WEST PALM BEACH, Fla. -
Timothy Kolk, managing partner
Brookwood Capital, Peterborough, N.H.
In my opinion:
1) Variable rates will reset quickly. Some within a month others no later than April/May (most variable rates are set quarterly and reprice based on Prime at the end of month 2 of the prior quarter...hence rates will rest in April/May based on Feb. 29 Prime.
2) Fixed rates will generally reset based on competitive pressure, as issuers have complete discretion on when to reprice. Last time rates came down we saw that most fixed rate issuers repriced much more slowly that variable rates.
This is due to two factors. It takes more time, energy and money to reset a fixed rate. You usually issue new disclosures and that takes time and money.
It also requires some internal analysis and dialogue to come to consensus on what the new rates should be. That takes time.
Repricing APRs down is a decision to reduce interest revenue, and that is a decision may institutions are not eager to make.
And I think in today’s competitive (and difficult) economy it will be harder for credit unions to actively reduce interest income than it used to be. With so many looking for better revenues even holding even is hard to accept. So a credit card rate cut is a difficult sale while credit losses are increasing, yields on other products are going down and investment returns are not what they used to be.
Choosing not to lower fixed rates has a downside, however. What we saw last time the rate cycle looked like this was that those credit unions that didn’t lower their fixed rates suffered a few problems in their portfolios. Specifically, they lost accounts to competitors that did offer lower rates (fixed or variable) and had trouble generating new accounts to replace them.
Aside from leading to a smaller program with fewer satisfied members, attrition can also lead to increased credit risk: those card holders that leave are the ones with the most options. Those whose credit quality is a little more troubled don’t tend to have those options.
Jay Kurian, first senior vice president
TNB, Dallas
We expect that credit unions using variable rates will implement changes rather quickly. The advantage of a variable rate is that card issuers don’t have to disclose the change, which gives them the ability to adjust rates without having to send out disclosure notices.
To make a change to a fixed rate card program, the card issuer must adhere to certain disclosure guidelines, which will determine how quickly a rate change can be initiated. First credit unions must determine what rate to set, then it can take up to two months to go through the planning and disclosure process.
Vinnie Calo, president of Credit Processing Services, Fiserv Card Processing Services, Lake Mary, Fla.
I believe that if the issuers have tied their rates to the Prime Rate, adjustments will occur based on their terms and conditions. I do not believe that other interest rates will see a rapid response to this market event.
