It has hardly gone unnoted that while interest rates have been plunging--the federal discount rate for banks to 5.5%, the prime to 7 1/2%, home mortgages below 10%--credit card interest rates remain high, currently averaging 19.37%. Consumer groups say such rates produce unconscionable profits and should be capped. Credit vendors, especially bankers, say that they're barely making money and that if their interest rates are capped, the consumer will pay some other way--even those who pay immediately.
A lot of consumers are affected by this debate, particularly those holding the 186 million outstanding cards issued by banks, which account for 63% of U.S. credit card debt, according to Spencer Nilson, whose monthly Nilson Report covers the credit card industry. Two-thirds of bank cardholders receiving invoices in any given month will pay finance charges-- on average, on $2,287 spread over 2.5 cards. They also take 16.5 months, on average, to pay it off.
On their behalf, consumer groups are circulating guides to which banks offer the lowest rates. State legislatures are enacting rate controls--either a cap on the rates (like Connecticut's limit of 15%) or an index to which they must be tied (like Arkansas limiting rates to the federal discount rate plus 5 percentage points).
Some legislatures (California's, for example) are passing watered-down bills that only require financial institutions to disclose their interest terms at time of application--" 'wimp' legislation," in the view of Rep. Frank Annunzio (D.-Ill.), whose own proposal to cap interest rates just died in Congress.
In response, credit card vendors argue that their profits aren't excessive and certainly not what Rep. Mario Biaggi (D.-N.Y.) calls "gouging, pure and simple." Moreover, Nilson says, cost of money to the vendors--the discount rate, for example--represents less than half of their operating expenses, the rest being high overhead (costs of investigation, billing and processing, they say) and fraud and credit losses. Nevertheless, he says, "credit card loans can still be profitable for most banks, depending on the state, the market and the bank."
What's more, the interest rates clearly don't offend consumers, the industry says, because they keep signing up for cards and charging purchases and piling up balances. They can even pick and choose among rates in a marketplace that's "robust and highly competitive"-- not a situation demanding government intervention, says the Consumer Bankers Assn., a trade group in Arlington, Va.
Finally, consumers may not care now about interest rates, but they probably will if legislation spreads. If their profits are squeezed, vendors will doubtless issue fewer cards, the CBA says, reducing "the availability of credit for many otherwise credit-worthy individuals." They may also increase other fees and charges.
They have plenty to work with.
There are annual fees and, on many cards, usage fees for any activity at all during the month, and sometimes even individual charges for each transaction. Many banks charge late fees on top of finance charges for carry-overs, and 15% allow no grace period before payment is due, assessing finance charges from the billing date or, worse, the date of purchase--even when the bill is immediately paid.
Few consumers are aware of these terms. Few even understand how finance charges work--not as simple late fees on an unpaid balance but as "loans" on money borrowed for the whole time it's borrowed.
Indeed, the cards may be successful less because consumers appreciate their workings than because they don't know what they're doing: "They're really buying credit ," says Redwood City financial adviser Robert Ortalda Jr., "and they're not really examining the goods ahead."
If they did, they might find that interest rates are the least compelling question (ironically, the industry's own view). Wimpy or not, disclosure is a valid concern: Few vendors clearly disclose all their terms up front--the fees, the grace period, etc. Some don't even disclose their interest rate. Almost none disclose terms in language accessible to the ordinary mortal: "Even people who want to shop terms can't," Nilson says.
Indeed, disclosure should not be required in advertisements, solicitations or applications, Congress was told by representatives of the Consumer Bankers Assn., MasterCard International and Visa U.S.A. in a joint statement, and, "if required, should be limited to two terms: the annual percentage rate and annual fee."
Many vendors even mail out masses of "pre-approved" applications, "at one time saying their losses are so high they need these interest rates," says Craig Floyd, spokesman for Biaggi, "and at the same time granting all this pre-approved credit, with no paper work, without even investigating."
Others automatically raise customer credit limits--not because they're "good" and pay their bills in full, but because they're overextended: "I'd get up at the limits," says one consumer, almost done in by the $10,000 that she ran up on her cards, "and instead of cutting me off, they'd send a letter saying 'Dear Valued Customer,' and up my limit. It became a vicious spiral."
In fact, the real killer in credit cards is not the interest rate, and only partly the obscuring of terms, but the easy, almost exponential build-up of principal encouraged, asking only tiny monthly payments and continually piling the inevitable finance charges into the principal.
Credit card vendors, says Ortalda, are inviting abuse: "They know you need money today and you're not being responsible, but they'll bail you out this week if you borrow more. It's like a giant financial drug problem."