Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Mar 24 1992 Date: Tue, 24 Mar 92 05:43:45 EST Message-ID: 03-24 0000 BONUS: Credit card industry in a pinch USA TODAY Update March 24, 1992 Source: USA TODAY:Gannett National Information Network Consumers have a simple message for companies offering credit cards with high interest rates: Drop dead. Many card issuers are getting the message and lowering their card rates. The paradox: Lowering rates may cause some issuers to drop dead anyway. It's a dangerous new world for credit-card issuers, such as banks that offer MasterCard and Visa cards. WHY ARE BANKS NOW IN A DIFFICULT POSITION: For years, they have relied on card enhancements - gimmicks ranging from frequent-flier miles to rental-car insurance - as selling points. High interest rates - currently averaging 18.8% - were enough to cover the enhancements and generate a tidy profit, too. Now, with the rate barrier broken, credit cards are no longer the profit centers they used to be. "The era of excessive profits in the credit-card industry is coming to an end," says Paul Kahn, chief of AT&T's credit-card division. "Thanks to competition, credit cards will provide shareholders with fair profits and customers with more quality. That's a healthier balance." WHAT WAS THE MOOD BEFORE THE RECESSION: Before the recession began in July 1990, many consumers looked at high credit-card rates as a necessary evil, like automated-teller-machine fees or chicken pox. No longer. When President Bush criticized card rates in November, Congress sensed it was an issue with broad support. Lawmakers passed a bill overnight that would have lowered plastic rates to 14%. The bill soon died under pressure from Wall Street, the banking industry and the Bush administration. ARE CONSUMERS VOTING WITH THEIR POCKETBOOK INSTEAD? Yes. And that's a vote that could hurt: Finance charges accounted for $26 billion of the industry's $34 billion in revenue last year. Annual fees, merchant fees and late charges accounted for most of the rest. Last year, card issuers with rates below 18% saw the number of their accounts grow 11%, according to RAM Research in Frederick, Md. But the averages hide some of the industry's big success stories. People's Bank of Connecticut, for example, lowered the rate on its card to 11.5% Jan. 29. Last month, People's got 40,000 applications - as many as it got the entire first half of last year. WHO ELSE TOOK ADVANTAGE OF LOW RATES? The AT&T Universal Card, whose variable rate is now as low as 15.4%, became the USA's third-largest card issuer this year after just two years on the market. A big draw: It waived the annual fee for life for cardholders who signed up the first year. Universal now has 8.1 million accounts. High-rate issuers haven't fared as well. Issuers who charged more than 18% increased their accounts by just 1.3%. Citibank, the USA's largest credit-card issuer, saw zero growth in new accounts last year, according to Credit Card News. Its main card carries a 19.8% rate. WHAT'S IMPORTANT TO CREDIT CARD CONSUMERS? Officially, card issuers still say consumers are drawn more by customer service than rates. Nonsense, say industry experts and card users. "They can say all they like about service, but only two things matter - a card's annual fee and its interest rate," says James Daly, editor of Credit Card News. "The bottom line is that I'm saving money," says Nancy Manson of Fayetteville, Ga. She switched from a First USA Visa card charging 19.2% to a Wachovia Visa charging 12.4%. "I had no remorse," Manson says. "I'd do it again in a heartbeat." WHAT'S HURTING CARD ISSUERS? Marketing costs are rising. Most people already have credit cards. To build a credit-card portfolio today, issuers have to concentrate on luring card holders from other issuers and retaining the ones they have. That costs money. On average, industry sources estimate it costs $100 to $110 to lure a new credit-card customer from another card. Annual fees are falling. Last year, the average credit card charged a $16 annual fee. That's down from $17 two years ago. But many issuers will waive the annual fee if you ask or threaten to go to an issuer that has no fee. HOW BAD ARE DELINQUENCIES? Accounts 30 days or more past due rose to 3.3% last quarter from 2.9% in fourth-quarter 1990. Charge-offs - the amount issuers write off as no good - were 5.6% of banks' portfolios last quarter. That's up from 4.2% in fourth-quarter 1990. And growth is slowing. Last year, credit-card balances grew 7.9%, vs. 16.7% in 1990. And the number of bank credit-card accounts grew 3.9%, vs. 8.6% in 1990. WHAT INCENTIVES DO CARD ISSUERS OFFER? Because most people have credit cards, banks are trying hard to get consumers to switch from one card to another. Many issuers now include detailed instructions on how to transfer your balance from an old credit-card account to theirs. Some are offering incentives to do so. AT&T said last week that it will waive the $20 annual fee for life on its Universal Card for consumers who transfer balances of $1,000 or more from another card. HOW CAN THE LOW-RATE CARD ISSUERS SURVIVE? Low-rate-card issuers are already cutting back frills. "We don't offer frequent-flier miles or buyer-protection plans," says Larry Parnell, spokesman for People's Bank. And larger issuers have been trimming some of their extras. Chase Manhattan lowered its rental-car accident insurance to $50,000 from $250,000 on its MasterCard and from $100,000 on its Visa card. Chase also dropped its insurance to $150,000 from $350,000 on its gold card. Banks are also experimenting with an array of cards designed to give low rates to customers who are good credit risks and higher rates to others. WHO'S OFFERING A CHOICE OF CARDS? Citibank's Choice, which carries a 15.9% interest rate. A pilot program on the Choice gold card raises the rate to 19.9% if you miss two consecutive payments. And American Express' Optima. If you pay on time for 12 months and charge at least $1,000 a year, the rate is 12.5%. Make two late payments, and the rate jumps to 18.75%. IS IT TOUGH TO GET A CREDIT CARD WITH LOW INTEREST? Many companies offering low card rates accept only those customers who have an immaculate credit record. People's Bank, for example, rejects two out of three applicants. Other issuers with extremely low interest rates have even higher rejection rates. The next trend: Some issuers may even try to dump card holders who don't carry a balance, says Daly. People who don't carry balances are good credit risks but rotten credit-card customers because they don't rack up interest charges. Banks may offer those people debit cards instead. A debit card taps your checking account like a check. ARE MANY CONSUMERS PAYING OFF CARDS SOONER? Diligent repayment habits might be the biggest trend working against credit-card companies. Many people, like Manson, are trying to cut down their debt - not build it. "I'm working to build a nest egg," says Manson. "To do that, I've got to get my balances paid off. In the meantime, I'm saving money with a lower-rate card." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM