A few months ago, American Express Co. released a report that aimed to discredit the bank card industry. The report, prepared by the Boston Co., an indirectly owned subsidiary of American Express, said that high interest rates on bank credit cards were hampering the economic recovery.
Four weeks later, Bankcard Holders of America, which says it represents the interests of credit card customers, released a report accusing the bank card industry of "loan sharking" and ripping off consumers by "an estimated "8 billion a year."
Boston Co. Report Cited
Nor surprisingly, the report cites the American Express/Boston Co. report as one of its sources.
That earlier report, by the way, invited consumers to call American Express for a list of low-rate bank cards, prepared by Bankcard Holders. And American Express has been sponsoring events where BHA officials have been uttering their "price gouging" message.
Consumers may be confused about how an advocacy group like Bankcard Holders, which claims to be nonprofit and independent, could ally itself with an industry giant like American Express. Equally confusing is why American Express would go to the trouble and expense of giving away a list of its competitors.
Actually, consumers should be angry with any group that sells out to corporate entities like American Express. In an attempt to provide some balance and a more accurate account of the facts, I'd like to offer some comment on the Bankcard Holders report.
Information Is Available
Most important, the so-called hidden information on terms and conditions of credit cards is freely available to consumers with the card application form and must be so provided by law. If consumers have questions about these terms and conditions, they can call their banks for clarification.
Bankcard Holders accuses banks of using "costly balance calculation methods." While RAM Research has documented that specific methods such as the two-cycle average daily balance method can be costly for some cardholders, less than 8% of all banks use the two-cycle and/or daily compounding of interest.
The only major card employing both two-cycle and daily compounding in the interest rate calculation is Sears, Roebuck and Co.'s Discover product.
|Endless Repayment Periods'
Bankcard Holders also suggests that banks are lowering minimum monthly payments to produce "endless repayment periods," BHA asserts that minimum payments "decreased from 5% in the mid-1980s to 2% to 3% today."
However, RAM Research's data suggest this is not a trend and that minimum monthly payments increased in the early 1980s and have remained relatively flat at 5%. Bankcard Holder's claim is based on the recent Amex-sponsored study prepared by the Boston Co.
But the author of the Boston Co. report admits there are no underlying data to support the claim just "a personal perception" that minimum monthly payments are shrinking.
Bankcard Holders also supports Amex's contention that consumers are still being gouged by excessive interest rates on credit cards.
Rates Have Gone Down
However, RAM Research's data shows that more than half of bank credit card holders are paying lower interest rates (by as much as 6.4%) this month than July 1991. As a matter of fact, consumers are now seeing credit card rates revert to the lowest levels in 15 years.
While some issuers have cut fixed rates, there is a clear trend toward offering or switching to variable card rates. Currently 34% of the nation's 280 million bank credit cards carry some form of a variable interest rate (up from 26% a year ago).
As a result, consumers are benefiting from a double bonus: banks switching to lower, variable rates and Federal Reserve action lowering the rates on which most variable-rate cards are based.
Bankcard Holder's recent report also attacks late fees, over-the-limit fees, and cash advance charges as a "hidden tax" and cites misleading grace periods. Yet, the terms for these features are openly explained in card application forms.
Accepted Business Practices
Late fees and over-the-limit fees are accepted business practices. Consumers are well used to them with their checking accounts and understand that overextending a checking account and bouncing a check will result in a fee charge.
Cash advances do cost extra, but the consumer has the option whether to use this feature or access cash through other means. Grace periods, again, are clearly explained. If the consumer chooses to pay off the balance, the grace period is in effect and no interest is charged - in effect, a noninterest loan.
If they chose to carry a balance, they are accessing an open line of credit with interest rates charges as there would be for any other type of consumer loan.
Bankcard Holders also has a problem with allowing a consumer to skip a payment. But in fact this feature can be very valuable to consumers, for example when they are away on a vacation. They can choose to postpone the payment without adverse effect on their record.
Finally, consumers might be interested in knowing that the sponsor of this "education" campaign also engages in the same practices it criticizes through its Optima card and other charge cards.
Mr. McKinley is president of RAM Research Corp., Frederick, Md., which publishes the CardTrak newsletter.
