Consumers Taking a Harder Look at Credit Cards
The credit card industry has escaped a congressional cap on interest rates for now, but not Marie Grigorian’s wrath.
A reformed charge-aholic, Grigorian now uses her high-rate Citibank Visa only for occasional mail-order purchases and travel expenses.
With average interest rates hovering around 18%, bank card issuers “want too much,” said Grigorian as she returned from a lunchtime shopping excursion with a new coffee maker. “I paid cash.”
The congressional debate over interest rate caps highlighted the growing consumer attention on costly credit card debt. While not likely to cut up their credit cards, consumers such as Grigorian are beginning to rethink the way they use them.
“Consumers have been taught to think of credit cards as an extension of their income or access to the good life,” said Geri Detweiler of Bankcard Holders of America, a consumer group. “Consumers are now starting to see credit cards as personal loans.”
This new realization, combined with recent government pressure, is expected to affect the way cards are marketed. This doesn’t mean that cards with warrantees or frequent flier miles will disappear. But card issuers that stressed such enhancements in the past may start talking about interest rates as well.
“We will probably see more marketing and product design done on (rates),” said Virginia Stafford, a spokeswoman for the American Bankers Assn.
In fact, some issuers are already cutting their rates. Last week, American Telephone & Telegraph Co. cut the rate it charges on its Universal card to 16.4% from 17.4% for “charter” customers who signed up during its first year. Ram Research, a Frederick, Md., newsletter on the credit card industry, said 166 credit card issuers now offer rates under 15%, compared to 105 at the beginning of the year.
The Senate last week hastily passed a measure that would have set a cap on credit card interest rates at no more than four percentage points over what the Internal Revenue Service charges on overdue taxes. With the IRS now charging 10%, the credit card cap would have stood at 14%.
The rates came under attack because they remained high while rates on automobile, home equity and other consumer loans fell considerably. The debate also focused attention on the profits that banks earn from credit cards, renewing criticism that consumers are making up for bank losses in real estate and commercial lending.
Statistics compiled by the Nilson Report show that banks earned nearly one-quarter of their profits from credit cards last year and had a rate of return on their cards that is double what they shoot for on other kinds of loans.
The high profits rankle consumers such as James Casey, a chemical engineer who now uses his card only for travel and pays it off at the end of the month. “The banks and savings and loans may be in trouble, but I don’t think a subsidy from consumers is the answer,” he said.
Casey’s behavior is one reason why profits from bank cards are expected to fall this year to $3.5 billion from $4.11 billion, according to the Nilson Report. The publication predicts that profit per credit card will drop to $9.32 in 1995 from a peak of $20.51 in 1989, as the recession causes some consumers pay down balances, and others to default.
With profits slipping, banks are likely to lower rates selectively, offering better rates to their most credit-worthy customers while continuing to charge high-risk customers high rates. Although Citibank charges nearly 20% on its bank card, some customers with an account at Citibank pay 16.8% on their credit cards. Bank of New York also offers cards at different rates.
The large issuers face stiff competition, not only from banks that charge lower rates but also from non-bank issuers such as AT&T;, Ford Motor Co. and Sears, Roebuck & Co.
Ford, for example, is charging car buyers 15.9% on Visa or MasterCard if they sign up by the end of this year.
Some banks in Arkansas--including Simmons National Bank and Arkansas Federal Savings--offer among the lowest rates in the nation, because that state’s usury laws are so strict. But in some cases, the annual fees are higher than what most major issuers charge. And many low-rate issuers have higher rejection rates.
Even so, Detweiler said, “people who are paying more than 14% to 15% are getting ripped off.”
There are some indications that consumers are starting to shop around. In a July survey, Ram Research found some high-rate card issuers lost an average of 5% of their accounts over the last 18 months, while the number of accounts at low-rate issuers surveyed grew by 10%.
During the summer, MasterCard set up a special consulting service for banks that are losing customers, and Citibank and American Express have recently established their own customer retention squads, said Robert A. McKinley, president of Ram Research.
“It’s a pretty good sign that cardholders are leaving,” he said.
Among the defectors is Barbara Samartino of Charlotte, N.C. She and her husband ditched their high-rate bank card last year when his credit union offered a MasterCard at a 14% rate.
The Samartinos made the switch even though they usually pay off their card balances monthly to avoid interest charges. “If you have to pay interest, it makes sense to pay as little as possible,” she said.
Money In, Money Out U.S. bank-card industry revenues, expenses and profit for Visa and MasterCard in 1991 REVENUES (in billions) Annual Fees: $2.38 Penalty Fees: $1.16 Miscellaneous: $0.99 Merchant Fees: $3.56 Finance Charges: $26.15 TOTAL: $34.24 billion EXPENSES AND PROFIT (in billions) Pretax Profit: $5.83 * Receivable Financing: $12.55 ** Operating Expenses: $7.49 *** Gross Charge-offs: $8.37 TOTAL: $34.24 billion * Includes revolving accounts, 30-day accounts and delinquent accounts ** includes advertising services, direct mail, fraud investigation, collection and other terms *** includes delinquecies, nonpayment, bankruptcies and fraud. Source: The Nilson Report
The Lowest Rates President Bush and the Senate sounded off last week on capping interest rates, pointing out that the most common rates charged by card issuers range from 19.80% to 21%. The lowest bank credit card rates range between 10% and 15%. Lowest National Bank Credit Card Interest Rates Bank: Simmons First National Location: Pine Bluff, Ark. Interest Rate: 10.00%* Bank: Arkansas Federal Savings Location: Little Rock, Ark. Interest Rate: 10.00%* Bank: Wachovia Bank Location: Wilmington, Del. Interest Rate: 10.90%* Bank: Prime Bank Location: Elkhart, Ind. Interest Rate: 12.90% Bank: AFBA Industrial Bank Location: Alexandria, Va. Interest Rate: 13.00%* Bank: Bank of NY Location: Newark, Del. Interest Rate: 13.40%* Bank: Fidelity National Bank Location: Atlanta Interest Rate: 13.70%* Bank: USAA Federal Savings Location: Tulsa, Okla. Interest Rate: 13.75%* Bank: Bank of Montana Location: Great Falls, Mont. Interest Rate: 13.75%* Bank: Bank One Wisconsin Location: Milwaukee, Wis. Interest Rate: 13.90% Bank: Peoples’ Bank Location: Bridgeport, Conn. Interest Rate: 13.90%** * Variable rate ** Higher rate charged for cash advances Source: RAM Research USA
