- The Washington Times - Tuesday, November 13, 2001

Credit-card companies are giving new customers the lowest promotional interest rates in history a move stemming from the Federal Reserve's 10 interest-rate cuts this year.
The low rates are a boon at the holidays to consumers, who have not been able to reap the benefit of the Fed's aggressive rate cutting because of several industry practices.
"We're seeing a lot of zero percent rates, and some cards are offering those promotions for 12 months," said Robert B. McKinley, chief executive of CardWeb.com, a Frederick, Md., firm that tracks the industry. "That's unprecedented. The promotional rates are definitely a product of the cuts."
Promotional rates typically last only a month or two.
Chase Manhattan, for instance, is offering 0 percent interest rates to new customers for a year. The bank, which mostly offers variable-rate cards that are repriced monthly, has cut rates four times in the past six months, a spokeswoman said. The bank's rate is based on the prime rate of the last day of the month before a Fed cut.
Large creditors such as Citibank, MBNA and Providian Financial are offering rates between 0 and 5.9 percent for six to 12 months.
People's Bank is getting more creative. The company is offering its customers a holiday card, which offers 5.99 percent, half the normal interest rate, for purchases made Nov. 1 through the end of the year.
Julie Melvoux, spokeswoman for the American Bankers Association, said companies are finding ways to pass on rate cuts to consumers, although their credit-card agreements do not allow them to lower rates beyond what the contracts stipulate.
About 30 percent of all credit cards have rates that do not change. The other 70 percent of cards offer variable rates, which are linked to the prime rate. The prime, which banks typically lower in step with the Fed, is at a 40-year low of 5 percent.
Customers who pay off their debt monthly do not have to pay interest rates. But 78 million Americans had at least one card with an outstanding balance in 2000, according to CardWeb.com. Americans carried an average credit-card balance of $8,488 per household at the middle of this year.
But having a variable-rate card does not guarantee a drop in interest rates, since more than one-fourth of the cards have a "floor rate," which limits rate drops. The rest have posted rate drops.
The General Motors MasterCard, for instance, offers prime plus 9.99 percent. But the card's floor is 16.9 percent. So although the current rate would be 14.99 percent, the floor cut off the drop in June.
About 80 percent of variable cards have reached their floor rates and will not drop any further, according to Bankrate.com, a Palm Beach, Fla., firm that tracks the banking industry.
The average rate on standard cards with variable rates slipped to 13.8 this week from 17.1 in the beginning of the year. Fixed-rate cards averaged a rate of 14.13, down from 15.46, according to Bankrate.com.
The credit-card industry is facing some tough times as the economy enters a recession.
Unemployment jumped to 5.4 percent last month, increasing the chance of payment delinquencies. The number of overdue accounts climbed to 3.93 percent in the second quarter from 2.99 percent in the first three months of the year. Delinquencies were at 2.99 percent in the second quarter of 2000.
Bankruptcy filings also reached a record high. More than 400,000 personal and business filings were recorded for the second quarter, according to the Administrative Office of the U.S. Courts.
Mr. McKinley noted that some analysts predict the credit-card industry will lose money next year. He also said Americans have had no problem getting plastic this year, although credit usually becomes more difficult to obtain during economic downturns.
"Normally [credit-card issuers] would tighten up and not approve as many accounts, and give lower credit limits. But they are not doing that," he said. That's because the difference between the rates they charge customers and the rates they pay has widened enough to cover the losses stemming from the rising number of delinquencies.
American consumers owe some $672 billion on all credit cards. Most of that about $570 billion is owed on major cards Visa, MasterCard, American Express and Discover.

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