Banks, Firms Team Up For Credit Card Game

COMPETITION in the credit card business has become more fierce -

to the benefit of credit card holders.

To attract new holders and keep current ones, card issuers are flaunting low interest rates, rebates, no annual fees, and pre-approved credit card applications in a nearly saturated market.

The credit card market has changed dramatically in the last 18 to 24 months, says Robert McKinley, president of RAM Research Corporation, a credit card research firm in Frederick, Md. ``New players are coming in with very deep pockets ... and have really turned up the heat on the traditional bank issuers,'' he says.

The new players are nonbank companies that began issuing credit cards several years ago, in what the industry calls ``co-branded programs'' - a joint venture between a bank and a commercial company. A notable example is the General Motors MasterCard, which made its debut in September 1992, offering no annual fee and a 5 percent rebate to be put toward a car or truck. ``No one has ever launched a card that has gained such rapid acceptance and usage,'' Mr. McKinley says.

In 1990, American Telephone & Telegraph Company launched its Universal Card, signing up 1 million cardholders in the first month. The program now has about 12 million holders, twice as many as the GM card. But GM's balances are much larger.

According to a RAM Research report, companies with the leading co-branded programs today (by number of accounts) include: AT&T, General Motors, AFL-CIO, American Airlines, United Airlines, Ford, American Association of Retired Persons, General Electric, National Education Association, and AmeriTech.

At least a dozen more programs will be introduced within the next few months alone, McKinley says. Nordstrom Inc., the Seattle-based retailer, will issue Visa cards for its customers this spring. Chrysler, Nissan, and Toyota all have proposals on the table, he adds. If Shell Oil Company's MasterCard, launched with Chemical Banking Corporation at the end of last year, is successful, other gas companies will follow, he says. The card generates up to $70 in rebates a year from all charges, plus a 1 percent rebate on Shell gasoline purchases.

Credit cards are a way for companies to ``increase customer loyalty, increase sales, and get another marketing tool,'' says James Daly, editor of Credit Card News in Chicago.

This month Mellon Bank unveiled its ``Cornerstone MasterCard,'' which Ram Corporation says is one of the most ``innovative'' and potentially successful cards this year. For the 66 percent of all bankcard holders who regularly carry over a balance, the card - with no annual fee - offers a 100 percent cash refund on all interest charges paid over a 20-year period. One catch is that customers have to be active cardholders for 20 years to get the full rebate and have to pay an above-average interest rate. Cardholders can collect an interest refund after only two years but at a lesser percentage.

Credit cards that offer rebates typically charge annual fees and higher interest rates, Mr. Daly says, because issuers hope that consumers will consider the rebates valuable enough to pay the higher fees.

McKinley says there is no excuse for anyone to pay high interest rates on a credit card today, regardless of the rebate. Consumers would be better off investing or saving the difference, he says.

``Ever since the recession, this whole refinancing-type mentality ... has trickled down to credit cards,'' McKinley says. In response, ``every one of the big issuers has cut fees and cut interest rates in the last two years and it's all come from consumer pressure.''

Wachovia Bank in Atlanta is leading the low-interest-rate race among major card issuers. The bank offers a 6 percent interest rate for the first year, then prime plus 3.9 percent afterward.

Among the ``Top Ten'' credit card issuers, 55 percent do not carry an annual fee. Analysts hold that the annual fee eventually will become a penalty fee, assessed only on accounts with little or no activity.

Citibank began eliminating the annual fee on one-third of its credit card accounts - $20 on standard cards, and $50 on gold cards - after losing about 100,000 accounts a month in 1992 because of holders switching to no-fee cards, McKinley says.