Since January the prime rate has fallen from 10.0% to 8.0%. Meanwhile, the American ExpressOptima card, which offers a variable interest rate based on the prime rate, has dropped from 16.75 % to 16.25 %. As a matter of fact, since December 1990, the Optima A.P.R. has actually increased from 15.75% to 16.25%.
How is it possible for a prime-based rate to decrease 0.5% while the prime fell 2.0%? Worse yet,how could the rate actually increase during a period of declining interest rates?
The answer is simple: Change the Formula !
American Express used the interest rate formula of Prime +5.75% for purchases charged to the Optima card. Effective January 1st of this year, the formula changed to Prime +6.75%. This month another formula change went in to effect. Effective October 1st the new Optima interest rate formula is Prime +7.75%.
If the formula had not changed Optima cardholders would be paying 13.75% instead of the current 16.25%. Since the average balance carried on an Optima card is around $2400, a typical cardholder will be paying about $60 more this year in interest charges as a result of the formula changes.
As general interest rates continue to plunge do not be surprised to see other card issuers, offering variable rates, to pull this stunt. While some issuers may tack on a percentage point or two others may simply add a floor rate or a minimum interest rate to the formula. Bear in mind credit cards are unlike other types of bankloans. You cannot lock in a credit card interest rate or a variable rate formula.
Card issuers are only required to provide fifteen days notice prior to the billing cycle in which a change in interest rate or interest rate formula is to be implemented. Changes in card fees require a simple fifteen days notice.
The lesson for holders of cards with variable interest rates is to be alert. Watch for notices of change-in-terms of the Cardholder Agreement.
Remember the term "variable rate" does not necessarily mean the credit card rate will drop if all other interest rates drop.
Under state law, card issuers in Arkansas may not charge more than 5.0% over the Federal Discount Rate. Last month the Discount Rate dropped to 5.09%. Therefore the maximum rate in Arkansas is now 10.0%.
One Arkansas bank, listed regularly in this newsletter, is still charging 10.50%. Arkansas Federal Savings in Little Rock is not subject to the Arkansas state credit card usury ceiling. Instead the bank uses avariable rate formula of Prime +2.0%. Ancidentally the Arkansas Federal Savings credit card rate will drop to 10.06% on October 15th to reflect last month's drop in the prime to 8.0%.)
This may seem baffling to most consumers butthe answer is quite simple. Arkansas Federal Savingssold off its credit card portfolio to Wachovia Bank, based in Atlanta, several months ago. AFS now acts asan agent of Wachovia Bank. AFS markets and processes the credit card applications while Wachovia issues and owns the cards.
This change was good for consumers.
In the past Arkansas Federal rejected a very high number of applicants (over 90%) and rarely granted initial credit lines over $1,000. Coupled with a $35 annual fee and no grace period, the card was not a bargain. Now that Wachovia has taken over approval rates have improved and credit lines have been substantially increased.
Consumers disappointed in the past with the cards issued from Arkansas Banks may want to reconsider the Arkansas Federal Savings/Wachovia deal (501-227-5654).
If you're looking for the highest interest rate paid on your secured credit card deposit then you should call Consumer Fresh Start Association, based in Princeton, IL. (800-352-5353).
This non-profit "support group for those who have gone bankrupt in the past" has teamed up with American Paciflc Bank (Portland, Oregon) to offer a security deposit interest rate of 6.25%.
The secured card pricing is the same as American Pacific's standard program: 18.90% interestrate, $30 annual fee and a $400 minimum deposit.
One of our California readers sent us a copy of a telegram they recently received soliciting for the FAFCO Gold Card. While the letterhead and envelope were marked "Telegram" it was nothing more than acomputer generated print-out, machine stuffed in a Pre-Sorted First Class envelope. A poor Western Unionlook-a-like.
The message was even more amusing:
Congratulations! You have been pre-approved for a gold card with a $10,000 line of credit. Mail your $29.95 annual fee by check or money order along with this telegram to activate your credit immediately. Failure to do so will result in forfeiture of charging privileges. Please return this telegram with payment by October 14,1991. Make check or money order payable to FAFCOGOLD CARD. Sincerely, Robert J. Armstrong, New Accounts Manager.
The fact that many of these solicitations show up in mailboxes across the country indicates consumers are still being taken in by such misleading offers. Consumers with marginal or poor credit are especially vulnerable.
The first red flag to emerge on many of these gold card solicitations is the use of the term "pre-approval". Also the offer of high credit limits without regard to credit history.
Most of the gold cards marketed like the one above have little or no value to consumers. The card is usually nothing more than a catalog shopping card. If you try to use the credit line for making catalog purchases you will be required to make a cash deposit between 40% and 85%. In most cases the merchandise is offered at inflated prices, considerably higher than prices charged by local department stores. To make matters worse your payment history is not reported to any credit bureaus. If you are trying to establish or rebuild credit, the card will have no benefit to you whatsoever.
Our investigation into this murky area has yet to turn up any worthwhile offer. If the "gold card" is such a turn on for you, stick with VISA, MasterCard or American Express.
Incidentally, the FAFCO GOLD CARD offer did not include a disclosure of credit card terms, required under federal law.
Speaking of disclosure, Congress will be debating a number of proposed changes to the Truth-in-Lending Act this month.
The proposed changes call for thirty days notice of rate changes and the right to pay off balances at the old rate if a cardholder discontinues use of the card. Other proposed changes include the requirement to display all card terms on the outside of solicitation envelopes and in all advertisements including television.
More telephone companies are getting into thebank credit card business. This month, AmeriTech, the Chicago-based "baby bell" announced it had teamed up with Household Bank (CA) to offer a MasterCard called the "Complete Card".
Like AT&T's Universal Card", the AmeriTech card features calling card discounts and no annual fee.The new card offers a tiered interest rate based on account balance: 19.80% under $1,000; 18.80% between $1,000 & $2,000; and 16.80% over $2,000.
