Fee-Free Card Has a ‘Catch-21%’
QUESTION: I was recently solicited by a small Southern bank to take out a Visa card. It is the first time in about 10 years that I’ve been approached about a new credit card and I’m thinking about taking the bank up on its offer. The incentive is no annual fee. But the rate strikes me as terribly high--21%. Is that the going rate on newly issued cards? Or is that how the bank affords not to charge an annual fee?--W. R.
ANSWER: Your instincts are good. A 21% interest rate on outstanding bank card balances is near the top of the scale, and you can be sure that the absence of an annual fee is a contributing factor.
A recent survey of the nation’s top 113 banks by Bank Credit Card Observer finds 22% as the highest credit card rate being quoted. The three banks found to be quoting that rate are all in St. Louis--Boatmen’s National Bank, Centerre Bank and Commerce Bank of St. Louis.
Next highest, at 21%, are four California banks--First Interstate, Bank of the West, Bank of California and Imperial Bank. Wells Fargo and Lloyds Bank of California both come in at 20%.
At the opposite end of the rate scale are two Arkansas banks--Simmons First National Bank of Pine Bluff and Union National Bank of Little Rock. At 11%, their’s were the lowest credit card rates quoted.
Also near the bottom were Connecticut National Bank of Hartford, at 11.75%, and Connecticut Bank & Trust, also of Hartford, at 12%.
The bulk of the bank credit card issuers, however, fall somewhere in between. Most banks are quoting rates ranging from 18% to 20%. But most also charge consumers an annual fee ranging from $15 to $25. Premium cards, which offer higher credit limits, also carry higher annual fees--as a rule, $35 to $45 a year.
You should also be aware that bank issuers offering a fee-free credit card often use that as a way to lure customers, only to slap on a fee a year or two later.
Interest rates on credit cards have been at their current levels for several years despite growing political pressure on banks to drop them as other consumer interest rates fall. The banks argue that high fixed costs to process card transactions and rising delinquencies justify the stubbornly high rates. Visa International, for example, says its losses on credit cards from consumers who never pay off their balances rose to 3.3% of outstanding credit card debt last year from 1.9% in the previous year.
Nevertheless, some banks have been re-evaluating their credit card practices and have chosen to drop their rates slightly or offer more creative rate structuring as a result.
Security Pacific Bank in Los Angeles, for example, recently decided to give its regular banking customers a break on credit card rates. Security Pacific bank cardholders who also have checking and savings accounts at the bank will pay a lower rate on outstanding credit card balances than will those consumers whose only affiliation with Security Pacific is as a credit card customer. The more banking relationships with Security Pacific, the better the rate. The range will be 16% to 20.4%
San Francisco’s Wells Fargo Bank also is trying a more innovative approach. Consumers who have held Wells Fargo bank cards for five years or more and who bill at least $100 a month to the card will be charged only 17% on outstanding balances instead of the standard 20% rate that Wells Fargo charges other credit card customers.
A variable-rate credit card is another innovation that is being considered by dozens of banks and actually being offered by a few--the largest being Marine Midland Bank. These cards typically are offering a lower interest rate than fixed-rate cards issued by the same bank--but a higher annual fee.
One big bank that has actually lowered its rates recently is Manufacturers Hanover Trust. The New York bank cut its card rate 2 percentage points--to 17.8%--last October and says it has attracted a million new accounts as a result.
