While the majority of bank credit cards now carry variable interest rates (1994:55% vs. 1991:34%) and three out of four of those rates are based on the prime rate, the overall trend toward lower re-pricing will remain intact for at least another year.
Cardholders with variable rates will see interest costs increase about $4.25 annually. The change for most cardholders will occur with the July and August statements as the third quarter gets underway. About 80% of issuers adjust variable rates quarterly.
Meanwhile, average bank credit card interest rates have declined from 15.67% in February to 15.54% in April. If this pace continues rates could hit 15.41% by July. This represents a drop of 0.26% or about equal to the recent prime rate increase of 0.25%.
If the prime rate surges by a full point within the next nine months it will take some steam out of the intense rate competition, but as long as the rise remains moderate cardholders will have plenty of pricing options. Issuers are still announcing single digit interest rate cards, including one upcoming offer with a 5.9% APR.
The price war continues to have a dramatic impact on the distribution of interest rates. Approximately 33 million more cardholders were added to the ranks of those paying less than a 16.5% annual rate. Today 70% of the nation's cardholders pay less than 18% annually compared to 37% four years ago. The sharp decline in interest rates is directly attributed to the fact that each of the nation's ten largest issuers re-priced: switched to lower, variable, risk-based, interest rates. Indeed, most of the nation's top 50 issuers with an aggregate market share of 89% switched to lower rates in the past twenty-four months.
Data are from RAM Research Corporation's 1994 portfolio study featured in the March, April, and May issues of Bankcard Update. The results of the study are being incorporated in the soon-to-be-released U.S. General Accounting Office study on bank credit card competitiveness.
