Banks slowly loosen grip on credit card rates But many still resist cutting into profits

November 09, 1991|By Kim Clark | Kim Clark,RAM Research USA

After seeing the interest rates they pay drop to their lowest level in 18 years, banks are finally beginning to pass some of those savings on to their credit card customers.

Some in the bank industry warn, however, that the hesitant move toward lower credit card interest rates may be stymied by the banks' need to beef up profits.

On Wednesday, the discount rate, which is the interest rate the Federal Reserve charges banks for loans, dropped half a percentage point, to 4.5 percent.

That cut will likely reduce the average interest rate banks will charge their customers for credit card loans and charges by only 0.05 of a percentage point, trimming the average to 19.28 percent, according to surveys by Robert C. McKinley, president of a Frederick-based interest rate analysis firm called Ram Research USA.

However, Mr. McKinley, who has been tracking credit card rates since1986, said yesterday that the momentum of rate cuts is accelerating.

For the first time in the five years he's been watching, consumers have started voting with their dollars and are rewarding companies that offer lower credit card rates, Mr. McKinley said.

His most recent monthly study shows that banks charging high interest rates are losing customers, while lower-interest cards are growing.

For example, USAA Federal, a bank in Tulsa, Okla., that offers credit cards that charge only 13.75 percent annually on purchases, has seen the number of its customers grow 10 percent since the beginning of the year, he said.

And the number of banks offering credit cards with interest rates below 15 percent per year has jumped from nine to 16 since last year.

Though that number seems tiny compared with the thousands of banks that issue MasterCards and Visas, Mr. McKinney said, customer pressure is forcing other normally high-priced cards to offer discounts to their customers.

Chemical Bank, for example, will cut 3 percentage points from its credit card interest rate to customers who also keep some money at the bank. And Chase Bank offers to erase its annual fee to some of its customers, he said.

Many banks are hesitating to lower interest rates for credit card customers because bad debts are climbing, he said. Unpaid credit card charges have risen this year about one-third to nearly 5 percent of all charges, he said.

But Mr. McKinley said that most banks also are reluctant to lower their credit card rates because they need the profits to offset bad loans to real estate developers and others.

"Credit cards have been their golden goose," he said.

Margie Muller, Maryland's banking commissioner, said that banks are slow to change credit card interest rates despite changes in the prime or discount rates because of the confusion it can cause.

"Customers would be paying a different interest rate" on things they charge at different times, she said.

In addition, she explained, regulators entrusted to make sure banks are financially healthy would consider it "not the best thing" if a troubled bank purposely cut its earnings by reducing its credit card interest rate.

Those arguments haven't swayed executives at banks such as AFBA Industrial Bank of Alexandria, Va., though.

AFBA has seen 50,000 new customers sign up for its credit cards since the bank started offering one of the cheapest credit cards in the country in March 1990.

It currently charges only 13 percent per year, with no annual fee. And the company plans to drop its rate to 12.5 percent soon, said Jeff Sandefur, vice president of marketing for the bank.

AFBA can afford to offer such low rates because its bad-debt ratio, only 1.5 percent of all charges, is less than a third of the national average.

Credit card interest rates

Most common rates charged by the 10 largest issuers, ranked by market share.

UI .. .. .. .. .. .. .. .. .. Interest .. .. .. Annual fee .. .. ..Grace

Issuer .. .. .. .. .. .. .. rate %.. .. Regular Premium .. .. .. days

Citibank .. .. .. .. .. .. .. 19.80 .. .. $20 .. .$ 50 .. .. .. ..30

rTC Discover .. .. .. .. .. .. .. 19.80 .. .. none .. . 40 .. .. .. ..25

Chase Manhattan .. .. .... .. 19.80 .. .. 20 .. .. .50 .. .. .. ..30

MBNA America .. .. .. .. .. ..19.80 .. .. 20 .. .. .40 .. .. .. ..25

Bank of America .. .. .. .. ..19.80 .. .. 18 .. .. .36 .. .. .. ..25

First Chicago .. .. .. .. .. .19.80 .. .. 20 .. .. .20 .. .. .. ..25

Optima .. .. .. .. .. .. .. ..16.25 .. .. 15 .. .. .N/A .. .. .. .25

Bank of New York .. .. .. .. .16.98 .. ..18 .. .. ..25 .. .. .. ..30

Manufacturers Hanover Trust ..19.80 .. ..20 .. .. ..40 .. .. .. ..25

Household Bank .. .. .. .. .. 21.00 .. ..none .. .. 25 .. .. .. ..25

Best low-rate standard cards (for consumers carrying balances)

EWachovia Bank, Wilmington, Del. 10.90 .. $39 .. .. .. .. .. .. .. 25

Prime Bank, Elkhart, Ind. .. .. 12.90 .. 20 .. .. .. .. .. .. .. none

AFBA Industrial, Alexandria, Va.13.00 .. none .. .. .. .. .. .. .. 25

USAA Federal, Tulsa, Okla. .. ..13.75 .. none .. .. .. .. .. .. .. 25

Bank One Wisconsin, Milwaukee .. 13.90 .. 25 .. .. .. .. .. .. .. ..25

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