Credit Card Paid Up? That Will Cost You At Least One Company Has No Interest In Frugal ‘Freeloaders’

Are you one of those highly responsible people who always pay their bills on time each month?

In the credit-card industry, you’re considered a deadbeat.

And now, one card issuer isn’t going to take it anymore. GE Capital Corp. is informing holders of its GE Rewards MasterCard that they will be required to pay a $25 annual fee if they insist on paying off their balances every month and avoiding any interest charges.

The fee apparently is a first in the industry, but analysts said Tuesday that if it sticks, other issuers very likely will begin adding similar charges for their “freeloader” card holders.

“I fear that if there is not a great consumer backlash, this could turn into a trend,” said Ruth Susswein, president of Bankcard Holders of America, a consumer group with offices in McLean, Va., and Salem, Va.

GE officials said the fee will affect only a minority of their customers and that they neither want nor expect to lose many of them. But the “very modest fee” is necessary “to offset the operational and administrative costs” of accounts that generate no interest charges, said spokesman Neil McGarity.

The GE Rewards program, which has had no annual fee, offers participants cash rebates of up to 2 percent of purchases. As a result, those who pay off their charges every month come out ahead using the card.

GE is offering these paid-up users a lower interest rate than it charges other customers - 11.9 percent compared with 17.15 percent - and will waive the new fee if they incur $25 or more in interest charges during the year, McGarity said.

The new fee and interest rate, first reported by USA Today, are “not a move to encourage anything,” such as increased borrowing, from card holders, he said.

Credit cards, long one of the most profitable segments of the banking business, have come under pressure in recent years as the market has approached saturation.

Beginning in the late 1980s, competition forced many issuers to drop annual fees to card holders and to cut the fees they charge merchants who accept their cards. That was manageable as long as interest rates remained high and the vast majority of card holders carried balances that kept the interest meter running.

Interest charges account for about three-quarters of the revenue from credit cards, according to industry estimates.

In the past few years, though, the number of people paying off every month has been increasing, and now amounts to about 36 percent of card holders, up from about 26 percent in 1990. Thus, what was once an annoyance has become a real problem, said Robert B. McKinley of Ram Research Corp., an industry research and publishing firm in Frederick, Md.

With the default rate also on the rise, the industry has “two problems: people paying too late and people paying too early,” McKinley said.

An important factor in the prompt-payment trend is the aging of the Baby Boomers, “who are wising up to the whole thing and becoming more savvy” about interest-rate costs, McKinley added.

The future is likely to feature a tussle between consumers trying to get a good deal and issuers trying to squeeze more revenue out of a largely static customer base.

Until now, issuers had focused on encouraging card holders to let their accounts “revolve” and incur interest. Some cut interest rates, others let customers go a month without paying anything, while others turned to rebates and other such blandishments.

The marketplace is now filled with cards offering holders everything from cash back, like GE’s, to frequent-flyer miles, to discounts on specific products and services such as long-distance calls or automobiles.

The hitch for issuers has been the growing recognition that these premiums are a good deal for consumers only if they don’t incur interest charges. Some issuers, such those that offer frequent-flyer miles, have stiff annual fees - $50 to $75 in many cases - but most have been reluctant to impose them.

Issuers have been quicker to boost fees on those with poor records, adding late fees, over-the-limit fees and the like. McKinley said a recent Supreme Court decision, upholding the right of credit-card companies to “export” fees from their home state into other states where they are capped or forbidden, has encouraged this practice.

Issuers also are looking closely at costs. A few are trying things like charging card holders if they call customer-service lines.

Capital One Financial Corp. of Falls Church, Va., earlier this year wrote card holders asking them not to call the company’s customer-service lines unless necessary.

A Capital One spokeswoman said the company had looked at its records and discovered that a tiny fraction of its customers accounted for more than a third of its customer-service calls. She said the letter helped and Capital One doesn’t charge for the service.

Credit cards have been a good deal for customers who pay off each month and Susswein urged consumers to “take their business elsewhere” rather than pay fees like GE’s.

“We strongly suggest consumers use the power they have. In any other industry you would be rewarded for paying in full and on time,” she said.