He Ain’t Heavy, He’s My Banker

As countless consumers have found to their dismay, the towering interest that banks charge for credit-card purchases can defy both gravity and the laws of economics. While the prime rate for corporate customers has plunged from 20 1/ 2% to 9 1/2% since 1981 and the average new mortgage rate has dropped from 17.7% to 11.6% during that time, credit-card interest in most areas has remained at a sky-high level of more than 18% annually. That is a rate once associated with local loan sharks rather than with your friendly neighborhood banker.

Manufacturers Hanover Trust, the fourth largest U.S. bank, last week became the first major lender in four years to lower its credit-card rate. The New York institution trimmed the charge from 19.8% to 17.8% for Visa and MasterCard accounts and other revolving credit lines. “We saw it as a significant marketing opportunity,” said Edward Miller, executive vice president for retail banking. The bank hopes to woo customers from its rivals with the lower rate.

Consumer groups, however, were not ready to applaud. “That’s a good first step, but they haven’t gone far enough,” said Marla Kaplan, associate director of Bankcard Holders of America, a consumer advice service that claims some 100,000 members. “It’s time rates came down still farther.” Alan Fox, chief lobbyist for the Consumer Federation of America, said cardholders could save $500 million a year if the average credit rate dropped to 17.1%. A recent federation study estimated that consumers spend a whopping $6 billion a year in interest on purchases made with bank cards.

Card rates range widely across the U.S. Consumers in Arkansas are lucky: state law caps credit-card interest at 5% above the Federal Reserve’s discount rate, and they currently pay only about 12 3/4%. The rates climb above 20% in California and other states.

Congress has been increasingly concerned about the high cost of plastic credit. Three bills introduced this year would set a ceiling on charges. The measures, which are likely to be taken up in early 1986, would peg card rates to the interest on other kinds of short-term loans. One of the bills, sponsored by Democratic Representative Mario Biaggi of New York, would limit card interest to no more than 5% above the cost of 90-day commercial paper, a type of corporate IOU that now yields about 7.9%.

Banks say that they must charge high rates because the level of fraud and defaults makes credit-card lending risky. They also contend that consumers give little thought to the interest costs. Nearly a third of all cardholders pay their balances within 30 days and thus avoid credit charges.

Nonetheless, U.S. bankers are now considering whether to reduce their card rates in response to Manufacturers Hanover’s move. Said Leo Mullin, executive vice president of First National Bank of Chicago, which charges 19.8%: “We are always looking at the variable features of the card business.” In California, Bank of America, which also charges 19.8%, said its rates were under review. But one Midwestern banker privately doubted that many institutions would reduce their charges soon. “Why should they?” he observed. “They’re growing fat on interest income, and until competitive pressures force a cut, they’re not going to give up the golden egg.”