What makes this new card so perplexing is a new interest rate gimmick called: "a time tiered rate". Current purchases including purchases made in the previous month are charged a lower rate while purchases that are more than two billing cycles old are charged a much higher interest rate. This pricing scheme makes no sense to consumers but will generate lots of cents for the issuer.
Who would have cooked up such a deal ?
The same bank card issuer that introduced other creative ways to calculate interest charges including the "two- cycle average daily balance method" of computing interest and "daily compounding" of interest.
Need another clue ?
This issuer promotes a 1.0% annual cash rebate yet pays, on average, a little more than 0.50% to the average cardholder or about $10.00. This issuer also does not issue VISA or MasterCard.
The Discover card people (a.k.a. Dean Witter) will be marketing a new card early next year called the Prime Option MasterCard. Bizarre as it may sound Discover negotiated MasterCard's permission to enter into a co-branding (or joint venture), relationship with NationsBank. This is like Pepsi agreeing to market Diet Coke or GM selling Fords !
Time will tell how much competition will be eroded between the nation's four bank credit card brands (VISA, MasterCard, Discover and Optima), but clearly this new venture blurs the lines. Diminished competition could drive up rates for consumers and potentially increase fees paid by merchants. However, the credit card marketplace is now being driven by highly informed consumers who demand aggressive pricing. The Prime Option MasterCard may have a tough time getting consumers to bite.
Prime Option's primary hook is the "time tiered interest rate". The interest rate will be 9.9% for new purchases and prime +9.9% for old purchases. Purchases made in the current billing cycle or in the previous billing cycle are considered "new" while purchases occurring more than two billing cycles ago and carried forward are considered "old" and subject to the higher 15.9% (prime +9.9%) rate. In other words as long as you pay-off your purchases every two billing cycles the interest rate will not exceed 9.9%. On the other hand if you're like most consumers and consistently carry a balance you'll pay a substantially higher rate than 9.9%.
This unique pricing feature of Prime Option MasterCard may sound good and look good on television but it is no comparison to other VISA and MasterCard deals currently in the marketplace. In fact it's not even apples and oranges, it's fruits and vegetables !
The average VISA and MasterCard account holder charges about $200 a month and carries an average daily balance of approximately $1,700. Using these figures a typical Prime Option cardholder could expect to pay about $250 per year in interest charges ($400 at 9.9%; $1,300 at 15.9% or 14.7% effectively). By comparison typical cardholders of Wachovia Bank's (Atlanta; 800-842-3262) VISA and MasterCard would pay about $120 in interest charges for the first year and about $186 in subsequent years. Wachovia charges 6.0% for the first year, prime +3.9% afterwards and an $18 annual fee.
Even though Prime Option does not charge an annual fee, some issuers with very high annual fees cost less. For example, AFBA Industrial Bank (Colorado; 800-776-2265) charges $35 a year and yet beats Prime Option by $70 per year. (AFBA A.P.R. is 8.5%.)
Wachovia and
Confusing ? . . . . You bet.
The best way to understand the two-cycle method is with an example. Say your previous balance is zero and you
charge a $1,000 purchase January 1. When your January statement arrives in February you will have the option of paying
the balance off, avoiding interest charges or you may make a partial payment and incur interest. If you decide to pay an
amount less than the full balance you will be assessed interest (on your February statement) from January 1. Under the
one-cycle method issuers only assess interest for February.
There are other variations and factors affecting the impact of two cycle billing. For example, new purchases may
be "included" or "excluded" from the formula. Also the timing of purchases may increase or decrease the interest costs.
Still confused ?
Best Advice: Stay away from cards using the "two-cycle" method. (Theoretically a cardholder paying off the full
balance every third month could incur up to four extra months of interest per year !)
Discover also uses "daily compounding" of interest instead of "monthly compounding". This simply means
interest is calculated daily and added to your balance daily instead of monthly. Paying interest on interest on a daily basis
will cost you 0.2% more per year. If the Discover card interest rate is listed at 16.9% it's really 17.1%, due to daily
compounding.
Best Advice: Call the issuer and ask if they use a "daily periodic rate" or a "monthly periodic rate" to figure
interest charges. (Federal law does not require issuers to note this term in the disclosure box found on credit card
applications.)
Key Federal Savings Bank of Maryland is slashing the interest rate on its secured VISA and MasterCards from
21.99% to 18.90%, effective January. Considering Key pays 4.06% to 4.57% on the secured deposit this program is one
the most cost-effective ways to build or rebuild credit. To assist consumers in comparing the total cost of secured credit
cards Key is offering a free "rate finder" by calling 1-800-235-7285 (after January 3).
American Airlines and Citibank will be limiting the number of miles cardholders can accumulate in a calendar
year. Effective January 1 American AAdvantage will set a 60,000 miles annual cap. Cardholders earn one mile for each
dollar charged.
First Chicago's United Airlines Mileage Plus program already limits cardholders to 50,000 miles per year.
However Premier members (flying a minimum of 25,000 miles annually) are not subject to the cap.
Meanwhile NationsBank's US Air program is lifting its 50,000 mile annual cap next month.
Finally a reminder: MasterCard and VISA offer a variety of free consumer education booklets. Call MasterCard
at (1-800-999-5136) or VISA at (1-800-VISA-511).
