Alfonse D’Amato (R-N.Y.). It would cap interest at four percentage points above what the Internal Revenue Services charges on late taxes.
Adding to the pressure on banks Wednesday was a move by AT&T;, the chief competitor of banks in the credit card business, to drop its interest rate. AT&T; said it was doing so in response to President Bush’s call for lower rates.
The drop in rates by the telecommunications giant, which has stirred up the industry through its aggressive marketing of its 11 million “Universal” Visa and MasterCards issued through a rural Georgia bank, was not scheduled to take effect until January. ATT’s rate drops to 16.4% for the 8.5 million original members of its program and 17.4% for those who signed up later. The card is an adjustable one pegged to the prime rate and reset every quarter.
Bankers called AT&T;’s move to accelerate its rate cut a publicity gimmick, which the head of AT&T;’s credit card division denied.
“I’d call it pretty expensive publicity. We’re doing it because we are concerned about the economy and about Christmas spending. President Bush asked that rates drop. We thought that maybe we’d get the ball rolling,” said Paul Kahn, president of AT&T; Universal Card Services.
The credit card issue is clearly a sensitive one for bankers. Most banks declined to talk publicly about their rates.
Philip S. Corwin, director of retail banking for the American Bankers Assn., disputed Bush’s suggestion that lower credit card rates will stimulate the economy and boost consumer confidence. Corwin said only 14% of consumer spending takes place with credit cards, compared to 86% using cash and checks. In addition, the amount people would save from lower rates won’t do much for the economy, he said.
“The average outstanding balance is $1,500. If you lower interest rates by 2%, the average card holder would save $30 a year, or $2.50 a month or 63 cents a week. CREDIT CARD INTEREST
The Senate has voted to put a 14% ceiling on credit card interest rates. A1
