The average interest rate on a U.S. credit card still hovers in the stratosphere at 18.42 percent. But the head of a Maryland company that tracks credit cards says the heat is on the big Visa and MasterCard issuers to lower their interest rates.
"There seems to be a crack in credit card competition," says Robert B. McKinley, who runs Frederick-based RAM Research USA, which surveys rates set by 500 card issuers and publishes monthly newsletters on its findings.
Mr. McKinley predicts rate relief that will represent "a windfall for consumers over the next year or two. Not only are we going to see rates coming down, we're also going to see the annual fee disappear," he says.
He predicts that rates charged by large bank issuers should drop at least 1 percentage point by year's end and 1.8 percentage points by the end of 1992.
Although the issuers' cost of funds has declined since the beginning of the year, Mr. McKinley says falling costs are not the main reason for the latest round of rate cuts. Rather, he says, the cuts are being driven by new competition from non-bank issuers such as AT&T, Ford Motor Credit, General Electric Co. and Sears, Roebuck and Co.
"Those players were just not in the market five years ago. The banks just didn't have that much competition in the past," Mr. McKinley says.
To be sure, several of the nation's big card issuers cling to rates as high as 19.8 percent. Still, as Mr. McKinley observes, signs that rates are dropping in this category are beginning to appear.
Within the last month alone, he notes, such large issuers as Chemical Bank of New York, Wachovia Bank of Atlanta and Commerce Bank of Omaha have effectively dropped their rates by 1 percentage point to 3 percentage points. And fighting to retain market share in a field dominated increasingly by majors, smaller issuers have followed suit, he says.
Some of the rate declines have come as variable rates have replaced fixed rates by such issuers as Chemical Bank. Under its new, two-tiered rate structure, which is linked to the prime rate, Chemical's preferred credit card customers pay 16 percent, while other customers pay 18.4 percent in annual interest. The old rates were 16.8 and 19.5 percent.
"We always look at what our competitors are doing," says Kenneth Herz, a vice president of Chemical Bank in New York. Still, he said, the declining cost of funds to Chemical is a more important factor than competition in motivating the bank to drop rates.
Along with the modest recent reductions in credit card interest charges has come a dramatic decline in the number of card issuers charging annual membership fees.
"There's no reason for a consumer today to pay an annual fee for a card," says Mr. McKinley, publisher of CardTrak, a consumer newsletter, and Bankcard Update, a newsletter for the credit card industry. Non-bank issuers such as AT&T, with its successful "Universal" credit card, have taken the lead in the elimination of the annual fee, he says.
Annual membership fees were designed to compensate credit card issuers for their costs in dealing with customers who pay off balances promptly. But, as Mr. McKinley says, the percentage of Americans who carry no debt on their cards has declined from 55 percent a decade ago to just 32 percent today.
"The average balance today is $1,626 per card, which translates $300 a year in interest charges for most consumers," Mr. McKinley says.
In the wake of the Tax Reform Act of 1986, which began a period of phaseout in the deductibility of interest charges on most consumer loans, many Americans vowed to pay off credit card balances or converted credit card debt to home-equity debt, on which interest is deductible.
But in recent years, many have slipped back into their old habits of accumulating credit card debt, and others have been forced to turn to credit lines due to job loss or other recession-related economic problems, Mr. McKinley says.
"Just like the federal government, consumers have gotten into the habit of running on credit," he says.
Although many consumers are carrying high balances on their credit cards, there is increasing awareness of interest charges, and some consumers are spending more time and energy researching rates and applying for lower-cost cards, Mr. McKinley says.
"Within the last year, we've seen a doubling in the number of consumers calling or writing us to ask about bargain cards or no-fee cards," Mr. McKinley says. "Until recently, they didn't know that bargain cards were available to people without sterling credit records."
Although some credit card rates are dropping, some issuers doubt they will go into a free fall, no matter how much competition enters the marketplace.
"There are glimmers of falling interest rates. But loan losses will put a break on interest rate declines," says Douglas McCoy, a vice president at USAA Federal Savings Bank, whose credit card division, with 1.4 million cardholders, is based in Oklahoma.
Mr. McCoy notes that since the third quarter of last year, an overall decline in the economy has brought with it an increase in the number of cardholders who are defaulting on their payments or going into personal bankruptcy.
While Mr. McKinley acknowledges that loan losses are up slightly, he says that the credit card industry has been highly profitable in recent years -- helping some bank issuers compensate for sour foreign loans and bad commercial real estate portfolios.
He says that while more consumers are aware of low-rate card options, the inertia of many others has allowed a few big issuers to continue charging rates far in excess of their costs of funds -- and that gap has widened since the start of 1991.
"Just 10 issuers control over 50 percent of the market and now charge an average interest rate of 19.3 percent. That's still exorbitant," he contends.