- The Washington Times - Monday, July 9, 2001

Several widespread credit industry practices are preventing millions of credit-card users from reaping the benefit of the Federal Reserve's aggressive interest-rate cuts this year.
The Fed has slashed rates by 2.75 percent since January, most recently cutting rates by a quarter point last week in an attempt to keep consumers spending.
But credit-card issuers have not lowered their rates, many of which are tied to the banks' prime rate.
"Prime-rate cuts have dropped about 30 percent, but credit-card rates only came down 6 percent," said Robert McKinley, president of WebCard.com, a Frederick, Md., company that tracks the industry. "It's a pretty big disparity."
The major reason is that creditors are growing increasingly concerned about rising bankruptcies and the slowing economy.
Bankruptcy filings rose 17.5 percent in the first quarter as the economy slumped, according to the Administrative Office of the U.S. Courts.
U.S. consumers owe about $666 billion on credit cards, mostly on the four major cards — Visa, MasterCard, American Express and Discover — according to WebCard.com.
About one-fourth of credit-card holders are unaffected by rate cuts because their credit cards have fixed rates.
The few cuts that credit cards have made have been slow in coming, because many creditors don't change their rates until several months after the Fed acts.
Some banks adjust the interest rates on their variable rate cards every three months, so millions of consumers had to wait until April to get the benefit of the Fed's first-quarter cuts. Now they are waiting to get the benefit of the April, May and June cuts.
Associates First Capital Corp., a division of New York's Citigroup Inc., adjusts the interest on its variable rate cards monthly, based on the highest prime rate listed in the Wall Street Journal during the previous 90 days.
Under this structure, consumers quickly pay more when the prime rate rises. But when interest rates start falling, it takes at least three months before consumers get the benefit of lower rates.
First USA, which has more than 50 million variable rate customers, also adjusts its rates monthly.
The Delaware issuer adjusts its rates based on the prime rate listed in the Wall Street Journal on the 22nd of every month.
WebCard.com estimates that 30 percent of variable rate cards also have "floor" rates, which set an interest-rate minimum.
"Those rates have come into play this year because of the dramatic drop in the prime rate," Mr. McKinley said. "Many cards have already bottomed out, so to speak, by hitting the floor rates."
A FirstUSA spokesman could not say how many of the company's customers are affected by floor rates. The issuer has hundreds of different credit-card agreements.
"We have over 2,000 different products," he said. "And it's depending on how they are structured, and if you had fixed rates whenever you entered, that's what you'll get even if the Fed lowers rates."
Capital One Financial Corp., a big issuer in Falls Church, sends out nearly one-third of the credit-card offers Americans get in their mailboxes each year.
That's more than 1 billion tailor-made solicitations.
Many creditors have been aggressively chipping away at the time clients get to pay their bills and duck interest charges.
The typical period between the close of the billing cycle and the payment-due date ranges between 20 and 25 days, down from 25 to 30 days in the early 1990s.
The biggest problem in the industry is lack of competition, according to Robert Manning, author of "Credit Card Nation" and a senior fellow at the Institute for Higher Education, Law and Governance at the University of Houston's Law Center.
"The top 10 credit cards now control three-fourths of the market, so it's a real myth when they say there are 6,000 credit-card issuers out there," he said. "The bulk of them is credit-card portfolios purchased by the top 10 banks or financial services companies."
Although consumer advocates like Mr. Manning blame creditors for not slashing their rates to reap profits from the Fed rate cut, they also acknowledge that consumers are partly to blame.
"Most people aren't cognizant of fluctuation of rates," he said. "They tend to be more concerned about how high of a credit limit they have."
Mr. McKinley agreed, saying consumers don't pay much attention to the fine print in credit-card applications.
"Consumers tend to be drawn in to the teaser rates, or introductory rates, and don't pay a lot of attention of what it does, and how it's calculated and structured," he said.

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