Credit card deals nearly maxed out

By TED GRIFFITH
Delwareonline.com
Staff reporter
08/15/2004

Consumers beware - attractive credit card offers appear to be headed for the endangered species list.

Increased borrowing costs are driving credit card issuers to raise interest rates, alter terms of cardholders' agreements and cut back on introductory offers that promise no interest for a year or more, industry analysts said.

"These are trends that are taking hold and that we can expect to see continue if, as expected, interest rates rise further," said Greg McBride, an analyst with North Palm Beach, Fla.-based Bankrate.com.

After hitting their lowest levels in more than 15 years, credit card interest rates have begun to climb, with the average rate on a variable-rate credit card jumping by more than one percentage point in the past two weeks, according to Bankrate.com. Credit card issuers, including Wilmington-based MBNA Corp., are also curbing zero-percent interest rate offers and shifting customers from fixed-rate to variable-rate cards in response to rising rates.

Mark Rowlands, a 44-year-old executive with a Wilmington financial services firm, said he's been enjoying the benefits of zero-percent offers for a decade, moving his balance regularly to take advantage of a new no-interest deal just as the old one expires. Like millions of consumers, Rowlands said he receives a steady stream of offers in the mail.

"I don't need to ask, they just send them to me," he said.

Now, though, Rowlands said he anticipates the bargains will become scarcer because of rising interest rates.

When they get hit with higher rates, cardholders should consider calling their credit card companies and negotiating for a reduction, said Ed Mierzwinski, consumer advocate with the Washington-based Public Interest Research Group. And, given the current interest rate climate, it's more important for consumers to pay down their balances, he said.

"You want to pay as much as you can on your credit cards to get ahead of the rising rates," Mierzwinski said.

Fed effect

Interest rates have been on the upswing because of moves by the U.S. Federal Reserve, which has great influence over the baseline rate for almost all types of borrowing, including credit card debt. The nation's central bank Tuesday boosted its target federal-funds rate by a quarter percentage point and suggested in a statement more hikes are in store. The Fed began what's expected to be a series of rate increases in late June with an initial quarter-point hike.

By ratcheting up borrowing costs, the Fed intends to cool the economy and stave off inflation. Recent economic reports that pointed to weakening job growth could temporarily slow down the pace at which the Federal Reserve raises rates, but economists anticipate rates will go higher eventually, McBride said.

For cardholders, a rising rate environment will mean several changes, including a decline in zero-percent interest rate offers, analysts said. As interest rates declined sharply in recent years, credit card issuers could afford to forgo charging interest for six to 12 months to attract new customers. But card issuers will need to rethink that strategy as borrowing becomes more expensive, said Evan Momios, an equity analyst with Standard & Poor's in New York. For competitive reasons, the zero-percent offers "won't disappear overnight," but consumers can expect to see fewer of them in the coming year, Momios said.

A shift in strategy

MBNA has already cut back, with the number of its zero-percent offers half what it was a year ago. Vernon H.C. Wright, MBNA's chief financial officer, said the No. 3 credit card issuer would like to see its peers follow suit.

"In making this shift in pricing strategy, we hope to see the industry move away from the aggressive use of zero-percent money and toward a more rational, albeit highly competitive, pricing environment," Wright said during a presentation at a New York investment conference late last month. "Zero promotional interest rate offers may generate significant cash volume. However, within many customer segments, they may also generate short-term unprofitable loans."

In addition, MBNA is notifying customers that it's shifting them to variable-rate cards, which adjust automatically based on the movements of overall interest rates. Some of MBNA's approximately 50 million cardholders will see the switch to variable rates take effect as early as September, and the company expects to have about a third of its cardholders moved from fixed to variable rates by the end of the year, spokesman Jim Donahue said.

The "vast majority" of cardholders at New York-based Citigroup, the No. 1 credit card issuer, already have variable rates, a spokeswoman said. A spokesman for No. 3 credit card issuer New York-based JPMorgan Chase & Co. declined to discuss whether the company is shifting cardholders to variable-rate plans. JPMorgan Chase, which recently completed a merger with Bank One, has selected Wilmington as the headquarters for its combined credit card unit.

Variable rates allow credit card issuers to quickly pass on their increased borrowing costs to consumers, with the hike often taking effect in the billing period immediately following a move in the prime rate, the rate banks charge their most creditworthy customers.

But even cardholders who retain fixed rates shouldn't think they'll escape the rising tide, Bankrate's McBride said. Unlike fixed-rate mortgages, credit card companies can change "fixed" rates as long as they notify the customers. The length of the notice period varies, but it can be as little as 15 days, McBride said.

Home Loans Articles, Mortgage Loans Articles, Financial News