Credit Cards Win With Low Rates

MANY banks turned a deaf ear to President Bush last November when he urged financial institutions to cut interest rates on credit cards. Instead, card issuers blamed the high rates on problem loans and administrative costs.

But in recent months the nation's 5,000 credit-card issuers have been under enormous pressure to drop rates as more consumers switch to low-rate cards that often carry no annual fees.

These days consumers are not interested in getting new cards in addition to the ones they already have, says Robert McKinley, president of RAM Research Corporation in Frederick, Md., a market research firm. "The focus now is on finding better deals and ... consolidating cards if necessary."

The recent economic slump in the United States awakened a lot of customers to the perils of debt. Credit card accounts average $1,200.

To lighten their debt load, people are shopping for cards that charge between 8.5 and 16 percent, compared to 19.8 percent charged by some of the nation's major credit-card issuers. Today, about 400 cards carry rates under 15 percent compared with 180 last May, according to a recent issue of RAM Research's CardTrak, a monthly credit-card newsletter.

CardTrak finds that one of the nation's lowest variable-rate cards is the 8.5-percent card offered by Arkansas Federal in Little Rock. There is a $35 annual fee, however, with no grace period for payment. The West Virginia-based National Bank of Commerce's 10.5-percent card (with no annual fee) is among the lowest fixed-rate cards.

Credit-card issuers that offer rates under 16.5 percent are experiencing 10 percent growth in new accounts, while those charging above 18 percent show little or no growth, the report says.

Citicorp, the nation's largest card issuer, began 1991 with 21 million accounts and ended the year with the same number. Chase Manhattan bank, No. 2 issuer in the industry with 10 million accounts also had no growth last year.

"This zero growth is considered a disaster" in an industry where double-digit annual growth has been the norm for a number of years, Mr. McKinley says.

At the same time, no-annual-fee cards such as AT&T's Universal Card and Sears's Discover Card are grabbing a growing share of the market.

AT&T has gained about 8.9 million accounts since it introduced its card in March 1990. In recent months, AT&T has been gaining 200,000 to 300,000 new accounts per month, according to Bruce Reid, a spokesman for AT&T Universal Card Services Corporation. The no-fee Discover Card ended 1991 with 41.2 million accounts, up from 38 million in 1990.

"People don't like paying annual fees on their credit cards," McKinley says.

Faced with increased competition, banks are lowering rates for their preferred customers.

Citibank announced in April that it would switch to a two-tier pricing structure starting this month.

The interest rate for cardholders charging at least $1,000 annually and with a solid repayment record will drop to 15.9 percent from 19.8 percent. About 40 percent of Citibank cardholders will benefit from this offer, according to McKinley.

Last month Rocky Mountain Bankcard System in Colorado, one of the nation's top 50 issuers with 1 million accounts, went one step further by providing most of its cardholders with a new 15.9 percent fixed interest rate. The only requirement for this new program is a record of timely payments for the previous 12 months.

Through this month, AT&T is offering the Universal Card without an annual fee to new customers who transfer a minimum balance of $1,000 from another credit card. The card's annual fee is normally $20.

Despite Citbank's move to cut rates, Chase Manhattan Bank has no plans at this time to change its 19.8 percent rate, a spokesman for the bank said. Chase will continue to compete on the basis of "better" customer services such as discount on flights and purchase protection programs, he added.

INDUSTRY analysts say that practically every card issuer offers similar services.

"Those who say they are not going to lower rates will find themselves cutting their rates within six months or a year," says Kurt Peters, editor of Credit Card News.

To retain current customers, Mr. Peters says, the big issuers that have a portfolio of more than $1 billion have to lower rates as Citibank did recently.

Mid-size issuers that have portfolios between $100 million and $1 billion will be squeezed by the rate war, analysts say, because many of them cannot afford to make investments in the expensive credit-card receipt processing systems needed.

Meanwhile, the small issuers with a portfolio under $100 million will not be affected by this competition because most of them already use outside processors, Peters says.

While many consumers are taking advantage of low rates and no-fee cards, banks are also tightening credit requirements as they wrestle with an increasing load of bad debt.

Credit-card debt charged off by banks as uncollectible was 5 percent of purchases in 1991, up from 3.5 percent in 1990.

"Two years ago, you'd hear stories about a dog and a nine-year-old getting credit cards," McKinley says. "But I don't think you're going to hear that kind of story any more."