Consumer Interest in Credit Cards Begs Question of Interest Rates

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Americans charge everything from groceries to health care. Savvy borrowers, however, are paying off their balances each month, eliminating finance charges and leaving meager profits for lenders.

Consumers charged more than $1 billion between Thanksgiving and Christmas. But besides the convenience and ever-alluring buy now/pay later possibilities of credit cards many shoppers are using plastic for its perks. Since 1992, credit-card issuers have been offering more and more rebate programs -- some 80 national and 1,400 local ones -- along with other incentives.

The average American charges $3,000 annually Merchants pay 2 percent, or $60, to banks, not much incentive for lenders to issue credit cards. But Americans also run average balances of $2,000 at interest rates of about 17.5 percent, generating $350 per card-holder annually for lenders.

Consumers have grown more reluctant to pay such interest, according to Robert McKinley, president of RAM Research in Frederick, Md. "Credit cards are a very expensive way to borrow, and consumers have opted to use their cards for convenience only," he tells Insight. In the eighties, 71 percent of credit-card users were revolving debt. That number now is 64 percent.

"Bankers in this business tend to view [those without a monthly balance] as freeloaders and deadbeats, and they just as soon they not have their card because in many cases they are losing money," McKinley says. Many credit-card companies either are phasing out programs or are charging low-activity fees or maintenance fees to users who don't hold balances.

Some programs simply have gone out of business, despite earnest experiments with interest rates and annual fees. GM Mastercard resuscitated its program by reducing benefits, as did many of the airlines two years ago with a 20 percent hike in the number of miles needed to cash in on a free ride. GE Capital has added a $25 fee to cardholders who don't pay interest. Giant Food, a Southeast grocery-store chain, kept its incentive program alive by changing lenders. "It's a sign of what's to come," says McKinley

There still are great perks. Gasoline cash rebates are popular. The Gulf card, for example, has no annual fee. Consumers who don't keep a balance and charge $4,000 a year ($800 toward gasoline purchases) will get a $64 rebate.

Other deals aren't so good. Citibank Advantage (American airlines) Miles cardholders charging $2,800 annually and carrying a balance of $1,950, for example, will pay $344 in interest for one year. Combined with the hefty $50 annual fee, these members will earn 2,800 miles at a cost of $394 -- a price higher than the cost of many supersaver tickets. A round trip ticket requires 25,000 dollar-miles within a three-year period. …