Banc One (OH) and NationsBank (NC), among the nation's fifteen largest issuers, are now offering no-annual-fee-for-life cards via direct mail solicitations. The no-fee-for-life offer was successfully used by the AT&T Universal card three years ago to est ablish itself.
Signet Bank (VA) recently sent approximately 20,000 solicitations for a card with an interest rate of prime + 0.9%, effective through January 1994. The interest rate will increase thereafter to prime +6.9%. If the prime rate holds steady at 6.0% the spe cial Signet card will carry a 6.9% interest rate for the next fourteen months and then climb to only 12.9%. Signet says the super bargain card solicitation is only a test. Incidentally Signet has been one the the industry's most aggressive marketing exp erimenters. Last summer the bank sent our solicitations to new high school seniors for co-signed Signet credit cards.
Signet is also now offering a 14.90% variable rate card with an $18 annual fee to consumers nationwide. For details call 800-955-7070.
Citibank, the nation's largest issuer of VISA and MasterCards, is continuing to adjust its pricing policy. New applicants with solid credit track records will automatically be placed in Citibank's Premier Membership program thus qualifying immediately fo r a 15.4% standard card or a 13.4% gold card. Also Citibank has shortened the time for new or existing cardholders, paying 19.8%, to qualify for Premier Membership. When the program was first announced last spring cardholders had to have spotless paymen t records for twelve months. The tenure period has now been reduced to six months.
Citibank's Choice VISA and MasterCard program also carries lower rates. New applicants can choose between a variable 13.40% card with a $20 annual fee or a no annual fee card with a 15.4% interest rate. For more information call 800-638-4767.
The effect of Citibank's rate slashing is dramatic. Two years ago only 10% of Citibank's standard cardholders qualified, through the Choice program, for a rate lower than 19.80%. Today 7.8 million or 43% of Citibank's standard card accounts pay 15.4% or less. Citibank's three million gold card accounts pay 16.80% or if a Premier Gold cardholder, 13.40%.
Even though most of Citibank's standard cardholders still pay 19.80%, less than half of their total customer base pay this rate. Citibank has 21 million credit card accounts with 10.2 million paying an interest rate of 19.80% and 10.8 million paying 16.8 0% or less (mostly 15.4%).
The intense price competition is also having an effect on card products not yet issued.
Two years ago Sears Roebuck & Company tried unsuccessfully to issue a VISA card called Prime Option. Since Sears issues the Discover card and competes directly with VISA, the matter ended up in the courts. Sears planned to issue the Prime Option VISA ca rd in 1990 with an interest rate of 12.90% for new purchases and 19.80% for old purchases. The terms were identical to the Discover card including the use of two-cycle interest calculation method, daily compounding of interest, charging interest from dat e of transaction, no annual fee and a 19.80% interest rate. The exception was a special or teaser interest rate of 12.9% for purchases occurring within the past sixty days.
In September of this year, or about one month before the start of its antitrust trial against VISA, the terms of the proposed Sears Prime Option VISA card were changed. Citing widespread pricing pressure Sears dropped the teaser rate for new purchases to 9.9% and to prime +9.9% or 15.9% for old purchases. The two-cycle method was also replaced with the less expensive one-cycle method.
Having won a favorable jury verdict November 5th in U.S. District Court, it is still unclear as to if and when Sears may issue a VISA card. Equally baffling is what pricing terms Sears may finally adopt if the way if cleared for its proposed VISA card. If launched as revealed in court, how will it stack up to other cards?
In order to make a comparison to other programs, we need to determine the effective interest rate. A simple way to this is to calculate the interest charges on a $1,000 average daily balance. If Sears Prime Option VISA has a 9.9% annual rate for new pur chases, the cost for the first two months would be $16.50 (9.9% divided by 12 months X $1,000 X 2 months). If prime holds at 6.0% and if Sears uses the prime + 9.9% rate for old purchases then the cost for the remaining ten months would be $132.50 (15.9% divided by 12 months X $1,000 X 10 months).
The total cost of a $1,000 average daily balance on the hypothetical Sears VISA card would be $149.00. This translates into an annual interest of 14.9% The use of daily compounding of interest raises the annual rate by 0.2%. Therefore the effective int erest rate would be at lease 15.10%. Charging interest from date of transaction rather than date of posting plus a higher than average fee for cash advances and 19.8% cash advance interest rate could boost the effective annual rate to as high as 15.90% o r wipe our the savings of no annual fee.
In comparison to the best rates offered to new standard card applicants by the nation's twenty-five largest issuers, the hypothetical Sears VISA would be a middling in the national marketplace.
Price competition on the local and regional level is even more intense. For example, credit card rates in Utah, where the Sears' VISA may be issued, range from 11.25% to 21.00%, and average 15.27%. Again the proposed card falls in the middle of the pack .
If launched, the Sears VISA brings little to the market except another pricing gimmick.
