Millions of credit-card holders are in for some bad news in the weeks ahead.
Just as Christmas bills are arriving, many people with variable-rate credit cards will be facing higher financing fees.In a lagged response to the interest-rate increase engineered by the Federal Reserve Board in November, many January statements will come with rates that are three-quarters of a percentage point higher than on the December bills.
Moreover, many low-ball "teaser rates" rolled out in 1994 to attract new customers will expire during the next few months.
The pain will be worse for people whose teaser rates expire just as rates ratchet up in response to the Fed's action.
"It's sort of a double whammy," says Robert McKinley, president of RAM Research Corp., a Frederick, Md., firm that tracks the bank-card industry. The higher rates will apply both to new purchases and existing balances.
For example, people who signed up for Citibank's Choice Master-Card and Visa in late 1993 at a teaser rate of 6.9 percent will soon be paying rates in the neighborhood of 17.9 percent.
As recently as 1991, nearly two-thirds of bank credit cards had fixed interest rates. But that changed significantly as the low interest rates that fed the home-mortgage-refinancing boom in the early years of the decade bred interest-sensitive consumers.
At the same time, banks, long the kings of the credit-card market, faced new competition from such players as General Motors Corp., General Electric Co. and AT&T Corp. Legislators in Washington and many states added to the pressure by threatening to cap rates on credit cards, which then were running over 19 percent. As a result, banks slashed rates but made them variable to ensure a healthy profit.
The new variable-rate cards won customers in droves. In some cases, consumers didn't even realize their cards had switched from fixed rates to variable ones. The low rates of the early 1990s "lulled some consumers into spending more," McKinley said.
Today, more than 70 percent of bank credit cards have variable rates. Typically, the floating rates are pegged to the prime rate (the rate banks use as a base for a wide range of loans to individuals and midsize and small businesses).
As a result of six increases in short-term rates by the Fed in 1994, the prime is now 8.5 percent compared with 6 percent a year ago.
Interest rates on credit-card purchases now average about 17.7 percent, up from 16.65 percent last spring. With some economists expecting the Fed to raise rates again this year, "The scenario is set for rates to actually exceed what they were in the 1980s," McKinley said.
Still, consumers continue to pile up credit-card debt. The average bank credit-card holder charges about $2,500 a year and carries a balance of approximately $1,700, McKinley said.