Did I hear the word greed mentioned?
"A $10 billion windfall
Credit card lenders don't pass on full interest-rate cuts
By Cecily Fraser, CBS.MarketWatch.com
Last Update: 7:39 PM ET Oct. 3, 2001
LOS ANGELES (CBS.MW) - The Federal Reserve's nine interest rate cuts this year aimed to stimulate the economy, but many credit-card issuers are only stimulating themselves by not passing rate cuts on to customers -- to the tune of $10 billion.
Credit-card rates have fallen by less than half the drop in general interest rates since January - meaning many lenders are pocketing part or all of the difference as windfall profits.
Since January, the Fed lowered its target for short-term interest rates by 4 percentage points to 39-year lows. See full story. While prime lending rates that major banks charge their best customers have fallen in unison with the Fed cuts, the average rate on credit cards nationally has declined only 1.85 percentage points.
"You're looking at $20 billion in interest savings" on $500 billion in outstanding bank card debt, said Robert McKinley, chief executive officer of research firm CardWeb. "What banks have passed onto consumers is about half of that. The rest goes to their bottom line, minus any losses."
Average national credit-card rates stood at 14.98 percent at the end of August -- only 1.59 percentage points below the December average of 16.57 percent, according to CardWeb.
Among the 110 million households in the nation, 82 million have credit cards of some kind. The majority hold variable-rate cards.
Going forward, it's unlikely credit card issuers will cut fixed interest rates, trim floor rates, or change pricing policies due to rising concern over the deterioration in consumer credit, McKinley said. The American Bankruptcy Institute expects as many as 1.5 million people to declare themselves insolvent this year. See full story.
An important factor in the growing margin between rate cuts and credit card rates involves increased use of fixed interest rates among major issuers such as MBNA and Providian, McKinley said. About 45 percent of all bank credit cards carry fixed interest rates today, compared with less than 20 percent three years ago.
Even with the succession of interest rate cuts, fixed-rate cards have been "stagnant" since the start of the year, McKinley said. "Issuers have been sitting on those rates to cover the anticipated losses."
Meanwhile, fixed-rate card issuers stand to benefit in a declining rate environment. Their net interest margin, or the difference between what it costs to borrow money and the rate at which they lend it out, will increase, analysts said.
"If it's costing them less and less to borrow money, but they have a fixed-rate card portfolio, that ratio expands," said Greg McBride, an analyst at Bankrate.com.
In addition, variable-rate card issuers can diminish the impact of the Fed's cuts though rate adjustment policies. Most lenders will adjust rates monthly, but about 30 percent do so on a quarterly basis. And many times, adjustments don't reflect the most recent reductions.
Meanwhile, about 25 percent of cards offering variable interest rates have a minimum, or so-called floors, to ensure rates don't dip below a certain price.
Consumer impact
The changing credit card environment can be frustrating for consumers, especially at a time when they're being called upon to continue spending and keep the U.S. economy afloat, said Frank Torres, legislative counsel at Consumers Union.
Federal regulators and lawmakers have yet to put pressure on credit card lenders to bring their rates down, he said.
"We're not saying it's wrong for credit card companies to price based upon risk, but when the interest rates the Fed charges are now at 2.5 percent, credit card companies can still cover their risks and generate income . . .and cut the rates even further for consumers."
Until regulators step up to the plate, consumers' best shot at lower rates is to shop around, experts said.
"If your credit is good, now is the time to see if you can't find a fixed interest card at 8 or 9 percent, or a variable rate card that doesn't have a floor to hold you at 13, 14, or 15 percent," Gumbinger said.
Generally, 4 percentage-points over the prime rate is considered a "reasonable rate," McKinley said. "There's not a lot of card at that rate."
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What was all that chatter coming from the right about WE are in this together. EVERYONE go out and buy one share of stock when the market reopens to show the WORLD that WE are united. So what happens, the little guy goes out and buys that one share and the BIG guys dump billions of shares giving US the biggest drop in the market since the 40's and now we find the banks are again screwing the little guy while the BIG boys continue with WE have to go out and BUY BUY because WE are in this together and WE must show the world WE are united. MY ARSE! Greed rules. |
