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Variable-Rate Credit Cards Add to Muddle

October 16, 1987|S. J. DIAMOND

It's happened again: Banks have taken a simple service and created a confusing menu of choices. This time it's credit cards, which people used to get from their regular bank, only occasionally noticing the annual fee and interest rate, which was virtually the same all over town.

Suddenly, credit cards offer "pricing options." Some have variable interest rates that fluctuate with the prime rate or consumer price index or cost of money. Some have "tiered" interest rates, which go down with the number of bank services customers use, the size of the unpaid balance and the amount of time they've been with the bank. Others also eliminate annual fees for customers who charge a certain amount yearly.

These are billed as a great advance--a choice, not an echo, among institutions. They could also prove to be just another roster of inconsequential distinctions, positioned as a marketing plan and posed as a response to consumer complaints.

Banks (and savings and loans) say they're responding to consumer "demand" for lower credit card interest rates--a demand of consumer advocates and legislators but rarely bank customers. "If you listened to TV, you'd think it's the most burning issue," says John Popovich, spokesman for California's First Interstate Bank, "but even in the heat of the congressional debate over capping interest rates, the number of letters of complaint to us about credit card interest rates was infinitesimal."

Complicated 'Tiering'

Actually, what's being offered is rate relief in return for more card use, higher charge volume and more deposits. "We realized there's a call for lower card rates," California First Bank spokesman Larry Boggs says, "but we couldn't forgo that interest revenue without making it up somewhere."

The most obvious way is to issue more cards--most commonly by offering an attractive-sounding variable rate, although less than a quarter of the country's banks do yet. First Interstate's regular card, for example, charges 21%, while its new variable rate card, Popovich says, runs 9 points above the prime rate, or just over 18% today.

Banks may also offer lower rates for higher balances, sometimes through a complicated "tiering" of the interest rate. The first $1,000 of an unpaid balance, for example, is charged a high interest rate, the second $1,000 is lower and the third $1,000 lower yet. Or, "once you get into the second tier, all the charges may get 18%," says David Robertson, vice president of marketing for the Nilson Report, a Santa Monica-based newsletter for the credit card industry.

Some banks use rate-tiering to sell more bank services. Los Angeles-based Security Pacific National Bank, for example, charges 20.4% interest to people who are only cardholders at Security. Taking another service (a checking account, perhaps) gets cardholders 19.4%; two others get them 18.4%; three, 17.4%, and four services, 16%.

Benefit Questioned

The goal, in banking lingo, is more "relationship banking," or loyalty from each customer. California First Bank, for one, "had a large number of customers with nothing but a credit card with us," Marketing Director Don Kinnaird says. Wanting them to have more relationships, all healthy, California First offers a tiered-rate system that starts with 19.8% (card only), and goes down to 15.8% for three or more accounts, each with required minimum balances. These "new deposits," Kinnaird says, "will make up for the lost interest income." California First will even waive its $15 annual fee for cardholders charging $2,300 a year--an offer that should also appeal to "convenience users" who pay their entire bill every month.

There's some question, however, about both the appeal and the benefit of these products to consumers, particularly for conven ience users, typically 30% of an institution's cardholders. Since they carry no balance, the interest rate doesn't matter to them, and their numbers should increase as the IRS phases out all such interest deductions.

Even the customer carrying balances may get minimal benefit, if anyone can figure it out given the need to tally average daily balances and the applicable interest. One can only accept a bank's own example: If First Interstate's variable rate was 16.5%, someone with a balance of $800 would pay $36 less annually than he'd pay at 21%, and $28 less if the variable were 17.5%--a net savings of $31 and $23 after paying the extra $5 annual fee.

More confusion ensues when one attempts comparisons. At Great Western Savings, a tiered-interest plan offers cardholders with three or more "relationships" a rate of 16.8% with a $20 annual fee. For a $30 annual fee, someone with nothing but the card can have a 16.3% variable rate. And who fares better at Wells Fargo? The five-year customer who got a special $18 annual fee and a 17% rate for charging over $100 a month, or the brand-new customer who pays $25 and gets a 15.8% rate through December and thereafter prime plus 7.55 percentage points?

'Super Confusing' Options

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