After a decade of self-deception, Americans have finally begun to face the truth about how much interest they actually pay on their credit cards. And now, for the first time, many consumers are shopping for a card that will charge them a lower rate.
For years, many consumers were drawn to Master Cards and Visa cards issued by banks mainly on the basis of which one offered the highest credit limit.
Studies show that the vast majority of cardholders simply pretended to themselves that they didn't pay any interest, when two-thirds of them did. Thus they were undisturbed by interest rates that stubbornly remained around 19 percent even as other rates fell sharply.
"People used to say to themselves, 'I may pay interest once in a while, but that's not really me because I'm going to pay it all off next month,' " said Ruvan N. Cohen, director of card marketing at Citibank, the nation's largest bank and largest issuer of credit cards.
"In the last year people began to be more honest with themselves. They admit they pay interest and have started to read the rate disclosure boxes. We have to respond to that."
And now the slide in credit card rates shows no signs of stopping. Citibank will announce today that it is lowering rates to 15.4 percent, from 19.8 percent, on 9 million cards -- including "affinity cards" linked to merchants, such as the widely held cards that offer frequent-flier miles from American Airlines.
Last year Citibank lowered the rate for another 9 million regular and gold cards for customers with good credit records. After today's rate cut, 70 percent of Citibank's 27 million cards will have rates below 19.8 percent, the industry standard since 1981.
And for the first time, Citibank will offer the low rates to new customers. Last week, it mailed 30 million direct mail solicitations offering a 9.9 percent rate for six months to customers who transfer their debts from another bank.
Norwest Corp. noticed in the middle of last year that many customers who were heavy borrowers were transferring balances to lower rate cards.
"It became clear that our customers had fundamentally changed," said Brian O'Hare, the head of credit cards for the Minneapolis-based bank. Norwest dropped its rate for most customers from 19.8 percent to 15 percent last summer.
This change in psychology comes largely because the economic downturn has forced many consumers to look more closely at their finances. "The recession has had a profound impact on people's idea of value," said Mr. O'Hare of Norwest. "People are choosing to spend less and save more."
Another factor was simply the publicity given to interest rates. In 1986, Congress voted to phase out the deductibility of consumer interest, and in 1991 the Senate passed a bill introduced by Sen. Alfonse M. D'Amato, a New York Republican, to cap interest rates for credit cards.
"Here were 30-second sound bites right from the halls of Congress, and lo and behold, 80 percent of the people know what their APR is," said Thomas Lynch, head of credit cards at Chase Manhattan Bank, referring to annual percentage rate. "Two years before only 30 percent did."
Immediately after Mr. D'Amato introduced his bill, in fact, calls began to pick up at the Bank Card Holders of America, a group that sells lists of credit cards with low rates.
Last year the group sold 2,500 of the lists a week for $4, double the rate of the year before.
"With rates for home mortgages and car loans dropping to 20-year lows, consumers were beginning to ask why they were paying almost 20 percent for a credit card," said Gerri E. Detweiler, the group's director.
Just two years ago, 70 percent of the money owed on credit cards --nearly $200 billion -- was at rates higher than 18 percent.
Last year that portion fell to 44 percent, according to a new study conducted for the Congressional Budget Office by Ram Research. At the same time, the portion of credit card debt with rates of 16.5 percent or less increased to 38 percent from 7 percent.
Most banks have quietly shifted to variable rates -- usually about 9 percentage points above the prime rate -- so this savings may not last when the prime, now 6 percent, rises.
Even though that rate is still far higher than the best deals available on credit cards, last year the lower variable rates saved consumers more than $2 billion on the more than $30 billion paid annually for credit card interest payments.
But while the banks are responding, they are not doing so cheerfully. When customers didn't shop for interest rates, the profit margins on credit cards were as high as 4 percent of the amount loaned, far higher than those on other bank products.
In 1990, banks earned more than $4 billion from credit card lending, one-quarter of the profits of the entire banking system. Some of the largest banks might not have survived their losses from bad real estate loans if they had not been buoyed by earnings from cards.
Now losses from bad credit card debt have risen just as annual fees and interest rates have come down. As a result, credit card earnings fell to 2.5 percent of assets in 1990 and to 1.5 percent of assets today, according to Salomon Brothers.
Banks, of course, can still demand higher rates on credit cards than on other types of consumer loans, because consumers are willing to pay for the greater convenience that cards offer.
Nonetheless, with industrial companies such as AT&T; and General Motors sponsoring very successful new card programs -- and offering discounts on everything from phone calls to new cars -- many banks are finding that their best defense is to cut rates.
Indeed most banks are seeing the fastest growth in their card business coming when they offer the most aggressive discounts.
Wachovia Corp., which offers a rate as low as 8.9 percent (with a $39 fee), saw its charge card loans grow by 33 percent last year. And the Bank of New York, which offers a card with no fee and a rate of 11.9 percent, grew by 27 percent, Ram Research found.
While it hardly seems surprising that rates on charge cards should come down as most other interest rates have plunged, that was not the case in the 1980s.
At that time, as the prime rate dropped below 8 percent from 16 percent, the rate charged on most credit card borrowings remained firmly wedged at nearly 20 percent.
Amid the increased scrutiny from consumers, banks tried to appear like they are offering lower rates than they were. Some banks, including Citibank, offer the new lower rate only on purchases after the cut is announced. Existing balances are billed at the higher rate.
Others, such as Discover and American Express' Optima card, give the best rate only to customers who charge more than a certain amount in a year.
And many issuers now will raise rates on customers who miss payments or go over their credit limits. Bankers say this policy appeals to consumers as fair and helps bankers compensate for their higher-risk customers.