If Rates Are Falling, Why Don't These?

By THOMAS McCARROLL

As interest rates fall, consumers are looking with puzzlement and anger at the carrying charges on their credit-card balances. Why have those rates refused to budge? The spread between what banks pay to borrow money and the interest rates they charge on credit cards has grown to nearly 14 percentage points, the widest gap since the deregulation of interest rates in 1982. The chasm has attracted both public scorn and scrutiny. Declares Stephen Brobeck, executive director of the Consumer Federation of America: "Consumers are being gouged by the banks."

Last month the Federal Reserve reduced the rate it charges banks for loans by 0.5%, to 5%, the lowest in 18 years. For many borrowers, especially the big ones, falling rates have been a windfall. In the past 12 months, the prime rate, which is what banks charge their best corporate customers, has declined 2 full percentage points, to 8%. Many consumers have benefited too. Mortgage rates, down 1.4 points from last year, have dropped below 9% for the first time in 14 years. Rates on new-car loans have fallen less, about 1 point, to an average of 11.5%.

But the cost of personal credit defies gravity. In the past year, the average rate on unsecured personal loans has fallen only one-third of a point, to 17.1%. And the rate on credit cards has actually edged upward one-fifth of a point, to an average 18.9%. Since 1988, the rate has increased nearly a full percentage point. Many consumer groups and financial analysts contend that banks are keeping rates high to help offset loan losses in such other businesses as real estate and leveraged buyouts. Credit cards are the most profitable line of business for most banks, earning three to five times as much as other activities despite rising cardholder delinquencies and bankruptcies.

Bankers, who have grown prickly about the issue, contend that the high charges help pay for the many services offered with credit cards, including 24-hour help lines and travel insurance. What banks pay to borrow money accounts for only one-third of their credit-card costs, according to Philip Corwin, director of retail banking at the American Bankers Association. If a bank is charging 18%, says Corwin, about 15 percentage points go toward covering costs; the rest is profit.

This week the House Banking Committee will hold a hearing on the issue, prompted in part by two bills that have been introduced to strengthen cardholder rights. One proposal would let consumers pay off their account balances under the original rate any time rates are raised. Another would extend the grace period between the time of purchases and the application of finance charges.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

[TMFONT 1 d #666666 d {Source: Bank Rate Monitor, Merrill Lynch}]CAPTION: DEFYING GRAVITY