Pre-Reform Credit Card Offers Soar with Higher APRs

With weeks to go before historic restrictions on interest rate hikes take affect, credit card issuers waged a comeback in mailed offers in the fourth quarter of 2009, but the interest rates were higher and annual fees more frequent, according to the market research firm Synovate.

U.S. households received 398.5 million credit card offers in the fourth quarter, a 46 percent increase from the 272.5 million solicitations during the third quarter, said Synovate, which tracks credit card acquisition volumes and response rates.

The average purchase APR (annual percentage rate) offered in the fourth quarter was 13.51 percent, and it’s the highest recorded by Synovate’s “Mail Monitor” over the past five years. In addition, 35 percent of the offers mailed in the fourth quarter carried an annual fee, the highest share recorded by the firm in the past decade.

“As the economy recovers, even at a modest pace, we expect credit to become available to consumers, albeit at a higher price,” said Anuj Shahani, Director of Competitive Tracking Services for Synovate’s Financial Services Group. “The CARD Act (pending reform laws) has clamped down on many revenue streams for issuers and some of this lost revenue is going to be made up by increasing annual fees or introducing new fees on credit cards.”

Mailing volumes are still “fairly tepid” the firm said when compared to 668.1 million offers mailed during the same time a year ago. 

However, after 12 months of historically low consumer credit levels and low demand for new credit, the credit card industry is increasing its marketing efforts. 

An increase in mailings to the subprime market was largely responsible for the surge in the mail volume in the latest quarter. But card issuers are also mailing to those with above-average credit as the economic outlook has improved somewhat and the distinct likelihood that loan losses have peaked.

The much-anticipated batch of credit card reform laws – commonly known as the CARD Act – takes full effect Feb. 22. The reform offers landmark protection against interest rate increases on outstanding balances, and requires card issuers to notify consumers with more advance notice – 45 days – and clearer language on any fixed-interest rate hikes on future transactions.

The reform even requires card companies to restore interest rates on outstanding balances for delinquent borrowers that have demonstrated they can pay on time for six months. It does not offer those protections for interest rates tied to a variable-rate index. That reform’s “loophole” has given way to a sudden surge in major card issuers, including No. 1 Chase, to convert more customers over to variable rates.

“Issuers have scrambled since mid-year to redesign and reconfigure their business models” to absorb all the changes required by the new legislation, Synovate said. This is the primary reason why issuers had cut down on new credit card mailings in previous quarters.

“The rules of the game were changing and, until the industry knew what the new rules were, none were keen on playing a blind game,” Shahani said. “With Mail Monitor, we predicted that issuers would start mailing again, once the details of the new law became available and, almost on cue, we saw the major players start to mail more once that happened.”