First Chicago Cuts Rate On Some Cards to 14.4%

First Chicago Corp., the nation's third-largest issuer of bank credit cards, has quietly slashed the interest rate charged to its most creditworthy card customers by three percentage points, to 14.4%.

The action, announced to select customers in mailings two weeks ago, was seen as a preemptive strike to protect a valuable piece of the company's card business in the midst of growing competition.

The price break comes as consumer groups and lawmakers have stepped up criticism that banks are keeping card rates artificially high.

More Quiet Moves Foreseen

The rate charged by the top issuers still averages more than 19% despite the dramatic drop in rates overall.

First Chicago is one of a few major players now offering relatively low card rates.

Another example: Banc One Corp., whose Wisconsin bank just last week introduced a card with a 13.9% rate.

While widespread rate cuts are not expected, other large issuers will probably also cut rates quietly for some customers while keeping higher rates for others, according to Anne Morgan Moore, president of Synergistics Research Corp., Atlanta.

Most Were Paying Prime Plus

At First Chicago, select card borrowers will pay an annual percentage rate of prime plus 6.9 points, or 14.4%, effective Nov. 1.

Most of the affected customers have been paying prime plus 9.9 points, or 17.4%; a smaller portion have paid a fixed-rate of 19.86%.

The banking company, which boasts $7 billion in credit card outstandings, would not say how many of its nearly 10 million cardholders would pay the lower rate.

"We're trying to retain good customers," said Scott P. Marks, an executive vice president, who is also president of the company's credit card bank. "Ultimately, good customers are profitable customers."

The Most Lucrative Customers

For banks, the most lucrative card customers pay finance charges on expenses that are not paid off immediately.

These clients are especially important because many cards no longer carry annual fees.

A spokeswoman for First Chicago said some affected cardholders pay annual fees, while others don't.

Segmented Marketing

According to Mr. Marks, it is common for banks to offer different versions of the same product to unique segments of their customer base.

Indeed, banks have long "segmented" their credit card portfolios, offering some customers standards cards, others gold cards, and others more specialized affinity cards.

But segmentation is now affecting pricing as well. It's no longer unusual for banks to levy varying rates and fees to customers.

Chemical Bank in New York, for example, offers lower rates to cardholders who do other business with the bank.

With the cost of funds falling, more banks are expected to introduce low-rate cards, at least for some of their customers.

"We definitely believe low rates is where the competition is now," said Ms. Morgan-Moore. "The press is really jumping on banks because their rates are so high."

The trend is a dangerous one for banks. While falling funding costs allow banks to launch some low-rate programs, extremely strict underwriting standards are required.

If marketed to all of a bank's card customers, the results of such offerings could be disastrous.

Some Experimentation

According to Stephen Szekeley of Payment Systems Inc., a portfolio priced to return a 4-point margin can afford only losses equal to 2% of outstandings.

Credit card chargeoffs industry wide are currently running at more than 4%.

"I think we'll see some experimentation with a low-rate card," Mr. Szekeley said. "Low-rate cards will not move significant market share because lenders have to be conservative. But they will move market share in terms of dollars" as they typically appeal to the biggest chargers and borrowers.

Low-rate cards also hold other dangers for banks. Issuers that selectively drop their rates for some customers could potentially alienate other cardholders.

But at First Chicago, Mr. Marks said he does not expect that problem to crop up.

"The normal American doesn't spend time comparing interest rates and fees," he said.

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