The Lure of Instant Cash

Money may be tight in the U.S., but across the country millions of people are finding their mailboxes crammed with unsolicited applications for bank credit cards that promise, among many other things, instant loans of up to $500. The card craze has spread as banks have intensified attempts to expand in the consumer credit field, which can be enormously profitable. Banks often earn a true annual interest of 18% on merchandise charged on the credit cards, and 12% to 24% on the "instant money" that a customer can borrow upon presenting his card at the bank.

Assuming the Risk. Merchants are usually receptive to the credit-card plans because the banks pay them almost immediately for merchandise charged on the cards and assume all risks for deadbeats. The banks only deduct about 3% as a fee, compared with 4% to 6% usually charged by other commercial credit-card companies.

Not surprisingly, the card blitz has led to some rather imprudent tactics: a San Francisco bank mailed cards to all of its customers without running any credit checks at all, while a bank in Chicago handed out cards to bystanders at a parade. A nationwide survey of 84 banks by Constantine Danellis and Richard N. Salle, two economists at California's San Jose State College, recently found that only 20% of the banks bothered to make credit checks. The economists also discovered that despite the profit potential of credit cards, many banks suffered bad losses. In all, 10% of the reporting banks lost between 17% and 40% of total charges during the first year of their credit-card business. Two-thirds of the banks earned no profit at all on the cards during 1968, partly because of high start-up costs, but also because of lack of experience in handling large-scale retail credit.

To minimize start-up headaches, banks now tend to join one of two major groups. The largest group is run by San Francisco's Bank of America. Its decade-old BankAmericard, available in 44 states, is interchangeable with Britain's Barclaycard, Canada's Chargex and Japan's Sumitomo. The other is Interbank Card Association, organized by eight banks in 1967 and now operating in 41 states; its card is also recognized in Europe. BankAmericard insists on certain credit standards, but Interbank lets members decide "creditworthiness" themselves.

No bank can afford to be too choosy, since the 3% discount barely covers overhead, and monthly carrying charges are the cream of the business. Success for the banks depends on wide circulation of the cards among people who will use them to finance big-ticket purchases. Customers are assessed no fee if they pay their bills to the bank within 30 days; thereafter, the interest mounts at 1 1/2 % a month. Thus the bankers expect to get most of their profits from people who do not pay punctually.

This file is automatically generated by a robot program, so reader's discretion is required.