Cardholders are encountering a new problem:
Rate Shock ! Lower rates are surfacing so quickly some cardholders are dizzy.
Consider what Norwest (IA) cardholders are currently experiencing. In the past six weeks 70% of its cardholders have watched their interest rates plunge from 19.80% to 15.00% for standard cards and to 13.40% for gold cards. This means the average standard cardholder will realize about $80 in annual savings. Average gold cardholders will save more than $200 a year.
Norwest switched most of its cardholders to prime-based rates June 1st. On July 2nd the Feds cut the discount rate forcing the prime rate down to 6.0%. Three days and nearly three months ahead of schedule, Norwest adjusted its rates to the new prime rate.
It is this swift response to the marketplace that has cardholders giggling.
Meanwhile another top ten issuer has entered the rate war.
Bank of America (merging with Security Pacific) is quietly introducing a new variable rate card with a 16.90% rate. Bank of America branches are now stocking up on the new applications featuring a choice between a fixed rate and a lower variable rate. Existing cardholders will also get a chance to select the new card.
The range of card rates is also expanding. Standard card rates now vary from 7.75% to 23.80%.
The Charles J. Givens Organization is offering an affinity VISA and MasterCard with an interest rate of prime + 1.75 % . Due to the new prime rate, the card will drop to 7.75%. July 15th, making it the lowest rate card in the nation. The card is available to the general public in all 50 states without membership requirements. Call 800-284-4082 for more information. (FYI: Givens runs a national personal financial planning service and is the author of Wealth Without Risk. The credit card is issued through Wachovia of Delaware.)
Thousands of cards now carry bargain rates. The July survey reveals 462 cards with rates under 15.0% available to the general public. Not included in this figure is literally thousands of low rates available through credit unions and other closed membership organizations.
Truth is: There is no reason to pay a high credit card interest rate if you do not want to ! There is no reason to pay an annual fee if you do not want to !
With rates as low as 7.75%, broad availability of low rates and major issuers chopping rates, why would anyone charge the industry with rate gouging ?
Crazy as it might sound . . . a consumer advocacy group is now touring the country with the message that issuers are "using secret billing methods" and "extra fees" to "deceptively gouge" consumers. To support its claims the group is offering a report recently prepared by Bankcard Holders of America (VA). (BHA is the featured organization of the group.)
Perhaps even more bizarre is the fact at main sponsor of this effort is,American Express Travel Related Services, Inc. Furthermore, as part of this venture, American Express is offering consumers a free list of banks offering low interest rate cards, prepared by Bankcard Holders of Arnerica. Consumers call American Express, toll free, for the list.
The AMEX/BHA tour billed as a 'series of consumer education seminars to be held across the country" kicked-off in San Francisco, July 7th. The workshop, held at the Hyatt Regency, was titled "CreditAbility: It's in Your Interest".
Two months ago American Express released a report supporting its suggestion that high bank credit card interest rates were hampering the recovery of the U.S. economy. The news release, accompanying the report, encouraged consumers to call American Express for a list of low rate bank cards prepared by Bankcard Holders of America. Since the report was prepared by an AMEX subsidiary, The Boston Company, it was widely rejected as biased and self-serving.
Four weeks later (June 18th) Bankcard Holders of America released a report accusing the bank card industry of "loansharking" and ripping off consumers by "an estimated $8 billion a year". Not surprisingly the report cites the AMEX/Boston Company report as one of its sources.
Consumers may find it difficult to understand how a consumer advocacy group like Bankcard Holders of America, which claims to be non-profit and independent, could ally itself with an industry giant like Arnerican Express. Equally difficult is why American Express would go to the trouble and expense of giving away a list of its competitors.
While we cannot offer any insight into the BHA/AMEX relationship we can briefly comment on the BHA report which serves as the underpinning of this recent effort.
BHA accuses bank card issuers of using "costly balance calculation methods". RAM Research has well documented that specific methods such as the 2-cycle average daily balance method can be costly for some cardholders. Our research on interest rate calculations has been widely published and has been used, this year, by the Wall Street Journal, CBS Evening News, US News & World Reports and many others. However our research data does not support the notion that issuers are switching to the more costly methods. Less than 8% of all bank card issuers use the 2-cycle method and/or daily compounding of interest. The only major issuer employing both 2-cycle and daily compounding in the interest rate calculation is the Discover card.
BHA also suggests issuers are lowering minimum monthly payments to produce "endless repayment periods". BHA asserts minimum payments "decreased from 5% in the mid-1980's to 2-3% today." The claim is based on the recent American Express sponsored study prepared by The Boston Company. However, the author of The Boston Company report admits there is no underlying data to support the claim - - - - just a "personal perception" that minimum monthly payments are shrinking. As a matter of fact, two large issuers NBD (MI) and Rocky Mountain (CO) have recently lowered minimum payments. However RAM Research's data suggests this is not a trend and that minimum monthly payments increased in the early 1980's and have remained relatively flat at 5%.
The BHA report presents calculations purporting to show how banks are earning much higher "effective" interest rates than the "stated" interest rate. RAM Research's data published in our industry newsletters: Bankcard Update & Bankcard Barometer reveals that last year the average interest rate charged by the top ten issuers was 19.45% yet the "earned" or "effective" rate was 16.35%.
