WASHINGTON — Elimination of the tax deduction for consumer interest payments--a provision of the tax-overhaul measure passed by Congress and awaiting President Reagan's signature--could have a significant effect on the credit card industry by encouraging more cardholders to pay off their balances without incurring finance charges.
A recent survey of 500 affluent consumers, conducted by Synergistics Research Corp. of Atlanta, reported that 30% of those who now use revolving credit said they expect to almost always pay in full in the future. Another third (37%) would try harder to do so, while the other third would not change their practices, the survey found.
If only a quarter of the respondents acted on their stated intentions, they would save an estimated $2 billion a year in finance charges. That amount represents one-fourth of the credit card interest that Americans deducted from their 1983 income taxes.
Feeling the Squeeze
It also represents about 10% of the annual interest paid on revolving credit issued by banks, retailers and gasoline companies. A cutback of this size coming at a time when an expanding industry is becoming increasingly competitive could put the squeeze on smaller credit card marketers, according to Synergistics Chairman Bill Adcock.
Two-thirds of those who use revolving credit or have an auto or personal loan and take a tax deduction for the interest told Synergistics pollsters that they would trim their use of credit. Among car owners, 44% said they would not finance a new purchase unless the interest were deductible.
Industry representatives, however, say they do not believe that eliminating interest deductibility will have any effect on cardholders' habits. "We don't expect any changes," said Richard Woods of MasterCard, whose 51 million cardholders ring up more than $5 billion a year in finance charges.
Ron Schmidt of Visa predicted "minimal impact" and said the average annual charge of $210 is too small to affect behavior.
Sears, Roebuck, issuer of the new Discover card, declined comment.
Stephen Brobeck, executive director of the Consumer Federation of America, also doubted that many people would live up to their announced intentions to cut back on revolving credit but added: "I would hope they do; consumers are purchasing too much on their cards."
Sensitive to Rates
John Pollock, publisher of Bank Credit Card Observer, noted that since cardholders are becoming increasingly sensitive to lower interest rates and annual fees--which are starting to take hold due to declining market rates and competition--they also probably will become sensitive to what the lack of an interest deduction will mean on their taxes. "I think more people will pay their bills with cash, checks or travel and entertainment cards," on which full payment is due in 30 days, he said.
The Federal Reserve estimates that the outstanding balance on all forms of revolving credit amounted to $125 billion in July. Annual interest payments on that run about $20 billion. According to Internal Revenue Service statistics for 1983, the latest year available, 22 million returns, or 23% of all returns, showed deductions for credit card interest. Total deductions claimed amounted to $7.8 billion, or an average of $350 per return.
A decrease in interest income for the industry might not happen immediately because the interest deduction will be phased out--65% would be deductible the first year--and cardholders likely would scale back accordingly.
The Joint Taxation Committee has projected that the government will save $26.2 billion during the next five years by eliminating the interest deduction. In making its calculations, the panel projected that there would be a falloff in use of credit--or a shift to deductible types, such as home-equity loans. However, it is not yet clear how much of that $26 billion would come from non-deductible credit card interest and how much from other types of consumer loans.
Any decline in use of credit by cardholders would not be welcomed by the industry, which has been growing rapidly and might face a slowdown even without the tax bill.
Some experts say the credit card market is saturated, the American Banker reports. The trade publication noted that there already are 96 million Visa cards in the United States, 73 million MasterCards and 17 million American Express cards, plus numbers of others such as Choice, Diners Club and ones with less familiar names.
In the past two years, the credit card market has been extremely lucrative because of the growing spread between the issuers' cost of funds and the annual interest rate that they charge their customers. With a return on assets in the 5% range, bank card sales are growing at an annual rate of 20% as more banks, thrifts, credit unions, retailers, oil companies and even non-financial organizations crowd their way into the field.