Credit card holders pay dearly for unpaid balance

WHY are credit card interest rates so stubbornly high? With personal borrowing as low as 10 per cent and mortgage rates in the 6-8 per cent range, it seems incongruous that the major credit card companies and their issuing banks are still charging as much as 25 per cent APR on purchases and over 26 per cent for cash advances.

In Britain, consumers are in the enviable position of being able to choose between the traditional bank credit card providers, whose rates are relatively high (average 22 per cent APR) and an increasing number of non bank issuers typically large corporations, often based in the US where credit card rates are generally quite a bit lower. Here, as the table, below right, shows the average Irish credit card holder is paying as much as 25 per cent APR.

Only affinity card holders enjoy lower rates usually about 2 per cent below the regular rate. Affinity cards are usually offered to academic alumni, professional groups like doctors, dentists, teachers, or to customers of organisations like the AA, Amev Insurance. There is even an Aer Lingus affinity card.

Spokes persons for the Irish credit card companies told Family Money that credit card rates theoretically move up or down with market rates, but will also come down relative to the profitability of the business. The banks/credit card companies make profits when customers do not pay off their monthly statements, since it is only these customers who pay interest. The more customers who pay off those accounts in full, the less the bank earns, all the while extending lengthily periods of credit. (The banks rule out the idea of cutting the credit period as a profit enhancing measure.)

The banks are always full of contradictions when defending their credit card operations. On the one hand they.publicly extol customers to use their credit cards wisely and pay off their monthly statements on the other hand they tempt customers with low minimum payments and., make their profits on outstanding balances..

Bad debts i.e. people defaulting their accounts have often been cited as a reason why Irish credit card interest rates are so high, yet Family Money was told by both the main bank issuers that bad debts are down this yea4, reflecting the general upturn in the economy. Logically this suggests that rates should come down, but no, keeping your account in the black means less profit for the banks and the need to keep interest rates high.

To listen to the banks, you wonder why they continue providing a service that returns such limp profits. "The perception is that credit card companies are making a fortune, but this is wrong," said a spokesman for Bank of Ireland credit card services. "This is a low volume, high margin business. The key is profitability.

The current high level of interest rates, he insisted, reflects everything from our healthy economy, the need for the bank to keep rewarding its shareholders and the fact that a couple of years ago the transaction charge to merchants was reduced from 5 or 6 per cent to 2 or 3 per, cent. "That took a lot of profitability out of the market," he said.

A quick glance at the interest rate table, and the fact that the rates have only come down once in the last year despite a number of cuts in the base rate since then, (Bank of Ireland's reduction was a mere 0.039 per cent), suggests that someone, somewhere, is making money out of credit cards. Interestingly, neither AIB or Bank of Ireland break down either turnover or profits from their credit card operations in their annual exports.

In the last year or so a number of us based companies have come on the British market with APRs as low as 11.8 per cent (Robert Fleming/Save & Prosper Visa) but more typically in the 15-20 per cent APR range. These include Royal Bank of Scotland ADVANTA Visa at 15.9 per cent, MBNA Intl., 18.9 per cent (13.9 per cent for the first six months) and the GM Card, 20.9, per cent.

At its launch GM also offered new cardholders the chance to build up a huge discount on the purchase of Vauxhall cars. British credit card rates are only slightly lower than rates here, hovering between 21-23 per cent APR. One of the reasons these rates are so much cheaper is that the contract includes penalties usually flat £10 each time the customer is late paying their account, over draw their limit or need a replacement card.

There are no plans for any of the U, companies to launch cards here typically, they targeted the British market for volume business. Thirty million cards are in use in Britain, compared to between 600,000 and 700,000 here. And while the blitz of cheaper credit did not result in huge numbers of existing card holders switching companies GM, for example still claims to have issued 600,000 cards since its launch in Britain in 1994.

It is impossible to predict whether Irish credit card customers would switch in any. great numbers to a cheaper card. The up take of cheaper interest affinity cards already available here has not been spectacular, despite extras like automatic travel insurance, and the absence of any annual fee.

What does seem likely however, is that rates will stay absurdly high so long as ironically more and more cardholders decide to pay their bills in full and on time.