Ka-chunk! Ka-chunk! Every day more than 200 million credit cards slide in and out of charge machines across the U.S. Ka-chunk! Americans used plastic to charge $480 billion last year, at a rate of about $1 million a minute. The typical American charge customer carries nine cards and owes more than $2,000 on them. Despite interest rates averaging close to 19%, many cardholders are blase about paying hundreds of dollars a year in interest, plus an annual fee for the privilege of doing so.
No wonder the competition for these docile consumers is growing far tougher. Powerful new players are entering the business, and the result is some welcome relief for the consumer. Card issuers are changing the rules as they go, cutting prices, waiving fees and offering an inventive array of new services. "The heat is on in the credit-card industry," says Robert McKinley, publisher of Bankcard Update, an industry newsletter. "Nonbanks are finally putting pressure on the banks to lower their rates."
In just four years, Sears has recruited 38 million customers for its all- purpose Discover credit card. Sears charges no fee, and refunds as much as 1% of all purchases at the end of the year; customers have collected $100 million in these reimbursements so far. When AT&T introduced its Universal card last year, promising 10% discounts on long-distance calls and no fee for life to anyone who signed up the first year, 10 million consumers called to ask for Ma Bell's special Visas and MasterCards. Last week Ford began offering no-fee Visas and MasterCards carrying the company's blue-and-white oval. Chrysler is preparing to offer its own brand of cards.
- The new issuers covet the rich profits that can be reaped from installment credit. Banks that issue general-use credit cards, like the 420 million Visa and MasterCards in circulation worldwide, have been borrowing funds in the U.S. at 9% to 10% interest and loaning those funds out on plastic at as much as 22%. For banks stuck with Third World loans and rancid real estate, that spells salvation. At the 10 largest banks in the business, which hold 48% of all outstanding card debt, credit cards account for 25% of profits. Citibank, the largest issuer, cleared $610 million in profits on its Visa and MasterCard operations last year, according to Spencer Nilson, editor of The Nilson Report, an industry newsletter. Even though some 6,000 financial institutions issue cards, the business had nearly been impervious to price competition. Consumers who will shop around for value on everything from groceries to autos have been sluggish when it comes to seeking better deals on credit-card costs.
Now they're getting smarter. Loaded down with $226 billion in high-interest revolving-credit debt, up from $55 billion in 1980, Americans are beginning to think twice before they pull out the plastic. Easy credit is no longer enough to attract them.