As the Fed continues to raise interest rates, card issuers find it more expensive to lend and are tamping down on promotional offers.
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“For years, the 0 percent APR periods have been increasing to as high as 20 months and offered widely to those who are creditworthy,” says card industry consultant Robert Hammer. “Now we’re some softening in that trend.” Balance transfer periods on some cards are getting shorter, and fewer cardholders are being offered an interest-free promotion.
Why all the belt-tightening? Blame the Federal Reserve, say experts. Nearly every analyst CreditCards.com spoke with pointed to rising federal interest rates as a primary reason for why card issuers are tamping down some of their promotional offers.
“Interest rates are going up,” says Claude Lawrence, director of insights for payment and lending at the market research firm Mintel Comperemedia. That, in turn, is pushing issuers to reevaluate their promotions.
Since 2015, the Fed has increased its benchmark interest rate by 1.75 percent, raising costs for borrowers and lenders alike.
“If you’re giving someone free money for 15 months, it’s more costly if interest rates are at 2 percent, rather than 1 percent because banks have to finance it at a higher rate,” says Moshe Orenbuch, an analyst at the financial services firm Credit Suisse.
So rather than scrap promotional offers altogether, banks are being more choosy about who gets an interest-free offer – and how long those offers last.
Direct mail offers aren’t as generous as they used to be
In addition to trimming offers, lenders also are rolling back the number of promotional card offers they mail – potentially foreshadowing a significant break from the way they’ve courted cardholders in the past. Direct mail offers are one of the more traditional ways that issuers try to woo potential customers and are often seen as an important bellwether.
According to new data captured by Mintel Comperedia and published by Credit Suisse, the average balance transfer period on offers mailed directly to consumers’ homes has dropped from 14.6 months in April 2017 to an average of 13.6 months in April 2018. By comparison, average balance transfer periods in 2013 and 2014 often swung as high as 16 to 20 months, according to data published by Credit Suisse.
In addition, credit card lenders are cutting 0 percent teaser rates from the offers they mail – a potentially ominous sign for cardholders hoping to cash in on a lengthy reprieve from paying interest.
For example, in April 2018, just 59 percent of the credit card offers consumers received advertised an interest-free promotion for new purchases. That’s the lowest level of card offers showcasing a 0 percent purchase rate since 2010, according to an analysis of Mintel data by Credit Suisse.
Online credit card offers are often more generous. However, not many card issuers these days are giving cardholders more than 15 months to carry a balance interest-free.
CreditCards.com analyzed 147 online card offers from 10 of the largest U.S. card issuers and found just four cards advertising a 0 percent APR for longer than 15 months:
- 2 cards gave consumers up to 18 months to carry a balance interest-free.
- 1 card offered 20 months.
- 1 card gave consumers transferring a balance up to 21 months to pay off old purchases.
Most of the credit cards evaluated by CreditCards.com don’t advertise an interest-free promotion at all. Among those that do:
- 25 cards offer some kind of a 0 percent promotion for up to 15 months.
- 4 cards limit cardholders to 14 months to take advantage of an interest-free offer.
- 18 cards give cardholders at least 12 months to carry a balance interest-free.
- 4 cards give cardholders up to nine months.
- 5 cards give cardholders between six and seven months.
Experts predict lenders will continue to curb offers as rate hikes and other financial pressures, such as rising delinquencies, continue to hit lenders’ bottom lines.
“Issuers do have a general challenge in profitability right now,” says Brian Riley, director of the credit advisory service at Mercator Advisory Group. “Cards are still more profitable, but the fact is the margins are slipping.”
Card companies are recording a growing number of losses as more consumers fall behind on bills. There are lots of inactive accounts, says Robert Hammer, and lending costs are getting steeper. Meanwhile, competitive rewards programs are also squeezing some card issuers’ profits – especially as issuers try to lure value-conscious consumers.
Credit card companies are also showing signs of strain by cutting other costs, say experts. For example, lenders such as Citi, Chase and Discover, have garnered headlines in recent months for cutting key side benefits – such as rental car insurance and return protection – that were once seen as standard card perks.
The cutbacks don’t appear to be spreading to rewards programs, says Riley. “But the potential is certainly out there,” he says.
What to expect
For some consumers, card offers could get worse before they better.
As the economy continues to beat expectations, the Federal Reserve has signaled it will keep hiking rates over the next year. On June 13, 2018, the Fed predicted it would raise rates at least one or two more times this year, potentially raising borrowing costs by another half a percent. Some Fed policymakers even forecasted rates could rise by as much as a full percentage point.
That means issuers will have to decide again whether lengthy interest-free promotional offers are worth the extra expense.
“On average, you’ll see a decline,” predicts Mintel’s Lawrence. For example, instead of receiving an offer for a 15 interest-free balance transfer period, you may be more likely to see a 12-month offer. “I would expect it to settle on around a 12- to 14-month range, overall,” he says.
Super generous offers won’t disappear completely, though.
“You’ll still have issuers that will have longer durations,” says Lawrence. Citibank, for example, is unlikely to scrap its notoriously long promotions. “That’s part of their brand,” he says. The Citi Simplicity card, for example, still advertises an 18-month, 0-percent introductory offer on both balance transfers and purchases. Meanwhile, the Citi Diamond Preferred card gives cardholders 21 months to pay off a transferred balance interest-free.
You may also see some card issuers taking advantage of the trend toward modest offers by veering in the opposite direction, says Lawrence. “You’ll see some players possibly try to differentiate themselves,” he says. For example, they might decide to give longer durations because everyone else is in decline, says Lawrence.
Some issuers appear to be pursuing that strategy already. For example, in 2017, U.S. Bank gave cardholders who applied for the Visa Platinum Card just 12 months to take advantage of an interest-free promotion. Today, cardholders are given up to 20 months.
Similarly, Wells Fargo has expanded its 0 percent introductory offer on the Wells Fargo Platinum Visa card from 15 months to 18 months (then a variable APR of 13.74% – 27.24%).
In addition, you may see some issuers focusing more heavily on their rewards programs than 0 percent promotions. Traditionally, lenders have used interest-free promotions to attract more loyal cardholders, says Orenbuch. But some lenders are finding that certain types of rewards programs can also encourage people to stick around.
“The idea that Discover came up with was that doubling rewards was sort of a replacement for a purchase teaser,” he says.
Issuers also may focus more heavily on rewards programs because they’ve become so popular with consumers, credit card expert Jason Steele says. “It could be that card issuers are recognizing that people are more interested in rewards than they are in 0 percent offers.”