Creditors Shoveling Gold and Platinum

Consumer advocates say higher bankruptcy rate may be result of credit-card wars.

Just how competitive has the world of credit-card marketing become? The answer may rest in your mailbox.

In the past year, credit-card companies sent out a record 3 billion letters urging Americans to apply for new cards. And the deals sound sweeter than ever.

There are gold cards with 6.9 percent interest rates. Platinum cards with rates as low as 4.9 percent. Some even boast a 2.9 percent introductory rate.

Consumer activists say that spells trouble. With 1.33 million Americans filing for bankruptcy last year - a record - consumer-rights groups contend that the credit-card companies' "deceptive" and "tricky" marketing practices are partly to blame.

"Some may do a kind of 'bait and switch,' " says Paul Richard, vice president of the National Center for Financial Education (NCFE) in San Diego. "Consumers have to be cautious and do a lot of comparison shopping."

Anxious to boost customer growth - and profits - credit-card companies and banks are resorting to creative new ways to urge Americans either to switch cards or stay loyal. They're also looking to expand their reach into new markets, wooing more moderate- and lower-income Americans than ever before.

"They're encouraging millions of families to spend well beyond their means, which will eventually harm the economy," says Stephen Brobeck, executive director of the Consumer Federation of America (CFA) in Washington.

Good for customers

But the credit-card companies counter that the fierce competition is great for consumers, bringing down interest rates and increasing opportunities. "The consumer is getting far greater value from their credit card than in the past," says David Sandor, vice president of VISA USA, in San Francisco. "They've got more choices in interest rates and more choices of benefits, whether it's mileage or other bonuses."

Mr. Sandor points out that 97 percent of VISA holders pay their bills on time, and only 1 percent end up in bankruptcy. Another 40 percent pay their balances on time, so they're not paying any interest. Nor do many of the newer cards have annual fees. "It's like they're getting a 30 day loan for free," says Sandor.

Studies also show that interest rates, at least for introductory offers, have gone down. According to BAIGlobal, a Tarrytown, N.Y., market-research firm, the average introductory interest rate on a standard card dropped from 10.25 percent in 1993 to 7.3 percent in 1997. But the study found that base rates, the amount paid after the first six to 12 months have passed, have gone up. The average base rate on a standard card went from 15.5 percent in 1993 to 17.3 percent in 1997. The increase came at a time when overall interest rates dropped.

"They're not only gouging people, but they're doing so deceptively," says Mr. Brobeck.

A recent study done by CFA found that banks are extending credit lines on cards at brisk rates. They have grown by 50.3 percent in the past year. The study also concluded that the aggressive marketing and credit extension "especially to low- and moderate-income people," is the principal reason for rising unpaid bank-card debt. It rose from 3 percent of outstanding debt in 1994, according to CFA, to an annual rate of 5.6 percent in the first quarter of 1998.

Records show the average person filing for bankruptcy had an after tax income of $19,800 and credit-card balances totaling $17,500, according to Brobeck.

Consumer activists are also angered by marketing practices they contend are deceptive. For instance, in a mailing, a card company may promise a 4.6 percent gold card with a $10,000 dollar limit. When the customer applies, they end up with a regular card with a 16.5 percent interest rate and a $1,000 limit. What the customer missed was the fine print at the back, which states the card company reserves the right to offer any card it deems appropriate.

Congressman Robert Menendez (D) of New Jersey has introduced a bill designed to stop companies from issuing cards that applicants didn't intend to apply for and may not want. It would allow the applicant to decide the type of card, annual fee, and lowest credit limit they're willing to accept.

"If the credit-card issuer does not want to approve the application, that is still their decision," he says in a statement. "But they would no longer be able to give the applicant an alternate type of card that wasn't part of the original offer, and that the consumer didn't apply for in the first place."

Banks and credit companies oppose the bill, arguing it's the consumer's responsibility to read all the fine print.

More fine print

In another kind of marketing push, some companies are sending customers letters informing them that if they don't respond in a certain number of days, they'll be automatically upgraded to a different card. If that gets thrown out, along with the other junk mail, consumers could suddenly find themselves with a new credit card.

"That 'unless you respond in 45 days we're going to upgrade you,' that sort of business should be outlawed," says the NCFE's Richard.

But at least one of the banks that used that as a promotion recently defended the practice as just another way to help their customers.

"We sent the mailing to our better customers, we wanted to do something nice for them," says Charlotte Gilbert-Biro, a spokeswoman for the Chase Manhattan Bank in New York. "Ninety-nine percent of then who took the upgrade were satisfied."

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