Interest rates for car, mortgage and other consumer loans will fall as much as one percentage point during the next three months. But most credit-card interest rates are unlikely to budge despite the decline in the prime rate charged by most banks, local banking experts agree.
"The general pressure on consumer rates is downward," said John B. Bernhardt, vice chairman of Sovran Financial Corp., the largest bank holding company in the region. "But credit-card rates won't drop, because no one has felt there's enough profit out there to offset loan losses and high administrative costs."
Since January, Sovran has trimmed its typical auto loan by one percentage point to 12 percent a year. The rate could be cut by one percentage point again during the next three months, but the bank has no plans to change the 18 percent annual rate it charges credit-card customers, Bernhardt said.
Dominion Bankshares, the fourth-largest bank holding company in Virginia, said it will cut its prime rate today to 8 1/2 percent from 9 percent and, as a result, will lower to 9 1/2 percent the annual rate it charges its best consumers with special credit-card accounts. The company has no plans, however, to lower the 18 percent annual rate charged on regular credit card accounts.
American Security, the second-largest bank in the District, got an early start on lowering consumer rates two weeks ago, when it began a "sale" on everything from car loans, advertised at 9.9 percent a year, to loans to pay off credit cards, advertised at 11.5 percent a year. The bank doesn't offer credit cards.
The interest charged on business loans usually changes within days of a change in the prime rate, the benchmark rate banks charge their best corporate customers. Consumer loan rates, which are tied indirectly to the prime, often take several months to reflect the lower cost of money in the market, said Richard Stillinger, a bank industry analyst who watches institutions in the Southeast for Keefe, Bruyette & Woods Inc.
Stillinger said that most commercial loans carry variable rates pegged to the prime rate and most consumer loans carry fixed rates. That makes bankers wary of lowering consumer rates and they delay making such decisions, he said.
But the rate of interest that consumers are paid on deposits also drops more slowly than the prime rate, so consumers reap some benefit from the longer time bankers take to cut consumer rates, he said.
Several bankers in the District region said, however, that while recent drops in the prime rate have helped to shave home and auto loans in the last six months, greater competition in those lending markets has provided the greatest incentive to cut rates.
Institutional investors such as insurance companies and pension funds have been moving into the home loan market, and auto makers have been offering loans that undercut the rates of most banks. Bankers say that they have been forced to lower their rates to protect their share of the loan market.
Credit-card rates have lacked such competitive forces, however, and most banks have maintained the rates they charged five years ago, when interest rates peaked.
Rep. Charles Schumer (D-N.Y.) told a news conference yesterday that credit card "profits are exorbitant" and declared, "We can no longer ignore the great credit-card ripoff."
Schumer said that the nation's major banks are charging in excess of 19 percent interest on credit cards even though interest rates have been dropping steadily.
"Credit card issuers -- both banks and retailers -- continue to defy the laws of free-market physics," Schumer said. "Although commercial loans, personal loans and the cost of money have dropped markedly in the past few years, credit card interest rates have climbed."
Schumer also released a study showing that banks made $3.6 billion in profit from credit cards in 1985. He said that banks make 5 cents of profit on every dollar they lend through credit cards compared with less than 1 cent of profit on every dollar they lend through all types of loan agreements.
Bankers defend high credit-card rates by saying that their current profits on credit-card loans are making up for losses incurred in the early 1980s when inflation and interest rates were high.
Bankers also justify the higher charges by saying that credit-card lending is the costliest to administer because borrowings for most accounts change monthly. They say that loan losses are highest among credit-card borrowers.