Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.twt.news From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: New competitors force credit card companies to cut rates, Date: Sun, 15 Nov 92 16:56:27 EST Message-ID: \SE A;MONEY \SS (WS) \HD New competitors force credit card companies to cut rates, offer deals \BY ASSOCIATED PRESS \DT NEW YORK NEW YORK (AP) - Angry consumers, an aggressive telephone company and the hot breath of congressional regulation have sent a shiver of panic through the once-cozy credit card business, and card holders are starting to reap some limited benefits. Less expensive credit cards have been popping up as the industry rewrites its pricing structure in the face of new competition. After a decade of stagnation, card rates have fallen 1 percentage point to an average 17.95 percent nationwide, according to Ram Research Inc., a credit card research group in Frederick. In a bid to lure new card holders and crank up the charge volume, card issuers are offering incentives for free airline trips, discounts on hotels and even money off a new car. "The good news is the market has become more competitive than it was five years ago," said Steven Brobeck, executive director for Consumers Federation of America, a District-based advocacy group. The options facing consumers are numerous. The top 100 card issuers are offering more than 500 rate combinations, according to a recent report by Salomon Brothers Inc. Even a poor credit history doesn't disqualify someone from the hotly competitive credit card market: Special secured cards are being pitched to survivors of personal bankruptcy. The trend has been slow in the making, but events in the past year have opened a wide range of options for plastic users. The new GM Card, introduced by General Motors Corp. in September, rewards frequent card users with rebates that can be applied to the purchase of most new GM cars. All the heavy-hitting credit card companies, such as Citicorp and Chase Manhattan Corp., have overhauled their rates this year in a bid to prevent customer defections to the upstarts, analysts say. "The fact is the cards offered by nonbank companies tend to be more attractive than those offered by commercial banks," Mr. Brobeck said. Credit card growth trends show why nonbanking companies set their sights on the business. Total credit card debt outstanding grew from $4.1 billion in 1970 to $194.1 billion in 1991. Last year, interest payments on credit cards totaled $33 billion, surpassing interest payments on auto and other consumer installment loans for the first time, according to a study by the Boston Company Economic Advisors. Greater accessibility of cards, convenience, the increase in household spending in the 1980s, and lower minimum payments are key trends behind that growth, the economic research company said. Three major events in the past six years laid the groundwork for the fierce rivalry. In 1986, Sears, Roebuck and Co. launched the Discover Card, a no-fee card that offered a 1 percent rebate on charges. "That kind of pricing stunned the market," said Professor Bill Dunkelberg, dean of the Temple University School of Business and Management. The annual fee had been a sacred element of the credit card business. In March 1990, American Telephone & Telegraph Co. launched its Universal Card with no annual fee and a variable interest rate. Within six months, AT&T Universal had 2.7 million accounts, making it the nation's eighth-largest credit card. Consumer anger over stubbornly high interest rates on credit cards, particularly in the face of sharply declining rates on savings accounts and certificates of deposit, rattled the financial markets in November 1991. President Bush told the banking industry that rates should drop, and the Senate quickly passed a bill to cap credit card interest rates. The industry responded with a new rate structure. American Express' Optima Card in February provided the basic outline that other major issuers followed: Optima's best customers had their rates cut by 3.75 percentage points to 12.5 percent; riskier customers paid more. Other major issuers, including Sears and Citicorp, adopted tiered pricing later in the year. The idea of tiered pricing is to reward the best customers with a lower rate and give delinquent card holders an incentive to improve their credit histories. And the pricing illustrated a refinement in the industry's plan to target narrow slices of the population rather than try to be all things to all people. An example is the secured credit card. Aimed at people with no or bad credit history, such a card requires holders to put in the bank enough money to cover the card's credit limit. If the holder defaults, the bank keeps the money. Banks profit on this niche with high annual fees, some greater than $45, and high interest rates, above 20 percent. American Banker's 1992 consumer survey, a Gallup Poll of 1,002 persons, showed 32 percent would seek out a credit card with an interest rate 1 percentage point lower than their current cards. Annual fees, grace periods and average balance requirements were important considerations for borrowers who pay off their balances each month, analysts say. A grace period is a delay, sometimes as long as 25 days, from the time of purchase to when banks begin calculating interest. For consumers not strongly motivated by lower interest rates, companies accelerated affinity programs. General Electric Corp. in September unveiled its GE Rewards card, which offers a complicated system of discounts at nearly two dozen businesses. Several consumer advocates said card holders would do better to hunt for inexpensive cards instead of incentives and rebates. "There is less there than meets the eye," said Mr. Brobeck of Consumers Federation. "Most of those so-called special deals offer no significant value for consumers whatsoever." Robert McKinley, president of Ram Research, predicted the new round of incentives will entice consumers to spend more this year. But the trend toward lower rates, combined with increased competition, bad debts due to the recession and fraud, have squeezed profits. The industry's after-tax profits were $2.4 billion in 1991, down from $3.32 billion in 1990, said Card Management, a Chicago firm that tracks the industry. ****BOX CREDIT CARD SHOPPING LIST You can save money by choosing a credit card that best fits your spending habits and finances. If you carry a monthly balance: Consider a card with a low rate. Many cards now have variable rates. The AT&T Universal Card, for example, offers rates starting as low as 14.9 percent, or 8.9 percentage points above banks' prime lending rate, for charter members. If you pay off your balance every month: A card with no annual fee is your best bet. About 30 percent of all plastic users fall into this category. Another critical feature for them is the so-called grace period, usually a 25-day period in which no interest is charged to an outstanding balance. Some cards, such as one issued by the Bank of New York, offer a low rate but no grace period, which means cardholders are stuck with interest charges from the time of purchase. If you have a poor credit history: So-called secured cards are available to people with tarnished credit histories. These technically aren't credit cards, however, since customers generally have to post a security deposit equal to the charge limit on the account. The cards generally carry high annual fees and interest rates. The non profit Consumer Credit Education Foundation warns consumers to make sure the banks or thrifts issuing them are federally insured and to be wary of "900 number" promotions, which cost money if consumers call to ask questions. If you need help: Some groups provide lists of credit card deals for nominal fees. * Ram Research offers its CardTrak list of 500 low rate, no-fee and other credit cards for $5. Address: Box 1700, Frederick, Md. 21702. Phone: 800/344-7714. * Bankcard Holders of America offers a "Low Rate-No Fee Credit Card List" for $4. Address: 560 Herndon Parkway, Suite 120, Herndon, Va. 22070. Phone: 800/327-7300. This article is copyright 1992 The Washington Times. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM