Consumers Can Be Victors in Credit Card Wars

Unprecedented interest rate wars in the credit card market are touching off a second wave of credit refinancing--a trend that could save consumers millions of dollars annually.

Average credit card interest rates--dictated by a handful of the nation’s biggest banks--have remained naggingly high. But smaller players in the market have launched aggressive marketing battles that have pushed the lowest rates in the market to record lows, said Robert McKinley, publisher of CardTrak, a credit card newsletter based in Frederick, Md.

Currently, eight credit card companies are offering cards at single-digit rates of interest--one as low as 6.9%. Nine more credit cards are offered for less than 12.5%, according to CardTrak. And many of these low-rate cards come with no annual fees.

“Today’s lowest rates are the lowest they’ve ever been,” said Gerri Detweiler, executive director of Bankcard Holders of America, a Herndon, Va., consumers group. “This is the time to refinance your credit card balance. Anyone who is paying more than 14% should be looking around for a better deal.”

McKinley credits Oak Brook Bank of Illinois with touching off the rate war in July by announcing an 8.9% MasterCard. Not to be outdone, AFBA Industrial Bank of Virginia matched the 8.9% interest rate the following month and offered the card with no annual fee. (Oak Brook charges a fee of $39 annually.) This month, Amalgamated Trust of Chicago says it will slash its rate to 8.75% on ordinary cards and to 8.5% on gold cards, according to McKinley.

Better still, unlike the low-rate cards of yesteryear, banks are now offering substantial credit lines on these inexpensive cards. As recently as a year ago, most banks that offered cards at single-digit rates maintained exceptionally low credit limits on them--often less than $500. Now you can get low-rate cards with several thousand dollars in credit.

Signet Bank, for example, recently sent out national solicitations for a no-fee, 8.9% card with a pre-approved credit limit of $6,500.

Notably, this kind of rate war is almost unheard of in the credit card industry, where the nation’s top players have been clinging to lofty 18% and 19% rates for nearly a decade--despite the fact that interest rates on everything from car loans to mortgages have plunged in the last three years.

But consumers, faced with a widening array of choices, are demanding low rates. So banks have had to comply or lose customers. Even the nation’s biggest card issuers have tiptoed into the rate war with promotional pricing and “tiered” interest rates. For instance, Citibank is in the middle of a six-month “sale.” If you transfer your balance to a Citibank card before the end of September, the bank will give you a 9.9% rate for six months. After that, though, your rate pops up to 15.4%.

Meanwhile, a number of other big banks have introduced new rate schedules based on your credit history. If you’ve got a pristine credit record, you get the lowest rate--usually 13.9% to 15.9%. If you’ve got a pretty good--but not spotless--record, you could get in a 17.9% tier. But if you frequently pay late, your rate stays high--usually from 19.8% to 21.9%.

“This (rate war) is really unprecedented,” McKinley said. “Credit card issuers are not used to doing this stuff. They’ve been fat and happy for a number of years, but consumers have clearly sent a signal that they are fed up and they are not going to take it anymore.”

Much like consumers have been refinancing mortgages two and three times as rates have continued to fall, experts believe they are taking this opportunity to refinance their credit card debts again. McKinley points to the whopping growth rates at the small banks involved in the rate wars to underscore his point.

Each of the five lowest-rate card issuers have seen their customer ranks swell by double digits. Simmon’s Bank in Arkansas, for example, grew 47.2% just between January and July. Oak Brook Bank was up about 18% over the same period, while People’s Bank in Connecticut has experienced a 31% boost in business. The big banks, even with their rate concessions, are barely treading water, McKinley said.

For consumers, the argument for refinancing is compelling.

If you normally maintain a credit card balance, finding a low-rate card can save you hundreds of dollars annually. For instance, someone who has an average balance of $4,000 on a 17.9% card would save $360 by switching to an 8.9% card.

However, industry experts note that it’s more important than ever to read the fine print in credit card solicitations. Where good deals abound in this market, there are plenty of bad deals in disguise.

For instance, one San Francisco bank is offering a low-rate card, but instead of charging interest on balances, the bank charges interest on the amount available to borrow. In other words, you borrowed $500, but your credit limit is $5,000. You’re charged interest on the $5,000.

Additionally, many banks have different rates for purchases than for cash advances. A few require you to borrow a particular amount during the year to maintain your low rate. And grace periods and annual fees can also be important, depending on how you use your credit.

“You have to read all the fine print to make sure that it’s really a good deal and not just a gimmick to make you switch cards,” said Detweiler.

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