Average interest rates on bank credit cards plunged to 16.78% for the first month of 1994 forcing the average rate to another record setting low. For the first time in the industry's history both the weighted and unweighted average dipped below the 1977 Federal Reserve record of 16.89%. (The RAM Research straight average for January is 15.74% while the average weighted to marketshare is now 16.78%.)
While credit cards represent the most expensive form of borrowing for most consumers the gap between interest rates on bank credit cards and rates for other loans is beginning to shrink significantly.
Leading the 94 battle among major issuers will be Wachovia Bank (Atlanta, 800-842-3262) offering a 6.0% rate for the first year, prime +3.9% afterwards. Other major issuers following Wachovia's aggressive lead: Signet, NationsBank, First USA, Bank One and Citibank. Among smaller issuers forging the way with single digit interest rates: AFBA Industrial Bank (Colorado Springs, 800-776-2265), Oak Brook Bank (Chicago, 800-536-3000), and Federal Savings Bank (Arkansas, 800-374-5600).
The pricing war is not limited to interest rates. Annual fees have quietly faded since 1987 to the point whereby most cardholders do not pay an annual fee today. Among the top ten issuers approximately 62 million or 55% of accounts do not carry an annual fee.
Industry averages do not reflect the erosion of annual fees because most issuers today offer some kind of annual fee waiver including first year waivers, selective waivers to good accounts, or annual fee rebates based on account activity.
The nation's largest issuer was the last issuer among the top ten to cave in to the annual fee pressure. Citibank announced last month it was cutting annual fees for seven million cardholders.
Annual fees will continue to disappear in ninety-four. Eventually the annual fee will become a penalty fee similar to the late fee, assessed only on accounts with little or no activity.
All this pricing pressure spells one thing for consumers: B-A-R-G-A-I-N-S----G-A-L-O-R-E.
Marketing partnerships with major retail brands or co-branded bank credit cards will continue to flood the marketplace this year.
The success of the General Motors MasterCard has yet to be duplicated. More than ten million consumers now carry the GM Card in the U.S and Canada and in excess of 100,000 consumers have used the rebates earned on their GM card to purchase a new GM product. GM is unleashing a U.K. version of the card this month.
As the year started Apple Computer and Citibank rolled out an imitation of the GM card. Look for dozens of co-branded cards to hit the streets over the next few months.
For consumers the wave of co-branded cards will require a careful review of the costs and benefits associated with these relatively new credit card programs before signing up.
VISA and MasterCards offering rebates will continue to be fashionable with consumers this year.
The most innovative program and potentially the most successful credit card for 1994 is the new Cornerstone MasterCard issued by Mellon Bank (Pittsburgh, 800-INT-BACK).
This brand new program offers cardholders a 100% cash refund on all interest charges paid for the next twenty years. The only catch is you have to be an active Cornerstone Mastercard cardholder for twenty years to get the full 100% rebate. Cardholders may elect to collect their interest refund as early as two years but at a lesser percentage. For example after two years cardholders are eligible for a 10% refund, after three years a 15% refund, four years a 20% refund and an additional 5% for each additional year.
Like most credit card rebate programs the Mellon interest rate is high. Mellon is charging a prime +11.9% rate for the standard Cornerstone MasterCard and prime +8.9% for gold Cornerstone MasterCard. There is no annual fee for either card.
To determine if this card is a good deal you will obviously need a calculator. Our computations indicate this is truly an incredible offer.
While cardholders could possibly save up to 10% each year on other lower priced cards, the Cornerstone MasterCard can return more dollars after twenty years than investing the annual savings difference. For example if you carry a $2,500 average balance, earn a 7% interest rate on accumulated savings and pay a 28% tax rate, you would receive a $9,000 refund after twenty years while a cardholder paying an interest rate eight percentage points lower would receive about $6,700.
Since investment rates and tax rates vary individually and may change radically over the next twenty years this may or may not prove to be a great deal. The bottom line is this is a long term relationship.
While the Cornerstone MasterCard is the first card to offer a 100% interest rate refund it may not be the last if it proves popular with consumers.
This year more issuers will begin offering cards on a secured basis to consumers with no credit or poor credit. This relatively untapped market will explode in 94 as programs launched last year develop.
Late last year Federal Savings Bank (Arkansas, 800-374-5600) announced an 8.0% VISA card with a $55 annual fee for standard cards and a $70 annual fee for VISA Gold. Cardholders receive a 90% credit line for deposits ranging from $300 to $10,000.
Key Federal Savings (Maryland,800-235-7285) slashed interest rates from 21.99% to 18.90% this month.
The secured card market will continue to change this year as interest rates drop, application fees are eliminated, minimum deposits lowered and annual fees moderate.
Debit cards, corporate cards, small business cards, procurement cards, prepaid cards and smart cards will finally take off this year. A debit card war is brewing between VISA and MasterCard. All types of business related cards will receive special focus this year by the industry. Prepaid cards and smart cards will be among this year's experiments.
