Competition is driving credit card interest rates down to new lows at what may be an inopportune time.
Three-month "teaser" offers as low as 0% are flooding consumers' mailboxes. Fixed-rate cards at 9.9% are setting a new and, to some observers, ominous standard.
The cards are unlikely to yield significant profits, the experts said. And any price war would seem counterintuitive, given the persistently high levels of delinquencies and the inevitability-if uncertain timing-of an economic slowdown.
"The whole industry is concerned about these issues," said Michael Auriemma, president of Auriemma Consulting Group, Westbury, N.Y. "We've been saying, 'How do we get out of this cycle? How do we break this trend' of low teaser rates?"
Economists say the trend, driven by some of the most sophisticated and profitable credit card marketers, is not hazardous if the economy does not turn down.
The pricing "makes sense in the current environment," said Warren Heller, director of research at Veribanc Inc., Wakefield, Mass., "but people don't realize" that the factors underlying today's favorable statistics can change.
All bets are off "if we move into a recessionary phase and a large number of borrowers get into repayment troubles," Mr. Heller said.
"Further down the road is where the peril is," he said. "It's too late once there are people who have run up large amounts of debt and banks can't get the loans off their books without charging them off."
Standard interest rates on credit card loans are in the 15% to 20% range. Many issuers have made trial offers with rates holding for three to six months under 10%.
Setting a pace in recent months, Capital One Financial Corp. and Banc One Corp.'s First USA unit have posted rates of 9.9% and 9.99%, respectively. Citicorp and others are touting interest-free introductory periods and encouraging balance transfers at that hard-to-resist price.
"Competition is at an all-time high," said James L. Accomando, president of Accomando Consulting Inc., a Fairfield, Conn.-based consulting firm. "You have to do something to break through the clutter."
More 9.9% cards are expected, because the companies in the forefront are claiming success, defying the skeptics.
Keith Leggett, senior economist at American Bankers Association, said that the price reductions have paralleled a decline in general interest rates. The card rates "don't pose much of a risk" to issuers, he said.
Indeed, these high-profile card marketers have excelled at risk-based pricing and impose a discipline on borrowers.
First USA, for example, offers its low fixed rate to "people who have a solid credit bureau history and make more than $70,000 a year," said David Webster, spokesman for the company in Wilmington, Del.
If a cardholder pays past the deadline twice within six months, the rate is immediately bumped up to 19.99%, Mr. Webster said.
Despite such safeguards, consultants and even some practitioners are concerned. The splashy offers may attract customers-but may also shave profitability.
"The card companies don't make routine checks on the financial status of their borrowers," Mr. Heller said. "If people lose their jobs," he said, the companies will be "in deep financial yogurt."
With no letup in their aggressiveness, card lenders have also pushed more and more unused credit lines on consumers. Mr. Heller put the figure at $1.78 trillion on March 31; it was growing much faster than outstanding loans.
A bank must reserve capital against idle lines with little if any annual-fee revenue to support it, and this poses "more risk than many banks ascribe to it," said Robert J. Zizka, managing vice president of First Manhattan Consulting Group, New York.
"It becomes a risk when somebody who has not been using his card starts using it aggressively," said James M. McCormick, president of that firm.
Providian Financial Corp. has discontinued its 0% teaser for balance transfers. In May the San Francisco-based issuer put out a card at that rate plus a $100 "signing bonus." The check is still available, but not the teaser rate.
Balances now can be transferred at 12.9% for the first three months. They then jump to an unspecified "guaranteed savings rate" that the company promises will be lower than on the customer's previous card.
Providian found it difficult to turn a profit on 0% balance transfers, said David Alvarez, executive vice president. "We have moved away from teaser-driven methodology," he said.
He also said 9.9% might be a flash in the pan.
"The key to the 9.9% is risk assessment, and the long-term amount of money you'll be able to make off of it is questionable," Mr. Alvarez said. "With all the price wars, the long-term players who are interested in good, profitable economics have to be disciplined."
Others would like to back away from teaser rates, but the consumer mentality makes that difficult, Mr. Auriemma said.
"When introductory rates came out in 1988, they made a great deal of sense-they were new, they were different, they inspired people to bring their accounts over," he said. "Now you've got a lot of people churning, going from one introductory rate to another, and sometimes the people who wind up staying are the higher credit risks."
Some card companies are giving away more than they need to, Mr. Auriemma added. He pointed out First USA's latest 9.99% fixed-rate card also offers a 3.9% introductory rate on balance transfers.
"We said, 'Aha, this (9.99%) is a great annual percentage rate, and it will break the cycle of the introductory rate,'" Mr. Auriemma said. "Today there is a new offer in the mail, which gives away even more. It's like they are trying to give money away."
First USA said people with good credit deserve a lower rate.
"Being able to offer lower-rate cards is one of the benefits of consolidation in the banking industry," Mr. Webster said.
First USA and Capital One are both known for "mass customization," making thousands of product offers with different attributes. Though these issuers may benefit from their size and leadership status, experts warn that the industry as a whole could suffer from their success.
"Every time a new enhancement comes out, profit margins tend to get smaller and smaller," Mr. Accomando said.
It is possible to make money at a 9.9% rate, he said. It encourages more transactions and revolving of balances that generate revenue for the issuer. But not every bank can manage risk well enough to take full advantage, he said.
Though low-rate card offers might raise regulatory or credit-quality concerns, they could also turn banks into heroes among consumers.
"People will see them as good guys going out and giving away cards with lower interest rates, " said Howard S. Dvorkin, president of Consolidated Credit Counseling Services of Fort Lauderdale, Fla.
The downside, he said, is that low-rate cards are a "marketing hook." By coaxing people to call and inquire, the banks can make offers for higher- rate products to people who do not qualify for the lower-rate ones.
"Smart people will use the new card to consolidate their debt," Mr. Dvorkin said. "But it will only go to people with perfect credit, which are people who probably don't need to consolidate their debt."