A credit-card war has broken out in Connecticut, with the leading banks cutting interest rates on Visa and MasterCard to 11 percent or 12 percent, the lowest such charges in the nation.
Whether this is the beginning of the long-awaited revolution in credit-card rates, or merely a limited local fray touched off by a new state rate ceiling is not yet clear. Banks in a few other states also are taking potshots at high credit-card rates, but most big "money center" banks are standing their ground.
Banks in Connecticut are waging an aggressive advertising campaign aimed not only at increasing market share within the state, but also at bringing home business from New York. An estimated 30 percent of Connecticut residents carry cards issued by money-center banks across the border. Connecticut cardholders by the thousands are reportedly responding to offers to shift their existing balances, on which they are paying 18 percent or 19 percent interest, to the new cards with lower rates.
The Constitution State's lovely little war results in part from a surprise move by its legislators that reduced the ceiling on credit-card finance charges from 18 percent to 15 percent in late April. The cut, signed into law June 5, makes Connecticut the first state in the union to order lower rates. Banks in other states are not compelled to lower their rates, because it is the state in which a bank issues cards, rather than where the customer resides, that determines the rate.
But competition could force out-of-state banks to drop their rates, "which in turn could cause a chain reaction throughout the country," said Irving J. Stolberg, minority leader in the Connecticut House of Representatives and sponsor of the bill. Currently, the nation's average credit-card interest rate is 18.8 percent.
On the other hand, since most of the super-low Connecticut rates are promotions that expire within four to six months, banks elsewhere may sit out this war. A banker, who asked not to be identified, noted that money-center banks could stand to lose millions of dollars if they had to write down large outstanding credit-card loans.
Although several Connecticut savings banks had lowered their rates prior to the new law, the 15 percent cap increased the size of the cuts already planned by the state's largest banks. While some banks in other states have cut rates by 1 or 2 points, this is the first time that finance charges have been lowered 6 points en masse. Moreover, until now, most credit-card competition has been based on added services -- such as the Citidollars bonus campaign for card use -- rather than on rates. Citicorp declined to comment on the situation in Connecticut.
The Society for Savings in Hartford, the state's fourth-largest depository institution, took the first step in April 1985, cutting its rate to 14.9 percent. After the 15 percent cap went into effect, the savings bank dropped its finance charge to 10.9 percent. Since it does not allow a grace period in which to pay bills before interest starts accruing, it is designed for the two-thirds of all cardholders who do not pay off their entire balance each month. The offer expires at yearend.
People's Bank of Bridgeport is offering an 11.75 percent rate through Sept. 30. The state's largest bank, CBT (Connecticut Bank & Trust) in Hartford, reports it is receiving 4,000 telephone calls a day from applicants who want to take advantage of a temporary cut in its rate from 18 percent to 12 percent rate, good through September.
Meanwhile, Connecticut National Bank in Hartford, its chief rival, is offering an 11.75 percent finance charge valid until Dec. 31, as is Union Trust in Stamford. Connecticut National is even trying to lure New York residents to take its cards.
Annual fees, which a number of banks are waiving until next year, range from $20 to $30. All of the Connecticut banks questioned offer the low rate only on new purchases; cash advances -- for which there may not be a grace period -- typically cost 15 percent to 18 percent interest. Paying off the old balance, however, is considered a new purchase. It is not necessary to have an account to obtain a card.
The only other states whose credit-card interest rates compare with Connecticut are those few, such as Arkansas, that never raised their usury ceilings. The lowest current nonpromotional rate recorded by Bank Credit Card Observer, a newsletter, is 11.5 percent in Pine Bluff and Little Rock, both in Arkansas. The highest, 22 percent, is charged by two St. Louis banks.
Scattered rate reductions have been seen in California, Florida, New Jersey and metropolitan Washington. Home Savings of America in Los Angeles dropped its rate 4.4 points to 16 percent. Sacramento Savings and Loan in California dropped its rate 6 points to 15 percent in March and quadrupled its applications, according to Bank Credit Card Observer. Chevy Chase Savings Bank charges 14 percent interest and a fee of $18; no account is necessary.
Manufacturers Hanover Trust Co., the first and one of the very few money center banks to move, dropped its rate by 2 points to 17.8 percent and picked up 870,000 new accounts, the newsletter said. New York savings banks -- new entrants in the market -- offer lower rates. For example, Dime Savings Bank's rate is at 14.9 percent, and Apple Bank for Savings is 15.8 percent.
Although banks earned a 5.37 percent profit on credit-card operations last year, according to Spencer Nilson, publisher of a newsletter, they contend cards would no longer be profitable if rates are lowered. When asked if they could make money at 11 percent or 12 percent, Connecticut's banks responded that they did not intend to lose money overall. CBT plans to chalk up any losses to promotion expenses, while Peter Mulligan, a spokesman for People's Bank, said, "We're willing to take less profit." Most rates eventually are expected to return to 15 percent.
According to Elgie Holstein, assistant director of the Bankcard Holders of America, 15 states have considered bills in the past year to cap interest rates or require disclosure of the terms offered by card issuers. A number of these have already rejected a change in usury laws, but the issue still is pending in the legislatures of New York, Ohio, Illinois, Louisiana and New Jersey.
At the national level, attempts by congressional committees earlier this year to institute federal usury ceilings pegged 5 or 6 points above various indices -- such as the discount rate or the six-month Treasury bill rate -- have been abandoned in the face of opposition from banks, the Federal Reserve and the states. Now efforts center on disclosure bills that would require informing prospective customers about fees, grace periods, rates and penalties. The Senate version would mandate standard ways to calculate balances.