KENNETH E. SLEZAK, Bank marketing consultant
President Bush hit a nerve recently when he suggested that banks lower the astronomical interest rates on their credit cards to stimulate more consumer spending. Consumers, historically, have brought a sluggish economy out of recession. But consumers, besides being squeamish about spending more, are learning to look for good deals, says Kenneth E. Slezak, a veteran banker who operates Vista Marketing Services in Huntington Beach. Slezak spoke with staff writer James S. Granelli about credit card rates.
President Bush raised the issue: Are interest rates on credit cards too high?
No, not really. A credit card is an unsecured line of credit, which has the greatest risk attached to it. Historically, banks have suffered tremendous losses from fraud and failure to repay the debt, causing charge-offs, and have consequently built those costs of doing business into the price of that product.
But rates on deposits have dropped significantly while credit card rates have barely budged. Why haven’t card rates dropped as well?
Besides being the highest form of credit risk to a financial institution, it is also a great expense to offer that kind of product in a down economy, even though rates on everything else are falling. It’s an unsecured kind of credit, and in a recession, that’s the kind of credit that people use when they can’t borrow from anywhere else. So there is more exposure (to losses) to a financial institution. Also, it’s a labor-intensive product for tracking purposes.
Some banks and credit card companies, like AT&T; Universal Card, responded immediately to the President’s comments by lowering rates a few percentage points. Can the rates go lower?
Yes, the rates can go lower. I think you will see many institutions that will drop their rates somewhat for competitive reasons. However, I don’t see a major drop for most financial institutions. I think rates for the most part will continueto stay relatively high because of the other reasons I mentioned, including fraud and bad debt. And institutions that are more aggressive will offer a lower-rate card to certain quality markets. There are banks out there now that are offering gold cards at a 12% to 14% rate, for example, to their most credit-worthy customers.
AT&T; grabbed a big share of the market a year ago with a promise of no annual fees ever. A number of institutions have since offered no-fee cards. Will the trend continue, or is it just a marketing ploy?
No, I think that’s a marketing hook. For the most part, fees and costs will continue to be applied. It’s one of the ways these institutions recoup their costs of doing business and offset other costs, such as the increased premium charges that the Federal Deposit Insurance Corp. is charging them. Those that offer these no-fee cards may do it as a hook just to capture market share. And they may only waive the fees or the charges for the first year, more as a marketing gimmick than an ongoing, sustaining type of thing. But again, it’s a sign to consumers that it pays to shop around.
In normal times, at least non-recessionary times, what is a good spread between a bank’s cost in raising funds and the rates they charge on credit cards?
Credit cards have historically been priced as a separate, stand-alone product and not tied into a spread. Normally, in a spread between the cost of bringing deposits in and loaning them out, a bank is looking for a spread of anywhere from 5 to 7 percentage points. I don’t see that applying to a credit card in particular because it is unsecured. And, with all the other elements involved--like bad debt, collection expense, charge-offs--it’s just a more costly product to offer.
Do you expect to see any kind of effort by states or even the federal government to put a lower cap on credit card rates?
I think there’s going to be continued lobbying by various consumer groups to try to get the rates down. I think the financial institutions will buck that trend and fight it, and I think they’re justified in doing that in this kind of marketplace with this particular type of product.
What can consumers do to get the best deal they can?
The one thing in any down economy that both consumer and business needs to be concerned with is liquidity--managing their money and their credit wisely. They shouldn’t overextend themselves. If they are using credit cards, they should try to pay them off as they incur those expenses, or within that 20- to 30-day window of time--that grace period--so that they don’t incur the interest expense. And in using credit cards, it pays not to spend beyond their own means and abilities to repay and to shop around for the kind of card that will meet their needs. If they qualify for some of these gold cards and platinum cards and these VIP-type cards, they can borrow at significantly lower than the 19% to 22% range that’s out there on most
Some credit unions, I understand, also offer good deals on credit cards.
Some of the credit unions are offering very competitive rates because they are offering them to a locked-in clientele. Smaller institutions around the country that have tried to build market share also are offering very attractive rates on credit cards to qualified borrowers.
Is there any clearinghouse where consumers can find out what banks or companies really do offer better deals?
Newspapers are publishing competitive rates on the major institutions, and there are different consumer publications that you can reach through libraries. Bank Rate Monitor is an example of one that monitors rates and fees charged by credit card companies, as well as comparative fees and rates on real estate loans and other loans. Financial consultants also can provide some information.
On Bush’s call for lower card rates. . .
“I think that Bush made an off-the-wall comment and Congress just jumped on it. I don’t think he had any serious intent.”
On consumer sophistication. . .
“The industry has done a better job of educating consumers on financial services, and the consumers are better read because newspapers and magazines have done a good job on these controversial issues.”
On price vs. value. . .
“A certain portion of the market consists of buyers who consider value more important than price. They’re willing to pay more to get better quality or to receive less in, say, interest on their deposits for that financial safety or that banker who knows them.”
On credit card losses for financial institutions. . .
“A 5% loss factor is considered good nowadays, and that can be a significant amount for a smaller financial institution.”