Arkansas, with the lowest credit card usury ceiling in the country, will now limit issuers to charging no more than a 9.5% annual percentage rate. UnderArkansas state law, the maximum credit card interest allowed is 5% over the federal discount rate.
Some variable rate issuers establish a minimum or floor rate in the interest rate formula. Bank of NewYork's (DE) standard card is set at prime plus 8.9%with a 16.98% floor. Union Planter's (TN) gold card interest rate is just 4.0% above the prime rate with a13.50% minimum. Both cards have hit bottom.
Rates from variable rate issuers without floors continue to sink. Wachovia's (DE) new prime +2.9% card drops to 10.40% this month and CentralCarolina's (NC) prime +1.5% gold card plunges to9.05te. Credit card rates at this level are unprecedented.
Our November survey shows 17 national and 35regional issuers with standard card interest rates below 15.00%. 64 issuers now offer gold cards under 14.00%.
Most encouraging for consumers is the announcement this month by Bank One Wisconsin of anew 13.90% card (800-388-4225). Banc One, the parent company, is the eleventh largest issuer in the U.S. The nation's sixth largest issuer, First Chicago Corporation, is also announcing this month a card interest rate cut forits best cardholders. The moves may prompt other major issuers to respond to mute mounting consumer criticism over credit card rate gouging.
Industry critics are quick to finger the nation's largest issuer, Citicorp, for charging an excessive credit card rate of 19.80%. However, Citicorp, like BancOne, has a lower interest rate alternative card available for consumers nationally called the "Choice USA" or "Choice MasterCard". One version of the Choice card offers a tiered interest rate of 16.90% for balances under $1,300 and a 14.90% rate for the portion of the balance exceeding $1,300. Another version of the Choice cardhas no-annual-fee, a 25 day grace period and an 18.90%A.P.R.. The Choice cards are available nationally through Citibank Maryland (800-638-4767).
Another major issuer, Bank of New York, offers a lower rate alternative called the Consumer's Edge VISA. This card is priced at prime +5.45% with no floor rate, no annual fee and no grace period. Cardholders with above average balances will find true rate relief with Bank of New York's 13.40% A.P.R.(800-942-1977).
The Citibank Choice card and the Bank of NewYork's Consumers Edge card are not widely promoted. However if an interest rate war erupts, do not be surprised to see more marketing muscle put behind the special programs.
Is a credit card interest rate war possible ?
Consider the following history lesson.
Between the summers of 1986 and 1987 the prime rate dropped to 8.00% while credit card rates remained high. A public outcry over high card rates led some legislators to call for a national usury ceiling. Although the proposal died, many issuers lowered rates, dropping the average rate from 18.73% to 18.03%.
Public criticism is again mounting as the prime rate tumbled from 10.0% to 7.5% this year. But things are much different now.
In 1986 the economy was robust, now the economy is bust. Five years ago cardholders were not overly concerned with their jobs or personal debt. Today job security is a major concern and personal debt is a dirty word. Consumers were fairly ignorant about the credit card choices available in 1986. In the past five years consumers have become fairly well educated to the fact that not all credit cards are created equal. Since1986 the IRS has also phased out the personal income tax deduction for credit card interest, which increases thereal cost of high rate cards.
The industry has also changed.
In 1986 the Discover card was just being launched, the Optima card was still on the drawing board and the industry was dominated by traditional banks. Today the bank credit card industry is loadedwith many, non-bank, players, including the Ford Motor Company, AT&T, and Sears, Roebuck & Co..
Cardholders have become debt sensitive andinterest rate conscious. The marketplace is plastic saturated with intense competition.
As a result, bank credit card rates are destined to fall. Then the current conditions we believe rates will decline in 1992 to lower levels than 1987.
Yes the credit card industry is dealing with record bad debt losses (up 30% this year) but the latest news indicates the worst is over. The latest research also shows a whole lotta switching is going on by cardholders.
For the first time in history, American consumers may actually drive down credit card rates.You can participate by locating and applying for a bargain card listed this newsletter.
Business credit cards have really picked up steam this year. The VISA Business and MasterCardBusiness cards have grown more than 50% this year. More than 2 million cards have been issued worldwide, much to the chagrin of American Express, the kingpin of business credit cards.
Companies in business for at least two or three years may apply for the new business cards. Tiny companies with short track records did not qualify . . ..... until now.
American Pacific Bank (OR) (800-879-8745) is now offering a secured VISA card for businesses. For a minimum deposit of $1,000 and a $45 annual fee thebank will provide up to four cards with an individual's name and the company name. The credit limit equals 100% of the deposit and the deposit earns 5.25%.
This is an excellent program, ideal for fledgling films seeking to establish credit credentials. Furthermorewith the elimination of the credit card interest deduction on personal income taxes it is not wise to commingle deductible business interest expense with non-deductible personal interest expense.
Speaking of secured credit cards, another issuer has taken the plunge to offer a program nationally.Equity Bank for Savings (OK) is offering the VISAOneCard (817-6794902) to U.S. citizens or permanent residents who are at least 18 years old and not currently in bankruptcy. The card is on the steep side, though, with a $65 processing fee, $35 annual fee and an interest rate of 21%.
