Virginia's General Assembly has tabled until next year legislation that would force credit card issuers to lower interest rates. In Annapolis, meanwhile, lawmakers continue to wage an uphill struggle to establish a credit-card rate ceiling.
Similar efforts are underway in Congress, where lobbyists for the banking industry are pressing for the defeat of legislation that would put a cap on credit card rates.
Several bills under consideration in Maryland would prohibit interest rates on credit cards from rising more than fixed percentages above the discount rate -- the charge, currently about 7.5 percent, on loans that the New York Federal Reserve Bank makes to banks. Other bills pending in Maryland would ban annual credit card fees.
There is little likelihood, however, that lawmakers in Annapolis, Richmond or on Capitol Hill will bring down what appears to be exorbitant credit card rates unless consumer attitudes change.
Consumers who are fulfilling the cashless-society prophecy apparently don't mind paying high interest rates of 18 to 21 percent for the privilege of buying now and paying later. A recent ABC News-Washington Post poll showed 62 percent of American households shop with credit cards. Cardholders will charge about $331 billion in goods and services this year, up from $293 billion in the previous year, according to some estimates.
Banks and other issuers of credit cards really have little incentive to lower interest rates as long as consumers indicate that they don't mind paying the high rates. Industry officials contend the high rates are necessary to cover increasing costs of issuing cards and extending credit.
But the industry has yet to make a strong case in refuting charges that interest rates are too high. Money rates have declined dramatically in the last four or five years, but credit card rates have remained unchanged. Inflation has plummeted to around 3 or 4 percent, and the prime rate, or the interest that banks charge for loans to their best corporate customers, is 9.5 percent, or roughly half of what it was five years ago. In the meantime, consumer savings rates paid by banks are also lower.
Chevy Chase Savings and Loan Association's decision last summer to lower the interest rate for its Visa and Mastercard is a prime example that rates can be reduced with no adverse effect on the issuer. Credit cards issued by Chevy Chase carry interest rates of 4.5 percentage points above the prime rate.
"The costs of funds have dropped," Alexander R. M. Boyle, Chevy Chase's vice chairman, confirmed shortly after his company became the first major financial institution in the Washington area to tie credit card rates to the prime. "It would be logical that the interest rates charged today would be lower than a year ago, when market interest rates were generally higher," he added.
The record shows, nonetheless, that the industry is reluctant to give up the huge profit margin that it enjoys. And, with few exceptions, banks have obviously concluded that they do not have to compete for bank-card customers by lowering rates. Competition has been focused, instead, on massive advertising and promotional campaigns.
It is little wonder then that the industry says expenses related to the credit card business are higher.
In its last annual report to stockholders, Central Fidelity Banks Inc. of Richmond noted that an "increase in other expenses was primarily attributable to increased promotional activity in the company's bank card operations and advertising campaigns related to various loan and deposit products."
Statements in annual reports of other regional banks suggest that income from interest and fees on credit cards continue to increase at much higher rates than expenses. Sovran Financial Corp. of Norfolk reported bank card fees were up 12.5 percent in 1985, while bank card expenses increased only 2.6 percent. First Maryland Corp. of Baltimore said income from credit card fees rose nearly $2 million last year, while expenses were $200,000 higher than in the previous year.
As long as the industry is able to sustain that type of growth and not have to worry about major competitors lowering rates, there is little incentive to change.
In the meantime, legislative efforts to cap credit card rates appear to be exercises in futility without the support of consumers, who control the only incentive that counts.