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Credit-card companies use lower rates to aid new promotional offers

Instead of giving current customers a break on finance charges, many credit-card companies have used this year's declining Federal Reserve rates to offer more promotional rates to attract more card holders.

While the prime rate has dropped 4 percentage points since the beginning of the year as a result of Fed action, and many loan rates have followed suit, the average credit card interest rate has sunk just 2 percentage points to 14.8 percent at the end of the September, said Robert McKinley, chief executive officer of CardWeb.com in Frederick, Md.

That difference surprised Mr. McKinley, who expected more credit card companies would make bigger rate cuts.

Referring to some promotional rates being offered, he said, “Some of the gestures at tapping patriotism were more designed as PR and attracting new customers than offering any specific benefits.”

Card companies are in a competitive industry — 81 percent of U.S. households have at least one card — but fears of defaults because of higher unemployment and a slower economy likely have held back many banks, he said.

Further, possible lower consumer spending will hurt card companies' income, he added. Merchants pay card companies a fee for each charged purchase. Travel and holiday spending, both typically big revenue streams for card companies, are expected to be slow nationwide for the next few months.

Nevertheless, some banks have made sizeable rate cuts. Locally, Fifth Third Bank (Northwestern Ohio) reduced a variable rate card to 9.4 percent from 13.4 last year at this time, senior vice president Mike Farrell said. Its highest credit card rate is 15.65 percent.

Nationwide, card interest rates vary from 5.5 percent to 41 percent, Mr. McKinley said. The lowest rates are from companies based in states such as Arkansas that have very low usury limits. The highest rates are for people with poor credit ratings.

Card companies with fixed rates generally haven't changed them this year, while those with quarterly adjustments typically use the highest prime rate during the period so there is a lag in how fast the card rate drops, he explained.

For four out of every 10 card holders, the interest rates are meaningless because they pay off their balance each month. For those card holders, this fall's zero-percent rates are worth considering. The promotional rates, though, typically have restrictions.

Richard Call, executive director of Consumer Credit Counseling Service of Northwestern Ohio, in Toledo, predicted very low introductory rates will account for the majority of interest reductions.

“I see ongoing teaser rates,” he said. “It sure seems like we've had a lot more promotional offers of the 0 to 2.9 to 4.9 than we've had in the past.”

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