One of the newer sounds of Christmas - the slide-click of a credit card machine - may be heard just a little less often this shopping season. And even where that sound of commerce is heard, it may not be so profitable for the banking industry. What you're witnessing is the start of a fundamental change in the credit card business. Where once the banks ruled, charging rates of 19 or 20 percent or more, competition, with the help of a few state legislatures, is beginning to make a difference. Rates of 14, 15, or 16 percent are now readily available, although finding a low rate and a 30-day grace period, where interest is not charged in the first month, may be more difficult.
Tax reform may also help pinch the profits of bank credit card departments. Already, some merchants report more purchases being made with checks, instead of plastic, as consumers realize they will gradually lose the credit card interest deduction over the next few years.
But it's good old-fashioned competition that's having the greatest effect. Ultimately, that competition will help those consumers willing to exert themselves enough to find the best rates, longest grace periods, and lowest annual fees, no matter what part of the country the card comes from.
The competition is also getting hotter from outside the banking business. Sears, Roebuck is expected to spend more than $115 million to promote its Discover card this year, but that money appears to be well spent. The company reportedly has a 17 percent acceptance rate among customers it solicits. A common rate for banks nowadays is about 1 percent.
Other card issuers are taking their gloves off, too. American Express, better known as a travel and entertainment card, is going hard after the retail market by offering an extra year's warranty on products bought with the card. But it is not changing its pay-in-full-every-month policy.
For the banks, credit cards have always meant big profits. In some cases, credit card operations account for 20 to 30 percent of a bank's total profits. The 70 percent of card holders who carry an average balance of $720 from month to month more than make up for any losses from those who always pay the full bill.
Even at 15 percent, which is three or four points lower than the average rate, banks make money. But first they have to get their cards in people's wallets, and get them used.
This is why several banks are offering low ``teaser'' rates to get their cards accepted. In Boston, for example, the Provident Institution for Savings, a subsidiary of the Hartford National Corporation in Connecticut, has been offering Visas and MasterCards at 11.75 percent interest. Provident, which did not have a bank card before, does not try to hide the fact that this attractive rate could go as high as 15 percent on Feb 1. Still, it has had a lot of takers.
``We had over 52,000 applications as of Nov. 15,'' says William Mullen, vice-president of the credit department at Provident. ``We were shooting for 20,000.''
Provident will pay off the outstanding balances on any other cards an applicant is carrying, in effect letting them ``trade down'' to a lower rate while keeping the same balance - with a new bank. While Mr. Mullen does not know how many of the 52,000 have done this, he does know his bank has sent out checks worth $8.7 million to pay off cards issued by competitors.
``More and more people are moving to a lower rate,'' says Steve E. Goodman, managing editor of Bank Credit Card Observer, a monthly newsletter published in Iselin, N.J. ``Consumers are ready to switch credit cards literally by the millions.'' A recent survey by the newsletter found that 63 percent of the people would switch cards if they got the chance.
Elsewhere, the competition is taking a different angle. In Buffalo, N.Y., for example, at least three banks, Empire of America, Goldome, and Keybank, are offering credit cards with rates under 14 percent, but no grace period. Interest charges begin as soon as the banks receive the statement of a charge from a merchant.
Empire of America has been peddling its Visa Lite card since Oct. 1, says Joseph Pastwick, senior vice-president in charge of consumer lending. The card has no grace period and a 13.75 percent rate. It's mainly meant for those people who tend to carry a balance on their accounts from month to month, Mr. Pastwick says.
``But we've kept both cards for those who pay off their bills every month,'' he says. The bank's other card, Visa Classic, carries an 18 percent rate and a 30-day grace period.
But rates and grace periods are not the only way card issuers are pushing their plastic. Some are using incentives such as termite inspections, or discounts on air fares and long-distance calls.
While these developments aid consumers, others are not so helpful. Banks still have ``dozens'' of ways of figuring monthly interest charges, Mr. Goodman says, and they do not always make it clear just what method they are using. A customer who normally pays the entire bill every month, but makes a partial payment just one month, may be charged interest for the entire original balance. This may be the bank's way of figuring interest, or it may be a mistake. It's up to the customer to find out.
For now, the best rates seem to be concentrated in a few areas. With the help of new state laws setting credit card ceilings, banks in Arkansas and Connecticut lead the lists of lowest rates. First Commercial Bank in Little Rock, Ark., for example, charges 10.5 percent, while Connecticut National Bank in Hartford charges 11.75 percent. Rates of 16 percent or less can also be found in Texas, Washington State, and Massachusetts.
In many cases, an announcement of lower rates is accompanied by an unannounced shortening of the grace period. Since September, the average grace period has dropped from 28 to 24 days, with many banks going to 14 days, the Bank Credit Card Observer reports.