The best news for consumers is that the pricing collapse of bank credit cards is showing no signs of slowing. In early April, Citibank, the nation's largest issuer, announced it was extending its "Premier Membership" variable rate of 15.4% to applicants off-the-street. To sweeten the deal Citi is also offering a special 9.9% rate on new purchases and transferred balances between April and the end of August. Three years ago, nine out of ten Citibank cardholders paid 19.80%. Today about 48% of Citi's 33 million cardholders pay interest rates of 15.4% or lower.
Even the smallest issuers continue to slash rates and fees from already attractive levels. About one fourth of the nation's 13,000 credit unions offer VISA and/or MasterCards. 3,000 of these limited programs now offer rates under 15% and more than 2,000 charge no annual fee.
In a recent RAM Research Corporation study prepared for the U.S. General Accounting Office by request of the U.S. House Banking Committee, it was revealed that only 42.9% of the nation's cardholders continued to pay card interest rates above 18% during 1992 compared to 68.9% two years ago. Also stunning was the increase in the number of cardholders paying rates below 16.5%, from 9.3% in 1990 to 38.9% today.
Even more striking is the shift in balances from higher rate cards to lower rate cards. At the end of 1992, $76.5 billion of receivables were accruing interest charges below 16.5% compared to $13.1 billion in 1991 for a phenomenal increase of 484%.
During the past two years, bank credit card rates have dropped from 18.53% to 16.47% for a net drop of 2.06%. Based on Mr. Sinai's calculations this has increased discretionary income by more than $7 billion, boosting retail sales by $2.8 billion and service sales by $1.3 billion and contributing $250 million in new sales tax revenue. No wonder consumers loosened up during last year's Christmas shopping season.
Besides demanding (and getting) lower rates and fees, cardholders are demanding higher value from card issuers. Cardholders have demonstrated, by dropping certain brands, they want payment cards with the greatest acceptance and they want cards that give them more than a statement once a month.
During the past two years, American Express has lost 1.6 million cardholders and the Sears' Discover card has lost 1.0 million cardholders in the U.S. By contrast, MasterCard has added 14.7 million new U.S. cardholders and VISA has picked up 11.3 million.
The underlying reasons for the exodus from American Express is acceptance and cost. American Express cards are accepted at 3.5 million locations worldwide compared to more than 10 million locations for VISA and MasterCard. The fee for the basic or "green" American Express card hangs solid at $55 per year while a substantial portion (about one third) of VISA and MasterCard issuers do not charge an annual fee. Those that do, charge about $16.00 per year, on average. It does not take a brain surgeon to figure out the value of signing up for a card with three times the acceptance at one-third the price.
The Sears' Discover card simply underestimated the intelligence of the American consumer. For the past two years Discover has been heavily promoting its 1.0% cash back feature and its interest-free cash advances. Consumers took a hard look at those annual rebate checks, which average less than $7.00 per account, and concluded it's not worth the effort to ask the merchant to take a Discover card for such a measly rebate. (The card is now accepted at 1.7 million U.S. locations only) The secret is: Discover's rebate program is based on a sliding scale that starts at 0.25% and tops out at 1.0%, therefore the annual rebate is always significantly less than 1.0%. Consumers also realized it was less expensive to pay the interest charge on a Discover card cash advance than to pay the extra fees tacked on.
The Discover card may also have lost cardholders because of widespread publicity over the way interest charges are calculated. Unlike the vast majority of VISA and MasterCard issuers, the Discover card computes interest charges on a daily basis and charges two months of interest whenever a cardholder starts to revolve. As a result, most Discover cardholders would be better off paying an annual fee than paying the inflated interest charges. Deservedly, a consumer group, Bankcard Holders of America, presented the 1992 Harlan Page Hubbard Lemon Award to the Discover Card for its misleading advertisements.
The Discover card also had the distinction of being the last top ten card issuer to roll back interest charges. In early September of last year, Discover announced it would lower interest rates for cardholders charging at least $500 per year. However, the rate change did not go into effect until February. Discover says it needed the lag time to "reset its computers." The delay in implementing the rate change cost consumers about $250 million in interest charges. By the way, the Discover card took the opportunity during the February rate change to raise the late payment fee from $10.00 to $15.00.
While the Discover card may be the victim of its own miscalculations, the American Express card is an example of a company unwilling or unable to adapt to the demands of the American consumer. Once the premier success story in how to package and market prestige, today's American Express card can be used to purchase fishing bait at the local K-Mart.
The American Express dilemma is clearly frustrating. How do you build acceptance, maintain the prestige factor, and become competitive? Rather than build utility and deliver higher value, American Express is using its resources to promote the notion that revolving bank credit card debt is an economic poison. Over the past twelve months American Express has paraded consumer groups, politicians, and other gadflies before legislators and opinion makers to build a constituency that believes bank credit cards are an unnecessary economic evil. Under the guise of public responsibility AmEx says its efforts are "ultimately good for American Express."
What is really amazing is how many consumer advocates and politicians have been sucked into what is clearly a commercial promotion. There is no sign yet that American Express has or will abandon its negative bank bashing campaign even though consumers are evidently not persuaded.
American Express has failed to provide any stimuli for the general economy except "hot air" and has failed to offer real incentives to retain fleeing cardholders. AmEx cardholders continue to shell out $1.5 billion in annual fees and merchants continue to pay about an extra $1.0 billion to accept "The Card." By contrast, the wholesale price cutting by bank credit card issuers has dumped more than $7.0 billion into the economy and has provided real rate relief to millions.
If American Express truly accepted public responsibility to educate consumers about the cost of revolving debt it would strongly encourage holders of retail or store cards to switch to lower interest bank cards. Retail cards now carry an average (and rising) interest rate of 20.3%. Consumers would save about $1.7 billion in interest charges if they transferred the $45 billion they owe on retail cards to revolving bank cards. Many retail cardholders have awakened to this trap but millions of other consumers need encouragement to take decisive action.
Consumers also need more education in the area of bank credit cards vs. debit cards. Bank credit cards offer cardholders two basic re-payment options: either pay the balance off in-full each month without interest charges or carry the balance forward and pay interest on your average balance. Debit cards enable consumers to access funds on deposit at a local banking institution with the convenience of a widely accepted bank credit card.
Nearly 15 million consumers now use debit cards with the VISA or MasterCard logo and the number will probably triple in the next year. VISA Debit or MasterCard Debit cards are "offline" debit cards which simply means there is a lag time or float period between the time of the purchase and the time the funds are withdrawn from your local deposit account. Offline debit cards are, in reality, electronic checks. Therefore, consumers can essentially write checks anywhere in the world without having to give their fingerprints or otherwise have their privacy invaded.
Another 20 million American consumers are now using "online" debit cards. VISA's online program is called Interlink while MasterCard's version is called Maestro. Online debit cards immediately access funds on deposit and therefore require the use of pin number for security purposes. VISA's Interlink program is for the U.S. while MasterCard's Maestro is being developed as a global online card.
The point is: consumers now have the tools to achieve the highest level of financial responsibility with the highest level of convenience. Consumers can now decide at the time of a sale how the purchase will be settled. For example: convenience purchases like groceries, gasoline, parking fees, health insurance co-payments can be directed to debit cards while large purchases or travel- related expenses can be directed to bank credit cards.
Americans have heard about the cashless society for twenty years. Now the combination of technology and consumer demands for a highly convenient payment system have made the cashless society visible on the horizon. As a result, players in today's payment system need to lead, follow, or get out of the way.
In honor of National Consumer Credit Education Week this issue has been expanded to provide additional commentary and coverage on secured and gold cards. A special section on airline bank credit cards can be found on page sixteen.
1. Call your current card issuer and ask if they will waive the annual fee or consider you for a lower interest rate. Many issuers now offer menu pricing or risk-based pricing. You won't necessarily know unless you call.
2. Look in your own backyard for a better deal. Local banks will usually discount rates and fees if you have a relationship. Credit Unions and Labor Unions are also good local prospects for lower pricing.
3. Bank credit cards are a national business so do not be concerned if an attractive card is available from a bank thousands of miles away. Most large national issuers offer a variety of rates and fees, just about something for everyone.
4. Before applying for a new card make sure you credit file is free of errors. Personal credit reports are available free of charge or for a nominal fee. Even if your not shopping for a new card you should proof your credit file periodically.
5. Narrow down your choices before applying. Each time you submit an application it will generate an inquiry in your credit file. Too many inquiries can disqualify you from the best deals.
6. Be realistic. If your credit record is perfect and you have an above average income and some assets you will probably qualify for cards with rates under 12.5%. Most consumers with good credit and moderate income will qualify for rates between 12.5% and 16.5%. Consumers will credit card debt exceeding 20% of annual income will have difficulty qualifying for rates under 15%.
7. Do not overlook gold cards, airline cards, automobile rebate cards or shopper's cards. If your income exceeds $30,000 per year and you have good financial discipline gold cards are true gems. Other niche cards offer exceptional value to certain cardholders.
TRW Credit Bureau (800) 392-1122
Provides one free copy per year of your personal credit file; Additional copies are $7 each; Free copies are also available if you have been denied credit in the past 60 days and the creditor used their services.
CBI/EquiFax Credit Bureau (800) 685-1111
Copies of your personal credit file are available for a small fee ($0-$8) depending on your state of residence. Free copies are available if you have been denied credit in the past 60 days and the creditor used their services.
TransUnion Credit Bureau (312) 431-5100
Copies of your personal credit file are available for $15 each depending on your state of residence. Free copies are available if you have been denied credit in the past 60 days and the creditor used their services.
NFCC/CONSUMER CREDIT COUNSELING SERVICES (800) 388-CCCS
A non-profit organization providing support services for cardholders need assistance with managing credit.
National Consumers League (202) 639-8140 Provides publications on various credit related issues.
VISA INTERNATIONAL (800) VISA-511
Offers "Credit Cards: An Owner's Manual" free of charge.
MASTERCARD INTERNATIONAL (800) 999-5136
Offer a free booklet called "Credit Card Basics" and a free "Smart Credit Quiz."
Federal Trade Commission (202) 452-3245
Publishes a brief semi-annual list (March and September) on card pricing by the largest issuers for $5 per copy. Offers a number of free credit-related publications.
Penquin Books (Bergenfield, NJ 07621-0120)
Released a new book April 13th called "Downsize Your Debt" by award-winning author Andrew Feinberg. Available at bookstores for $10 per copy.
Veribanc (800) 442-2657
For a $10 fee this company will provide a safety or stability rating on any banking institution. Of benefit to cardholders looking to make a substantial deposit for a secured credit card.
Bankcard Holders of America (703) 481-1110
A consumer membership organization providing support services for credit cardholders including mediation of cardholder and issuer disputes. Dues are $24 per year.
Faulkner & Gray Inc. (800) 826-3115
Publishes a bi-monthly industry newsletter, monthly industry magazine and an annual industry directory. Credit Card News (newsletter) is $345 per year; Credit Card Management (magazine) is $98 per year; Card Industry Directory (book) is $325 per year.
HSN Consultants Inc. (310) 392-7720
Publishes a bi-monthly industry newsletter called The Nilson Report, available for $695 per year.
Hoppenstedt & Wolff 4940 271 042 (Germany)
Publishes a monthly industry newsletter called a la Card - Euro-News covering the international field of card-based payment systems. Subscription rate is DM 780. Also publishes a report called European Card Market for DM 2,900.
Lafferty Publications LTD 353 1 718022 (Ireland)
Publishes a bi-monthly industry newsletter called Cards International covering the global plastic card industry. Subscription rate is DM 1,699.
International Credit Association (314) 991-3030
Publishes a monthly newsletter called Consumer Trends focusing on consumer credit and financial affairs. Subscription rate is $100 per year.
RAM Research Corporation (301) 695-4660
Publishes a monthly consumer bank credit card newsletter called CardTrak available for $5 per copy or $60 per year and a monthly industry newsletter: Bankcard Update for $995 per year. The firm also publishes an consumer credit card directory called CardSearch 93 for $50 per copy and an annual industry statistical report called Bankcard Barometer 93 for $995 per copy.
