Interest-rate guesswork on credit cards

The banks seem to have added a new element to the credit card business. It's called confusion. Once, the only thing you had to worry about with a Visa or MasterCard was the interest rate. Sure, 18 or 19 percent is high, but if you pay off your entire balance every month, it costs you nothing to use the card, except for the annual fee of $20 or so.

For many cardholders, that's still the way it is. But the interest rate is just one of several things to consider when deciding which credit card to carry, if any.

Banks are doing what they can to keep the attention focused on the rates. Recently, for example, New York's Manufacturers Hanover Trust Company cut the rate on its cards from 19.8 percent to 17.8 percent. In doing so, it declared itself ``the nation's first major money-center bank'' to cut its credit card rates across the board.

That claim was discredited somewhat when officals at the Bank of New York pointed out that they have been charging no more than 17.4 percent to regular credit card customers and 15.96 percent to preferred MasterCard holders.

And Manny Hanny's announcement came a year or more after banks in some other places -- Boston, for example -- had made even deeper cuts. In Boston, rates at three of the largest banks range from 16.5 to 17 percent. In a few other, smaller cities, banks offer credit card rates under 15 percent.

While rates are going down here and there, the nationwide average is still 18.8 percent, says Robert K. Heady, publisher of Bank Rate Monitor, a newsletter in North Palm Beach, Fla. But even that can be deceiving. The rate ``most often'' seen is about 19.8 percent, and some banks charge as much as 21 percent, he notes.

Rates have continued at this level, bankers contend, because of the high cost of administering credit card operations and to cover losses from fraud and theft. Also, many states have had usury laws limiting credit card interest rates to 18 to 20 percent, even when the prime was over 21 percent. Even though these laws have been repealed or relaxed in some states and the prime is down to 10 percent, banks say they need the spread to keep credit card operations profitable.

``For years banks fought state usury ceilings,'' Mr. Heady noted. ``Now, they aren't about to give up easily by lowering their rates.''

At some banks, the interest rate is not fixed. Instead, it is ``pegged'' to some other index, like the prime rate, three-month Treasury bills, or a combination of rates put together by the bank. It can be changed every few months.

Because banks using variable rates tend to keep a closer watch on costs and expenses related to credit cards, their rates are usually lower than those using a constant, fixed rate. In Hartford, Conn., for instance, the Society for Savings has a 14.9 percent variable rate guaranteed through the end of the year. There is no index; the rate is set by the bank's asset-liability committee.

In addition to a variety of interest rates, annual fees vary from bank to bank, credit lines range from $300 to $10,000 or higher, and the amount of time it takes before interest is charged, known as the ``grace period,'' is being reduced to nothing at many banks.

Now, instead of charging no interest for the first 25 to 30 days after receiving a statement from the merchant, some are charging interest the day they get that statement, known as the day of ``posting.'' Others have kept the grace period on purchases, but eliminated it on cash advances. Still others have kept the grace period for customers who pay off their entire bill every month while eliminating it for those who only make partial payments. Then, there are many banks, including Manufacturers Hanover,

that have kept the grace period intact.

The elimination of the grace period, Heady says, can more than offset whatever gain may come from lower interest rates. At banks where the annual percentage rate has been cut to 16 percent but the grace period has been eliminated, ``the banks are making more money than before, because they've cut out the grace period,'' he says.

Learning what the grace period is at your bank, or at a bank you're considering for a credit card, may not be easy. Often, says Georgeann Abbanat, general counsel to the Massachusetts banking commissioner, people receive solicitations for new credit cards but aren't told about the grace period until they get the card in the mail.

``Sometimes, they aren't even told what the interest rate will be,'' she says. ``They just sign the application and find out when they get the card. Instead of sending it back, we've found people are more likely to keep the card and start using it.''

One way to avoid confusion about credit cards and to avoid overpaying is to find the cards yourself. Often, solicitations you get in the mail for credit cards come from banks that charge more than you could get elsewhere. That may change as more banks compete for this business, but it is still generally true. If you need a MasterCard or Visa, and you are fairly sure you qualify, call the banks and thrifts in your area and ask them about the interest rates on their cards. Also compare annual fees, gra ce periods, and credit limits. The credit limit you get will partly depend on bank policy and partly on your credit history and income.

Then again, maybe you don't need a MasterCard or Visa. Many people are beginning to discover that these cards are, in fact, too easy to use. If you want to make a purchase at a major department store, for instance, you may be able to arrange credit through that store. Often, the interest there will be lower than prevailing bank card rates. Or you may be able to get a small, unsecured loan at a local bank or thrift for less.

Finally, if you can get out of the habit of carrying those cards around with you, you may find that many of those ``must'' purchases you used to pay for with plastic weren't so necessary after all.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.

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