Now losses from bad credit card debt have risen just as annual fees and interest rates have come down. As a result, credit card earnings fell to 2.5 percent of assets in 1990 and to 1.5 percent of assets today, according to Salomon Brothers.
Banks, of course, can still demand higher rates on credit cards than on other types of consumer loans, because consumers are willing to pay for the greater convenience that cards offer.
Nonetheless, with industrial companies such as AT&T and General Motors sponsoring very successful new card programs -- and offering discounts on everything from phone calls to new cars -- many banks are finding that their best defense is to cut rates.
Indeed most banks are seeing the fastest growth in their card business coming when they offer the most aggressive discounts.
Wachovia Corp., which offers a rate as low as 8.9 percent (with a $39 fee), saw its charge card loans grow by 33 percent last year. And the Bank of New York, which offers a card with no fee and a rate of 11.9 percent, grew by 27 percent, Ram Research found.
While it hardly seems surprising that rates on charge cards should come down as most other interest rates have plunged, that was not the case in the 1980s.
At that time, as the prime rate dropped below 8 percent from 16 percent, the rate charged on most credit card borrowings remained firmly wedged at nearly 20 percent.
Amid the increased scrutiny from consumers, banks tried to appear like they are offering lower rates than they were. Some banks, including Citibank, offer the new lower rate only on purchases after the cut is announced. Existing balances are billed at the higher rate.
Others, such as Discover and American Express' Optima card, give the best rate only to customers who charge more than a certain amount in a year.
And many issuers now will raise rates on customers who miss payments or go over their credit limits. Bankers say this policy appeals to consumers as fair and helps bankers compensate for their higher-risk customers.