Goodbye, Freebies--Hello, Fees

By Stacy Perman

For consumers, the world of plastic is not looking so fantastic anymore. AT&T Corp.'s departure from the business--its Universal Card portfolio is being sold to Citibank for $3.5 million--is the latest buyout, as the industry consolidates in an attempt to get back on the gravy train it once rode. With fewer big competitors, the remaining card issuers are getting less generous. AT&T's initial no-fee offer inspired a wink of inducements from other issuers, each upping the ante with low initial rates and rebates. And consumers snapped them up, stuffing an average of seven cards in their wallets.

But for many in the industry, profits have melted under the costs of these incentives. They fell 24% in 1996--dropping 300% from the mid-1980s--and remained flat last year, pounded by a wave of delinquencies as consumers maxed out their debt. "The credit-card free-for-all has come back to haunt the industry," says Robert McKinley, president of RAM Research. To stanch the southern flow of profits, card issuers are seeking to edge up their income by retrenching on offers and charging penalties, new fees and higher rates.

The trend gained momentum last September when GE Capital, the finance arm of General Electric, announced it would slap a $25 annual penalty on holders of its GE Rewards MasterCard who did not accrue interest-bearing debt. Since then, issuers have come up with a slew of punitive measures--er, fees--that squeeze responsible cardholders as well as slackers. Just two years ago, no company charged a late fee of more than $18; today almost half do. Even grace periods are shrinking from the average 25 to 30 days to 20 days, which means some customers could get hit with a finance charge even before receiving a bill.

Some 55 million to 60 million households owe more than $7,000 on their plastic, according to the Consumer Federation of America (up from $6,000 last year). That means they already pay at least $1,000 a year in fees and interest. The average interest rate is 18.84%, up from 17.7% a year ago. Mellon Bank of Pittsburgh, Pa., assesses its cardholders $15 for not charging during a six-month period. If you cancel your card account with Advanta Bank of Wilmington, Del., it may impose a $25 fee as a parting gift. Warns McKinley: "There are going to be more costs associated with cards in the future." And that future is now.

--By Stacy Perman. With reporting by Valerie Marchant/New York

With reporting by VALERIE MARCHANT/NEW YORK