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Banks in particular are willing to deal because credit cards, even those with "low" interest rates, remain the most profitable assets in their portfolios. The math is relatively simple: banks borrow money from the government at 5%; the average card carries a 17.54% annual charge. The difference between the two is called the spread, for obvious reasons. In addition, card issuers typically charge merchants some 2% to 3% of the amount of each purchase that a customer makes. Throw in late fees, or in GE's case early fees, and margins might be enhanced further. "Banks earn more from credit cards than from any other business, even with all the delinquencies and losses," says Ruth Susswein, executive director of Bankcard Holders of America, a Virginia-based consumer group. "Even if you pay no annual fee, they still make money off merchants."
To remain profitable, however, lenders want cardholders to pile up big debts. Consumers who pay off their balances each month are known in the industry's distorted parlance as "deadbeats" because they avoid steep interest charges. GE, which offers its Reward cardholders cash rebates worth as much as 2% of their purchases, put the deadbeats on notice last month with its $25 prompt-payment fee. "If there is not a tremendous consumer backlash," says Susswein, "we will see more companies punish cardholders for paying in full."
Prompt payers have also bedeviled AT&T's Universal Card subsidiary and helped spur the recent resignation of David Hunt as president of the unit. Analysts say roughly 60% of the Universal Card's 18.3 million accounts were held by convenience users who took advantage of free lifetime memberships and other benefits while paying their bills in full each month. Industrywide, only 36% of cardholders pay off their balances each month. Although AT&T officials say they have no plans to dock card users for paying up, the company is pondering other ways to persuade the holders to take on more debt.
Such problems notwithstanding, countless credit-card wannabes continue to crowd into the field. Next week Wal-Mart and Chase Manhattan Bank will roll out a no-frills MasterCard with no annual fee and an annual interest rate of 14.48%. "We found that people really don't care that much about special promotions," says Keith Morris, a spokesman for the largest U.S. retailer. "They want a card with a fixed low-interest rate that won't go up after 60 or 90 days." But Wal-Mart is baiting its hook with a 9.9% teaser rate to encourage holders of other cards to switch. In the war for buy-now-pay-later customers, the battles never end.
--Reported by Tammerlin Drummond/Miami, Marc Hequet/Minneapolis and Stacy Perman/New York