Credit Card Interest Rates Stir Concern: Consumer Group Charges They're Unjustifiably High
Trigaux, Robert, American Banker
WASHINGTON -- Are the high rates charged on consumers' credit card balances justified? Concern over this issue is catching on here, with a new report out this week and a congressional hearing on the subject slated for late October.
High interest rates charged on consumer credit card outstandings and other loans have remained virtually unchanged since 1980, while rates paid by banks and commercial borrowers have fallen nearly 50%, a consumer group charged Monday.
According to a report released by the Consumer Federation of America, interest rates charged on credit cards have increased in recent years -- fluctuating between record high averages of 18.71% and 18.85% -- while the prime and discount rates have dropped. Today, the report said, the prime rate is 9.5% and the discount rate 7.5%.
Alan Fox, the legislative representative for the Consumer Federation and the report's author, said in an interview that his organization plans to urge Congress to consider requiring banks to improve disclosure of credit card rates and to further investigate the unequal rates charged to consumers and businesses.
"Over the last 10 to 12 years, at various points in the last year or two the gap between consumer rates and the prime rate has been among the highest," Mr. Fox said Monday.
In Congress, hearings are scheduled for Oct. 29 by the House Banking subcommittee on consumer affairs to explore the issue of consumer credit card rates.
Last Friday, Rep. Charles E. Schumer, D-N.Y., introduced a bill that would require the Federal Reserve to investigate the credit card market and determine whether the market is responding to competitive forces. If the Fed concludes that the market is not responsive to changes in interest rates, Mr. Schumer said, "a floating federal [interest rate] cap would be imposed on credit card interest rates." A rate ceiling of six points over a three-month Treasury bill rate would go into effect under Mr. Schumer's legislation.
Similar legislation introduced by Rep. Mario Biaggi, D-N.Y., in February would place a credit card rate cap of five points over the discount rate.
In remarks before Congress last Friday, Mr. Schumer said that competition "has had some effect.
"Banks are competing for customers by offering lower annual fees, rebates, and prestige cards. But basic price competition has been virtually nonexistent."
The report by the Consumer Federation of America, which calls itself a coalition of more than 200 "pro-consumer" organizations, makes these other points:
* Federal Reserve figures show card rates charged by commercial banks averaged 17.8% in August 1981 and climbed to 18.7% a year later while the prime rate dropped to 15% and the discount rate fell to 11%. Since then, while the prime and discount rates fell further, credit card rates fluctuated between record highs of 18.71% and 18.85%.
* August 1981 rates for personal loans averaged 18.5% and climbed three months later to 19.2%. Since then, rates have dropped to just over 16% -- a three-point decline, compared to an 11-point prime rate drop and a 6.5-point fall in the discount rate.
* High annual card fees, high rates, and "dramatically increasing levels of debt" suggest that there is "no adequately functioning market mechanism to hold down the cost of many forms of consumer credit."
Mr. Fox said that consumers are not sensitive to price differences in credit cards "because they are not made aware of price differences. I think institutions would pick up customers if they" advertised less expensive credit card products. …