"It" was a significant interest rate cut by the nation's largest issuer of VISA and MasterCards.
Last July, RAM Research predicted, in interviews published in Time, BusinessWeek and major newspapers, that a major credit card interest rate war was brewing. The prediction was based on a mid-year issuer survey showing little or no growth among issuers charging interest rates above 18.00% while issuers offering rates under 16.50% were experiencing a growth rate in accounts of nearly 10%.
It was crystal clear to us that consumers were, for the first time in the industry's history, rate shopping. Every consumer credit card survey in the past decade confirms that American consumers were more concerned about the annual fee than the interest rate. As a matter of fact the majority of consumers could not recall the interest rate they were paying but could readily cite the annual fee they were charged. The recent recession has changed all that. Consumers are now more sensitive to personal debt and consequently very sensitive to the most expensive form of borrowing: Credit Cards !
In an American Banker special September insert entitled "Credit Card Rates - How Low Will They Go?", RAM Research predicted interest rates would tumble from 19.8% to somewhere between 15% and 16%. An informal survey among purchasers of this newsletter in August indicated the magic number fell in this range. Furthermore the cost of funds for banks was beginning to plunge and most economists indicated further sharp drops were imminent. Therefore a four percentage point drop was not unrealistic.
The consumer trend towards lower card rates continued through the last six months of 1991. A record number of smaller issuers began to offer alternative cards with lower rates. Regional rate wars erupted in Missouri, Michigan and Ohio. Variable rate cards pegged to the prime rate such as AT&T's Universal card descended to more attractive levels. Politicians started jumping on the bandwagon condemning big issuers for rate gouging, calling for credit card interest rate caps.
Nonetheless the nation's largest issuers, most of whom charge 19.80%, held firm. Bad debt and high administrative costs were cited as justifications for high card rates.
But with the end of 1991 came statistics indicating big issuers were losing as many cardholders as they were gaining. The nation's largest issuer began 1991 with 21 million accounts and ended the year with 21 million accounts. Since bank credit card issuers are accustomed to double digit annual growth figures, zero growth is considered a disaster.
Fourteen weeks later the giant in the industry announced a significant rate reduction for nearly 40% of its cardholders. On April 16th, Citibank announced it will switch to performance based pricing effective June 1st. Cardholders charging at least $1,000 and with solid repayment records will automatically qualify for a rate reduction from a fixed 19.80% to a variable prime +9.4% or 15.90% interest rate. Gold cardholders charging at least $3,000 and with good records will see rates fall from a fixed 16.80% to a variable, prime +7.4%, or 13.9%.
Citibank's move is a win-win situation. Cardholder's will see real savings on purchase balances created after June 1st. The bank will also stem the tide of cardholder defections and hopefully get legislators off its back. The only downside to Citibank's strategy for consumers is . . . if the economy overheats and the prime rate soars again to 11%. Under this scenario Citibank's cardholders may see higher card rates than they are currently paying.
Other issuers announced significant price reductions or new competitively priced products in the past thirty days.
On April 29th Wachovia Bank (Atlanta) introduced a new no-annual-fee, variable rate card. The card is pegged at 9.9% over prime with a current interest rate of 16.40%. The card is available nationally as a regular or gold card. (800-842-3262)
On April 27th Bank One Columbus announced it is cutting rates from 18.0% to 14.4% (prime +7.9%) for cardholders carrying balances and having at least one relationship with, the bank. Cardholders without relationships will see rates fall from 19.80% to 16.40% (prime +9.9%). The rate cuts, effective May 1st, only apply to local cardholders with Bank One Columbus and not other affiliates of Banc One. However the program may be expanded.
Fleet Financial (Rhode Island) disclosed April 21st it will reduce rates from 17.90% to 14.90%. Effective July 1st, Fleet will switch from a fixed 17.90% A.P.R. to a variable, prime +8.4% rate.
Associates National Bank (Delaware) is now promoting a new 12.90% card called "Limited Edition". The interest rate is fixed at 12.90% until July 31st, after which it will float at prime +6.4%. The card carries a $30 annual fee which is waived for the first six months. (800-521-9508)
Oak Brook Bank (Illinois) slashed rates on its silver MasterCard program April 7th. Oak Brook now offers four aggressively priced products:
#1: 10.9% (variable prime +4.4%) with $20 annual fee
#2: 12.4% (variable, prime +5.9%) with no-annual-fee
#3: 14.9% (fixed), with $20 annual fee
#4: 16.9% (fixed), with no-annual-fee
Oak Brook also offers two no-annual-fee gold cards with rates of 12.9% and 16.8%. (800-666-1011)
Our predictions for 1992 ?
The rate war will pick up even more steam as other major issuers roll out new low rate cards or roll-back current rates for profitable cardholders. Consumers have only themselves to blame for paying rates above 18%. Nearly 400 publicly available cards now carry rates under 15% compared with 180 last May.
