Credit Card Holders Pay Balances, Frustrating Issuers

When credit cards first hit the market more than 35 years ago, bankers were concerned that cardholders wouldn’t repay their balances. Now they have the opposite concern: Customers pay off too quickly.

Recent years have seen a maturing of the credit card market. Almost everyone who wants a credit card has one. Issuers have found that to make their business grow they have to either steal customers from competitors or persuade current cardholders to charge more. Or both.

So, for close to a decade now, the issuers have been cranking out promotions and other enticements with these goals in mind. They want to make their card stand out in the crowd, so that customers will apply for it, and they want those customers to use the card once they get it.

Frequent-flier miles, cash rebates and donations to charity are only a few of the special features that have been employed in this unending marketing war. But while these gimmicks have indeed brought more people into the plastic market and spread the number of outlets that will take the cards, there’s been a hitch.

A distressing (to the issuers) number of cardholders are taking the rebates and running. Although they are using their cards as never before - for groceries, gasoline and other day-to-day purchases - they are paying off their balances at the end of the month, and not paying any interest.

But for the issuers, interest is where the real profits are.

So now a small number of issuers are turning to promotions designed to reward those who carry a balance, which about twothirds of all cardholders do anyway.

Among the first into this field was the AT&T Universal Card, whose “Something Extra” program offers benefits such as free long-distance calls for new purchases and for amounts carried over from month to month.

For example, said Universal Card’s Bruce Reid, if a cardholder charges $1,000, he or she gets 1,000 points redeemable for various benefits. If the person then pays off $500 at the end of the month and allows the other $500 to “revolve” onto the next month’s bill, he or she gets another 500 points, plus any new activity.

Now a half-dozen other issuers are offering similar programs. Most tie benefits to the amount of the cardholder’s balance, but some base their premiums on interest paid or other factors.

Chase Manhattan Bank’s Cash Builder Visa pays cardholders 1 percent of their purchases and cash advances each month as long as they total $200, and pays an amount equal to 10 percent of finance charges paid.

“Customers are going to have certain spending habits. If a customer is going to be the type that maintains a balance, we feel we should give them value added,” said Chase Vice President Charlotte Gilbert. For other types of customers, the bank has other cards with other incentive, she said.

The original rebate programs were “sort of an indirect method” of building business, said Robert McKinley of Ram Research, a research and publishing firm in Frederick, Md., that follows the credit card industry. As charge volume rose, issuers figured some of it would stick and become revolving balances.

But in today’s competitive market that wasn’t good enough. Too many cardholders paid off their balances and not enough left them to accrue interest,” McKinley said.

Critics of the new promotions fear that they will encourage cardholders to run up bigger balances, and may turn some “convenience users” - people who pay off their balances each month - into “revolvers,” who do not.

“The ideal customer” for a credit card company is the person who carries a balance, always is able to pay the monthly minimum but never manages to pay the card off entirely, said Ruth Susswein, president of Bankcard Holders of America, a consumer group based in McLean, Va.

Banks search hard for such customers, Susswein said, and research companies are “making fortunes coming up with various credit scoring models that figure out which ones of us are not going to default and are not going to pay in full, either.”