NEW YORK -- As General Motors, General Electric and other corporate giants rush into the lucrative credit card business, you may be bewildered by the cacophony of bells and whistles used to hawk the new plastic.
Today, credit cards offer cheaper appliances, discounted phone calls, lower-priced cars, free plane trips and cash rebates. Gone are the days when you'd whip out a Visa or MasterCard simply to make big purchases easier.
But before reaching for one of the new cards, be careful. You might pay for such bonuses through high interest rates, annual fees or by having to shop at stores that may not have the best prices.
"Consumers will have to sit down and figure out if these are
really good for their needs. The new cards might not be appropriate for many people," said Mary Beth Butler of Bankcard Holders of America, a non-profit consumer organization.
For the new companies in the $160 billion-a-year credit card business, the attraction is clear. They hope to spark more sales ++ of their main products.
"GM is in the credit card business to sell more cars and trucks," company Vice President Mike Losh said last week after announcing the launch of a new MasterCard.
What's more, the companies hope to reap profits from a business that remains lucrative despite fierce competition. The key to profitability: people who do not pay off their credit card bill each month.
Over the past 11 years, the prime rate has dropped to 6 percent from 19 percent, while credit card rates have on average stayed at 18.5 percent. Banks and other companies can borrow money for 6 percent and charge credit card customers about 12 points more. That spread, analysts say, can yield a 3 percent profit, compared with 0.8 percent for normal banking services.
With about 100 million bank cards in circulation and the average cardholder owing $2,000, credit cards seem a sure-fire moneymaker, said John Daly, editor of Credit Card News, an industry publication.
And American Telephone & Telegraph has shown that it is possible to break into the market. In the 2 1/2 years since it began offering its no-fee Universal card, AT&T has become the eighth-largest card issuer with $5 billion in outstanding debts and 9.9 million accounts.
But because so many cards are already available, the newest players are offering a bewildering array of rebates, discounts and coupons to attract customers.
General Motors, for example, offers rebates on new cars to its cardholders. General Electric's new MasterCard gives rebates on its appliances and at 24 participating stores. AT&T offers discounted long-distance calls. And airlines, including USAir, give extra frequent-flier mileage.
But the benefits of the new cards probably are worthwhile only if you charge upward of $5,000 on one and pay off the balance each month, said Robert McKinley, head of RAM Research, a Frederick-based research firm that tracks the credit card business.
The $500 in rebates that GM offers its cardholders, for example, can only be reached by people who charge $10,000 a year. If you charge that much and plan to buy a Chevrolet or other GM model in a few years, the card may be a good deal.
But if your charges are closer to the $2,300 average, and you usually don't pay off your entire monthly balance, look elsewhere. You'd probably do better with a no-frills card that charges a lower interest rate, Mr. McKinley said. Some credit cards, for example, carry interest rates several points lower than 16.4 percent.
"For consumers, the idea is not to get tangled up in the benefits," Mr. McKinley said. "Keep your eye on the bottom line, which is interest rates, annual fee and grace period. The rest could just get too confusing."
GM's new card has an edge over many others, Mr. McKinley said, because it charges no annual fee. It may attract many fee-paying consumers, even if they aren't interested in the rebate program.
Gail Strauss, a 35-year-old accountant for a New York brokerage firm, has seen the new GM commercials. And she's thinking about switching her MasterCard account away from her bank, which charges a $25 annual fee. "Anything nowadays to save money seems a good idea. On the other hand, I do have a balance and if they are charging over 16 percent, then maybe I could do better," she said.
According to the Bankcard Holders of America, if you have a $1,000 balance, the interest cost in using the GM card would be $150. You also would earn a $50 rebate on a new car. A cheaper MasterCard such as the one offered by USAA Federal Savings in Tulsa, Okla., would cost $112 in interest for the same balance but would offer no rebates. Neither card charges an annual fee.
One of GM's big advantages is its marketing power. The company started an ad campaign Thursday that will cost an estimated $50 million to $70 million. The car giant, which has 9,000 dealers across the country, also plans to pool its credit card and automobile data base to carry out sophisticated direct mail and telephone marketing.
Analysts predict that the big losers will be Citibank, Chase and other banks that have traditionally offered credit cards. Many are now countering with low or variable interest rates, but the end result may be that consumers abandon familiar names for low costs. "One of the definite effects is that loyalty is decreasing," Mr. McKinley said. "People just want the best deal and are willing to dump their bank if someone else can offer a cheaper or more desirable card."