GE to Tack On $25 Fee to Cardholders Who Pay Off Their Balances Promptly

For years, credit card companies have been raising fees on their worst customers, the ones who make tardy payments.

But now, customers of GE Capital Services’ Rewards MasterCard who faithfully pay off their balances every month will face a new fee--a $25 annual charge on customers who don’t carry a balance from month to month or who incur less than $25 in annual finance charges.

The effects of the new fee will be watched closely by other credit card issuers, who have seen falling profits in recent years as increased competition has held down interest rates, analysts said.

Analysts say GE’s plan seems designed to weed out so-called convenience users of credit cards, whom the industry considers “freeloaders” or “deadbeats”: customers who don’t incur interest payments and therefore earn credit card companies little profit.

In GE’s case, that is about 20% of its 3.7 million accounts, said Robert B. McKinley, president of RAM Research Group in Frederick, Md., which publishes a credit card newsletter.

“The average credit card balance is about $3,000 a year,” he said. “If a customer charges less than that, or doesn’t pay interest . . . they can generate as little as $25 a year in revenue to the card issuer, about the same as it costs to administer the account.”

Many so-called co-branded cards, which generally award credits, miles or points based on charge use, already assess an annual fee on all accounts. For example, airline mileage cards generally charge at least $40 a year in annual fees. The GE Rewards MasterCard earns cash rebates on certain purchases.

Cardholders who incur GE’s new fee would also get a lower interest rate: 11.9% compared with 17.15% on a regular account. The new charge will take effect Dec. 27.

“This modest fee is done in order to offset the operating and administrative costs involved in offering the card,” said GE Capital spokesman Neal McGarity in Stamford, Conn. Even with the new fee, “we still feel competitively we’re offering the best card out there in terms of benefits, rebates, etc.”

“All portfolio managers are trying to find a way to maximize their returns,” said Bruce J. Brittain, president of an Atlanta-based financial services market research firm that bears his name. “The kinds of people who don’t carry a balance, particularly those who don’t use their cards very often, they’d just as soon they go to someone else.”

So far, however, no one is rushing to match GE’s program, and consumers are livid about the new fee, which comes on the heels of other recent screw-tightening by credit card issuers.

“I think it’s really disturbing,” said Ruth Susswein, executive director of Bankcard Holders of America, a consumer group based in Salem, Va. “Someone who pays on time and in full . . . is not necessarily an unprofitable customer. Issuers earn money from every merchant that you do business with.”

She advised affected GE cardholders to drop their accounts and switch to another issuer. Consumers are “getting squeezed with fees and they’re getting squeezed with rates,” she said. “The key word this year is ‘penalties’--not only penalty fees, but penalty rates.”

Earlier this year, the Supreme Court upheld the right of card issuers to charge high late fees if they are based outside California, even though California state law restricts late fees charged by home-grown issuers. Late fees can range as high as $20.

Last year, AT&T; Universal Card Services, one of the nation’s largest issuers of Visas and MasterCards, reduced the grace period on late payments from 10 days to “any time after a payment is due”; the company then assesses a $15 late charge.

Other companies have instituted penalty interest rates for continuing tardiness. If a consumer misses two monthly payments, Citibank boosts a customer’s interest rate to prime plus 12.9%, which would currently be about 21%.

But GE’s move marks a turnaround in an overall general industry trend to eliminate annual fees.

GE’s move comes at a time when credit card delinquencies and personal bankruptcies are on the rise and credit card debt is increasing.

In the meantime, banks facing ever greater exposure to bad consumer debt are tightening credit standards.

Outstanding consumer credit grew at an 8% seasonally adjusted annual rate in July, the biggest jump in three months, with growth in revolving credit--which includes credit cards--growing to a whopping 19.4%, the Federal Reserve Board reported this week.