Credit cards return, but at higher interest

Some new year good news: Many of the major New York City banks that stopped issuing credit cards will soon begin embossing names on plastic again. And some new year bad news: The charge for borrowed money will be a shade under 20 percent instead of 12 percent.

For users of "plastic money," the new year brings bittersweet news: Credit is available, but it won't come cheap. Not only will borrowers on credit face steeply rising rates, but they also will be charged a $15 annual fee.

Behind the change in rates is a new credit law in New York state which allows the banks to raise the rates they charge to a new maximum of 25 percent. Under the old law, banks could charge 18 percent for the first $500 worth of borrowing and 12 percent on the rest.

The New York banks' moves, says a spokesman for the American Banker Association, may foreshadow a trend nationally toward higher intrest rates on credit cards and revolving lines of credit. "The New York situation is not unlike a lot of other states," says the ABA official, noting that "quite a few states will be considering raising the consumer usury ceiling this coming year." Among those states are Iowa, Michigan, Mississippi, Montana, New Mexico, North Carolina, Oregon, Rhode Island, Tennessee, Utah, Washington, and Wisconsin. Last year about 50 percent of the states raised their usury ceilings, but many imposed a two-year sunset period, hoping rates would fall.

In spite of the rising rates, the bankers expect to seee more people borrow. "We expect our outstandings to grow substantially as more credit is made available," says Marion Bestani, a spokeswoman for Chase Manhattan Bank which is raising its rates to 18 percent. She adds, "The demand is there, we just haven't been able to meet it because of the old interest rate ceilings."

However, a spokeswoman for Citibank says the bank expects to see some attrition. The bank has moved have tacked on $15 annual membership feeS.

One of the impacts of these higher rates, says Sandra Shaber, senior economist for Chase Econometrics, the economic forecasting department of Chase Manhattan Bank, "is going to be a general weakening of the economy and pressure on household purchasing power." Ms. Shaber notes "it will be interesting to see how the consumer reacts this time, since last spring when credit restrictions are imposed it reacted all out of proportion."

The consumer probably can't expect any immediate relief from the higher rates either. "You have to price for the longer term," says Charles C. Lehing, senior vice-president, metropolitan division, for Chemical Bank, "and if you start to change the structure, you confuse the consumer."

In New York state it is possible the consumer is feeling confused anyway because of the differences between the banks. Citicorp, with the largest number of cardholders, has a rate 1.8 percent higher than the other New York banks. Richard Cain, president of Citicorp Credit Services Inc., says the bank made its pricing decision based on what it projects the cost of money wil be in 1981, the ranges charged by banks around the country, and what the consumer considers a fair price for services offered.

In its analysis of interest-rate ranges around the country, Citicorp found that some banks in California were charging as much as 21 percent, some Missouri were 22 percent, one bank in Oklahoma was at 24 percent, and many were still at 12 percent.

Mr. Cain says that the bank decided that it wouldn't be able to make money on the cards at 18 percent if interest rates remain hihg. In 1980, for example, the average costs and 3 percent for bad loans. The end result was red ink.

For Citicorp this year, says Mr. Cain, this will mean a pretax loss of over $ 100 million. Most other banks had similar experiences although their losses were probably smaller. In order for the bank to make money -- even at its new pricing -- Mr. Cain says interest rates must fall below 12 percent. "For the other banks to make money at their rates," says Mr. Cain, "they have to be expecting a 10 percent level."

Mr. Lehing of Chemical Bank says there are other reasons why Citicorp has higher rates. He cites the fact that the bank has a national operation. At 18 percent, he says, Chemical Bank, "hopes to make a profit." Still other bankers say Citibank has a higher loan loss rate than most other banks.

In order to get the New York State Legislature to raise the usury ceilings, the banks had to threaten to pull their credit operations out of the state. Citicorp, in fact, made arrangements to move 300 to 400 jobs and its card division's headquarters to Sioux Falls, S.D., which had raised its usury rates to get the Citicorp jobs. Over the next three to four years the bank expects to move 2,000 jobs to South Dakota. Chase is considering moving its credit operations to Wilmington, Del., although the move would encompass fewer jobs. Chemical Bank says it has no immediate plans to move its operations.