Twenty-four hours after Bush's remark, the U.S. Senate overwhelmingly voted to cap credit card interest rates at 14.0%. Immediately, banking lobbyists in Washington kicked into high gear and Wall Street hit the brakes as the U.S. House considered its own credit card interest rate cap. Five days later the proposal was dead.
For balance carrying cardholders, a 14% rate cap would have provided reduced interest charges of approximately $6.00 per month, on average. However, the relief would have been short lived. Under a low rate cap, credit card issuers would jack up annual fees, levy transaction fees for each purchase, and remove cash advance fee ceilings. Furthermore, existing credit lines would shrink, marginal cardholders would be dropped, and new applicants would face increased scrutiny.
An unreasonable rate cap is bad for consumers, investors and the industry. Frankly, a credit card rate cap is inappropriate at this time.
The level of competition has never been greater, and bank credit card interest rates have never been lower. This month, interest rates start at 9.0% for gold cards and 9.5% for standard cards. More than 175 cards now carry interest rates below 15.00%, not including credit union and invitation-only offers. Last December, interest rates started at 11.50% and just 92 cards carried interest rates under 15.00%.
Look for more bargain rates next month. Do not be surprised to see some major issuers cut rates or introduce a lower rate alternative card.
Three days after the rate cap proposal died in the U.S. House, RAM Research conducted an informal poll among the nation's top 200 bank credit card issuers. We found 43% discussing potential rate adjustments. The most popular suggestion: cut rates for the best cardholders. Some issuers were toying with the idea of a "tiered" interest rate (interest rate decreases as balance increases).
The results, published in our industry newsletter, Bankcard Update, also showed that 27% had no plans to change their current pricing because they already offered lower priced alternatives. The remaining 30% indicated they had no plans to change or any plans to discuss changes.
The fact that 70% of the industry is currently offering a bargain rate alternative or is considering some sort of rate reduction is good news for consumers.
Perhaps the "good" coming from President Bush's remarks is that consumers have finally awakened to the wide range of interest rates currently being offered. After all, it is cardholders not politicians who carry the real power to force credit card rates lower.
Next year is an election year so vote for lower rates by switching now to one of the bargain card issuers listed inside.
Another encouraging sign for cardholders: more competition is on the way. This month, VISA U.S.A. Iifted a moratorium on credit cards issued by financial institutions owned by non-bank organizations. Last year, VISA U.S.A. came under intense pressure by existing bank members to do something to slow down non-banks after the success of AT&T's Universal VISA. VISA responded by denying new memberships to non-banks.
Non-banks are a formidable force in the industry today. Five years ago, non-banks controlled about 8% of the industry. Today non-banks control about 22%. As a matter of fact, about half of the nonbanks currently issuing cards were not in the business five years ago.
Prime Bank began offering the card nationally in July. Before going national the bank had issued approximately 16,000 cards. The 12.9% card did not offer a grace period and required a $20 annual fee.
Do not despair, a better deal in the works !
Oak Brook Bank in Oak Brook, Illinois is introducing a new, nationally available, 12.99% Gold MasterCard in January. This card is an excellent deal because it comes with no annual fee and a full 25-day grace period. Consumers with an excellent credit record and earning at least $38,000 annually can have their cake and eat it too.
Oak Brook's 12.9% card is a variable rate. The rate is based on prime plus 4.4% subject to a 12.95% floor rate. As with Gold MasterCards, Oak Brook's card has an extensive package of benefits and a $5,000 minimum credit line.
Oak Brook also offers two other Gold MasterCards. One with a 15% A.P.R./$18 fee and one with a 16.80% A.P.R./No Fee. The bank has been issuing Gold MasterCards exclusively since 1984 and currently has about 60,000 cardholders.
The average interest rate charged for bank credit cards continues to decline. This month the average standard card rate is 18.18% down from last month's 18.24% and significantly down from last year's 18.57%. The average gold card rate has dropped to 16.47% from November's 16.61% and last November's 17.13 % . RAM Research's average is based on rates charged by 107 issuers with an aggregate marketshare of 93%.
The top ten issuers with a 51% marketshare, now charge an average of 18.68% compared with last year's 19.02%. Since most of the top ten issuers offer more than one interest rate, this average is weighted to the number of accounts carrying a specific rate.
According to a five-year pricing study published in the most recent issue of BankCard Update, annual fees have also declined. Standard card fees dropped 11 cents in the past year to $16.70. Gold card fees have dropped significantly from $36.20 to $32.91 in the past twelve months.
