The Shaky House of Cards

America's $55 billion love affair with plastic money was on the ropes last week. Big retailers and banks began sharply reducing the borrowing clout of credit-card holders. J.C. Penney stiffened credit requirements, curtailed card promotions and hiked the minimum purchase eligible for time payments from $19 to $200. Banks, which had been deluging customers with Visa and MasterCard (formerly Master Charge) applications, suddenly throttled back the flow of easy credit. New York's Bankers Trust Co. slapped a $500 credit limit on new accounts and froze ceilings on existing credit lines. Chase Manhattan Bank said no to more Visa applications. This week American Express is expected to raise the $25 per year fee on its 10.5 million cards.

Though the immediate cause of alarm was the Federal Reserve action two weeks ago that forced credit-card issuers to place a sum equal to 15% of new loan money into a noninterest bearing account, the lenders have been suffering pinched profits or even losses for months. Banks in most states are caught in a squeeze between high interest rates and local usury laws. In New York, for example, the maximum interest on credit-card purchases is 18% on an annual basis for the first $500 and 12% on everything above that. But banks are now paying as much as 19% to borrow the money they lend. Citibank, the nation's second largest financial institution, has threatened to incorporate all its Visa and MasterCard business in South Dakota, where bank cards may charge as much as 24%, unless New York raises the level of interest that can be charged. Chicago's First National Bank is instituting a $20 fee for the previously gratis Visa card. Such fees may enable banks to weed out unused cards, which now represent about $25 billion in outstanding credit lines, as well as so-called "non-revolvers," who pay their bills on time. Prompt payers get free credit without generating any revenue for the bank.

Retail stores have also been hit. In 1978 Sears, Roebuck and Co. lost $7 million on its credit operations, while J.C. Penney's ran $34 million in the red. Last year's losses were even higher. Reason: the companies, like banks, have to borrow the money they loan at a higher interest rate than they can charge.

Early this year the two companies began tightening credit reins. Previously, shoppers were given a free ride on charges until the end of the month. Now interest will start on the day of purchase on accounts with balances outstanding.

Reaction to the Federal Reserve's action was strong. Retailers complained that the new rules would torpedo Christmas spending, if controls last that long, because credit limits were set in sales-slow March. They also questioned how they would sort out major purchases, like refrigerators, which are exempted from the regulations, from less expensive credit-restricted items, like fancy leather goods. Economists estimate that the card crackdown would have a measurable, if minor, impact on inflation. Consumers, in any case, will be forced to think twice about spending their plastic money, and banks and retailers now have an excuse to drop some money-losing business.

This file is automatically generated by a robot program, so viewer discretion is required.