American Express Launches New Credit Card : Finance: The Optima True Grace, which features lower rates and a 25-day grace period, is expected to boost competition.

TIMES STAFF WRITER

American Express launched a low-rate, no-fee credit card Tuesday that could escalate competition in the industry while signaling a new approach for the New York-based travel services company.

The card, called Optima True Grace, was immediately heralded as a consumer breakthrough in part because its variable rate is lower than those on cards offered by most of its major competitors. It could spark a new rate war at a time when card rates have generally been rising.

More important, the card is expected to spark competition in an important but widely misunderstood facet of the credit card market: grace periods, which are the period between when purchases are made and when interest charges start to accrue. The card will be one of only a few to offer a grace period even when a customer has an outstanding balance. Users who carry balances--about 70% of all cardholders--generally don't get grace periods.

The new card is also a departure for American Express, which until now has offered credit cards with revolving balances mainly as "companions" to its charge cards. American Express' charge cards--the classic green, gold and platinum-colored American Express cards--require consumers to pay off the balance each month.

American Express' True Grace card allows revolving balances and boasts low interest rates and fees. However, it will be marketed only to holders of the company's other charge cards, which come with respective $55, $75 and $300 annual fees for the green, gold and platinum.

"This is clearly going to fan the competitive flames a lot," said Robert B. McKinley, editor of CardTrak, a credit card newsletter published in Frederick, Md. "This is particularly helpful to consumers because American Express is putting heat on an area where there hasn't been any competition at all. Now every segment of the market is hotly competitive--rates, fees and grace period."

The Optima True Grace card will offer a 7.9% interest rate for the first six months. After that, the rate will vary, based on banks' prime rate plus 8.75 percentage points. That would be a 16% rate at today's prime rate.

There's no annual fee during the first year. After that, the card's $25 annual fee will be waived for customers who use the card at least three times annually.

But the card's grace period may be the most significant feature, said Gerri Detweiler, a Virginia-based credit card consultant who wrote "The Ultimate Credit Handbook."

The True Grace card always provides 25 interest-free days on new purchases--whether the balance is paid or not. Most consumers believe they do get a grace period, even when they maintain a balance, McKinley said, but roughly 90% of card issuers eliminate the grace period for customers who have a revolving balance.

American Express said it will market its new card through television, print and radio advertisements, as well as an aggressive direct-mail campaign. The company hopes to woo 1 million new cardholders. Notably, in a clear effort to lure away competitors' customers, American Express notes that it will also offer 25 interest-free days on transferred balances.

However, the new card will be offered only to people with good credit. Those who fail to pay their bills on time could find their interest rate boosted, American Express spokeswoman Gail Wasserman said.

Those who have more than three late payments in six months will be put into a higher-risk "tier." Instead of prime plus 8.75 percentage points, they will pay prime plus 12.9%, Wasserman said.

The risk tiers are partly in response to credit quality problems that American Express encoun tered when it launched its Optima card in 1989. While American Express doesn't talk specifics, it's widely known that Optima cardholders defaulted in far greater numbers than holders of other types of credit cards.

"Some people say that good judgment comes from bad experience," said Phillip Riese, president of American Express' Cardmember Financial Services Group. "If that is true, we now have very good judgment."

The True Grace card will be the first in a series of new credit cards offered by American Express over the coming years, Riese said. It will provide holders with a package of benefits, including travel accident insurance and 24-hour customer service.

However, cardholders won't get automatic car rental insurance, frequent-flier miles or a variety of other services standard with the classic Optima or American Express charge cards.

Because many consumers like these extra benefits, American Express said, it doesn't expect a lot of shifting by its own cardholders.

For the Record Los Angeles Times Friday September 9, 1994 Home Edition Business Part D Page 2 Column 6 Financial Desk 2 inches; 36 words Type of Material: Correction American Express--The New York-based company's new Optima True Grace card will be offered to all consumers who are good credit risks, regardless of whether they have other American Express charge cards. An article in Wednesday's editions was incorrect.
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