Bad credit card issuer's moves send interest rates lower

Credit One replaces high-interest card; also eliminates cards' grace periods

By Jeremy M. Simon

Interest rates on new credit card offers fell this week, according to the CreditCards.com Weekly Credit Card Rate Report, after a subprime issuer tweaked some of its card offers.

The national average interest rate on new credit card offers declined to 14.44 percent, according to the CreditCards.com Weekly Credit Card Rate Report. That decline followed changes made by bad credit issuer Credit One, which discontinued a card carrying a high rate. As a result, we replaced that card in our database with a similar Credit One card with a lower interest rate.

At 29.9 percent, the Credit One Visa Silver card had the highest annual percentage rate (APR) of any product we currently track. The Credit One Visa Platinum card -- which took its place in our database -- has an APR of 23.9 percent, which is more in line with other cards in the bad credit category. Credit One didn't respond to requests for comment about what prompted the change. 

More than just APRs changing
Subprime APRs are much higher than they were six months earlier. Banks have raised rates in response to the challenging economy and the Credit CARD Act, which restricts increases to existing cards but doesn't set limits on APRs for new card offers. 

Analysts say that faced with new laws restricting fees and rate hikes, "we would expect most bad credit issuers to offer a higher APR (to make up from lost revenue from other streams)," says Anuj Shahani, director of competitive tracking services for Synovate's financial services group, in an e-mail. And while Credit One took a different approach regarding APRs, it also made other less consumer-friendly moves.

Credit One also changed the fee structure on its card offers and -- importantly for cardholders -- eliminated its grace period, meaning that consumers begin paying interest charges for purchases and cash advances beginning on the day those transactions occur. Recent credit card reforms set restrictions as to how long a grace period must last -- if offered, it must last at least 21 days -- but they don't require an issuer to offer one. That gives issuers the wiggle room to make changes such as this one, which forces even those cardholders who never carry a monthly balance to make regular interest payments.  

The cost of higher rates
Based on the increasing national average, a typical cardholder who borrowed $5,000 on a credit card today and consistently paid $150 per month at today's average interest rate would have to pay $6,430 to pay off the debt. That's $263 more than would have been required six months earlier. (Calculator: How long will it take to pay off your credit card balance?)

Banks, however, realize that high interest rates can have unintended consequences. Shahani notes that First Premier's decision to test a 79.9 percent APR in October 2009 was met with intensive media coverage, while prime issuer Citi's decision to raise many card APRs to 29.9 percent last year drove many cardholders to close their accounts. "It also prompted Rep. Louise Slaughter, chairman of the House Rule committee, to suggest legislation that would cap credit card interest rates at 16 percent," Shahani says.

"Some issuers, aware of the potential backlash and special attention now being paid to extreme APRs, may choose to lower their APR rather than deal with the consequences," he says. 

See related: Credit card reform arrives in the form of the Credit CARD Act, A guide to the Credit CARD Act of 2009, What's NOT covered by the credit card reform law, Issuer of 79.9% interest rate credit card defends its product, Calculator: How long will it take to pay off your credit card balance?

Published: March 31, 2010

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