THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Wednesday, August 23, 1995 TAG: 9508220009
SECTION: FRONT PAGE: A14 EDITION: FINAL
TYPE: Editorial Notebook
LENGTH: Short : 48 lines
A friend says she and her husband are still paying for the wonderful meal they shared in New York City's Chinatown in 1974.
They put it on a credit card.
Although they have faithfully made payments on the card over the decades, they have never quite paid it off. Owing to unexpected expenses from time to time, they have never repaid their way down to the Chinese dinner.
Many credit-card purchases are owed forever, for the credit-card balance never reads zero.
And yet - all evidence to the contrary - people expect to pay for the things they buy with credit cards before the interest charge kicks in.
That, at least, is the belief of Lawrence Ausubel, a University of Maryland economist who has studied credit cards.
The reason banks' hot competition for credit-card customers fails to drive down the interest rates, he says, is that customers don't worry about the rates, figuring they won't be charged them.
As a result, the interest rate banks can charge credit-card customers is a full 10 percentage points more than what banks pay for their own funds. The profit rate for credit-card operations, according to Ausubel's calculations, is five times the overall rate for banking.
``Despite spending billions each year trying to lure new credit-card customers and keep old ones,'' New York Times columnist Peter Passell wrote recently, ``issuers still managed to earn 30 percent-plus returns on equity in the last decade. That is more than double the average return on investments by corporate America, with no greater risk.''
People who would not dream of paying 16 percent to 18 percent per annum on a loan to buy dinner nevertheless flash plastic and end up paying an annual interest rate of 16 percent to 18 percent.
Extrapolating from surveys, Ausubel discovered that Americans claimed they owed $70 billion on their credit cards in 1992 when in fact they owed $182 billion. For every buck they thought they owed they actually owed $2.60.
Two hours after the couple ate the wonderful meal in New York City's Chinatown in 1974, they were hungry again.
Twenty-one years later, they still suffer financial indigestion.
Patrick K. Lackey - staff writer by CNB