Early Warning Of Card Revolt Went Unheeded
The last week's assault by Congress on credit card interest rates was not the first sign of discontent this year against the consumer credit industry.
The earlier eruption followed allegations by consumer advocates of inaccuracies and mismanagement in the credit reporting industry.
Because bankers played only supporting roles in that drama, many did not pay it close attention.
If they had studied it, they would have noted simmering public outrage against the entire credit-granting system, and they could have acted to prevent the storm of damaging publicity in recent days.
Such action might have included more aggressive price cutting or basic consumer education about the interplay between annual fees and interest rates - and about why some cards cost more than others.
The American Banker's consumer survey this year revealed widespread dissatisfaction with high interest rates. Some marketing experts had suggested that bankers keep a lid of finance charges and make up the difference by boosting annual fees. The nationwide consumer survey - as well as the events of last week - showed that they may have a point.
Despite the popularity of credit cards - seven of eight U.S. households have at least one, and about four of five have at least one bank-issued Master-Card or Visa - 55% of the respondents said they would switch their accounts if another bank offered to charge two percentage points less on outstanding balances.
More than 80% agreed, and 64% "strongly" agreed, with the statement that "consumers have taken on too much personal debt."
A Tempting Target
While the consumers took on that debt voluntarily - often swayed by banks' offers of preapproved credit - the industry becomes an easy target of blame for the excesses of the credit culture.
Those public attitudes gave political credibility to a proposal by Sen. Alfonse D'Amato, R-N.Y., to cap credit card rates at 14%-an idea that surprised and panicked the banking industry, the stock market, and the Bush administration. Even the secretary of the Treasury and the chairman of the Federal Reserve Board spoke out against the plan after the Senate approved it last Wednesday by 74 to 19.
Whether viewed as a cynical play for political points or a purposeful shot across bankers' bow, Sen. D'Amato's amendment was just a bolder variation of the earlier attack on credit bureaus.
The credit reporting agencies, particularly TRW Inc., were forced to take drastic measures to restore their reputations - a task now facing the banks that Sen. D'Amato has accused of price-fixing and other offenses against an unsuspecting middle class.
In July, a group of state attorneys general led by Robert Abrams of New York sued TRW, the largest and best known supplier of credit-background checks to consumer lenders. TRW, which subsequently countersued, allegedly failed to correct erros in borrowers' files and was also alleged to have illegally sold confidential data to direct-marketing companies.
Meanwhile, in Washington, several bills were introduced in Congress to put TRW and its lower-profile competitors - Equifax Inc. and Trans Union Corp. - on a tighter leash.
Aside from consumer protections, such as notification when adverse information is added to a credit file, the proposals included an increase in the liability of banks and other lenders when they give erroneous data to TRW or its competitors. The liability provision was recently denounced by representatives of the American Bankers Association, Consumer Bankers Association, and other lender groups.
The American Banker consumer survey, conducted last May with the help of the Gallup Organization, showed why, in hearings on those bills, consumer advocates had a field day at the credit bureaus' expense.
In a clear show of frustration with those organizations, 48% of consumers said they were concerned that the information in their files was inaccurate.
"That jibes with our own study," said Michelle Meier, government affairs counsel for Consumers Union, the publisher of Consumer Reports and a leader among the critics of the credit-reporting industry.
In the latter study, which was released in April, 48% of the credit reports reviewed by Consumers Union employees contained errors.
Bad Publicity Blamed
In the heat of their crisis, the credit bureaus took sharp exception to the data. One company's spokesman said survey results were influenced in large part by negative publicity.
"I would say those responses represent surmises based on the Consumers Union study, rather than actual experience," said John Ford, assistant vice president at Atlanta-based Equifax.
"We do all we can to ensure that the information is accurate, but until the consumer tells us there is a mistake, we have no way of knowing," he said.
In the wake of the Consumers Union study and the lawsuit filed by six states against TRW, Equifax and TRW set up toll-free customer service hot lines, and Equifax simplified its reporting forms to make them more understandable to consumers checking on their files.
The concern that showed up in consumer surveys about credit reporting may be part of larger right-to-privacy movement, which will likely make in increasingly difficult to do telemarketing campaigns or to target households with preapproved credit offers.
Rep. Esteban Torres, D-Calif., made repeated complaints about preapproved credit offers, which have become a staple of credit card marketing and thus a major revenue generator for bankers and their credit-bureau support services.
In offers of preapproved credit cards, bankers typically use a screening process. Because the current law prohibits credit checks without the permission of the borrower, banks ask credit bureaus for lists of consumers that meet certain criteria - an indirect method that avoids the need to obtain written authorizations from individuals.
By Oct. 24, when the House Banking Committee's subcommittee on consumer affairs and coinage, under Rep. Torres, held a new round of hearings on credit bureaus, TRW was ready to turn the tables.
The Cleveland-based company did its own consumer research during the summer and fall and found no reason to question the findings of the American Banker survey or other polls, said Martin E. Abrams director of consumer affairs and policy analysis at TRW.
"The results hit us between the eyes," he said. Consumer negativity toward credit bureaus was "not a minor problem but one that could have a major impact on our industry over time. It required decisive action."
But just before Rep. Torres' hearing, TRW dropped a headline-making bombshell: In 1992, it will give a credit report free, once a year, to any individual requesting one.
Change of Heart
"In the past, TRW opposed the free report," said D. Van Skilling, executive vice president and general manager of TRW Information Systems and Services.
With the credit report now viewed as "a powerful tool that, if inaccurate, could disadvantage a consumer," Mr. Van Skilling said, an annual disclosure would provide an important check on accuracy.
TRW's initiative was not immediately endorsed by its competitors, but aside from favorable publicity it may have gained some leverage in related debates.
It remains to be seen whether bankers can defuse the rate-cap bomb. They have a message to send about fair pricing, but they are in danger of losing the initiative.
AT&T's Rate Coup
A nonbank, American Telephone and Telegraph Co., set the standard so far with full-page newspaper ads Monday trumpeting an early reduction of rates on its Universal cards tied to the prime. It got more publicity than one large bank issuer, Wachovia Corp., which reduced its prime-based rate to 10.4% last week-though it goes with a $39 annual fee.
Telephone inquiries to AT&T were running 30% above normal Monday, though its lowest card rate is still more than two points higher than the 14% sought by Sen. D'Amato.
RAM Research USA of Frederick, Md., has counted 117 MasterCard and Visa issuers that charge less than the 16.4% now being paid by charter AT&T Universal members. And 23 of those banks do not charge annual fees.