SAN FRANCISCO — Credit-card finance charges are declining at a dramatically slower pace than general interest rates so far this year, costing consumers billions of dollars in potential savings.
Since the beginning of the year, the Federal Reserve Board has lowered short-term interest rates six different times, causing the banking industry to lower its bellwether prime rate from 9.5 percent in early January to 6.75 percent Tuesday.
Less than half of that 2.75 percentage point decline has been passed on to credit-card holders, according to CardWeb.com, an industry research firm. At the end of June, the average credit-card rate nationally stood at 15.43 percent, or 1.14 percentage points below the December 2000 average of 16.57 percent, CardWeb said.
The decrease in credit-card rates will shave an estimated $6.5 billion in payments on the $666 billion of outstanding credit-card debt owed by consumers nationwide. That translates into an average savings of about $80 this year among consumers with a balance on their credit cards.
"But consumers would be saving more than twice as much if the rates were keeping closer in step with the prime," said Robert McKinley, CEO of CardWeb, which is based in Frederick, Md. "The savings aren't filtering down to consumers like they have in the past."
Credit-card lenders say their relatively high rates reflect the greater risks associated with making unsecured loans. Some bankers are also worried that they will suffer more unusually high losses on credit cards this year because more attorneys are advising financially troubled consumers to file for bankruptcy this summer before new laws make it more difficult to dismiss past debts.
The stickiness of credit-card rates also can work to consumers' advantage. For instance, San Francisco-based Providian Financial, the nation's sixth largest credit-card issuer, didn't raise its rates last year when the prime rose from 8.5 percent to 9.5 percent.
Industry analysts say the proliferation of fixed rates on credit cards is the biggest reason why finance charges aren't falling as quickly as they have during other periods when the Federal Reserve slashed interest rates to help boost a sagging economy.
"Issuers prefer the fixed-rate cards in an environment like this because their profits aren't as likely to be hurt as they would be with variable-rate cards," said Greg McBride, an analyst with Bankrate.com in North Palm Beach, Fla.
About half of all credit cards have fixed rates today versus just 25 percent three years ago, according to CardWeb. Consumers clamoring for the security of a fixed rate at a time when interest rates were rising during the late 1990s drove the industry's switch to fixed rates.
"Now that trend is coming back to haunt consumers and benefit the banks," McKinley said.
Even lenders with variable-rate cards have minimized the impact of falling interest rates by adjusting the finance charges just once every three months instead of the previous standard of monthly reassessments. About one-fourth of credit card lenders now have "floor" rates, meaning their variable rates can't fall below a certain price no matter how far short-term rates go.
The widening spread between credit card rates and general interest rates should help several major lenders report strong second-quarter earnings later this month, McKinley predicted.
Other popular financing vehicles besides credit cards are maintaining relatively high interest rates. For instance, the average interest rate on new car loans has fallen from 9.32 percent in January to 8.60 percent in June, according to HSH Associates, a research firm in Butler, N.J.
"It looks like lenders just want to keep rates as high as they can for as long as they can," said Paul Havemann, an HSH Associates vice president.