3 Credit Card Giants in Low-Interest-Rate Battle

Three of the nation’s top credit card issuers are engaged in an interest rate battle that has taken the costs of using plastic to new lows for a few of their best customers.

First USA, Capital One Financial Corp. and Providian Financial Corp. are offering--on a limited basis--a credit card with a 7.99% interest rate and no annual fee. It is the lowest regular rate on a no-fee card ever offered by a national credit card issuer, analysts say.

“It’s a good deal for those who can get it,” said Robert McKinley, president of CardTrak, a Maryland-based consulting firm that tracks low-rate credit cards. “That’s better than what I’m paying on my second mortgage.”

Unlike so-called teaser rates, the card’s 7.99% rate does not expire after a few months.

First USA, the nation’s second-largest credit card issuer, and Capital One, the No. 8 issuer, were reluctant to talk about their 7.99% cards, calling them a “test.” San Francisco-based Providian has been more aggressive in marketing its card.

But all three companies stressed that the low-rate cards are available only to consumers who receive mail or telephone invitations. None are accepting applications for cards at those rates.

Though the companies declined to discuss their credit guidelines publicly, Providian is reportedly targeting households with good credit records, incomes above $100,000 and debt loads above $10,000.

For those lucky enough to qualify, the 7.99% card offers substantial savings: A cardholder with a $10,000 debt would save about $730 a year in interest compared with a card at 16%, the industry’s current average.

These offers are the latest salvo in the battle for credit card customers, especially those with perfect credit records, high incomes and big debts.

Card issuers are finding that rather than airline miles or cash-back rewards, many sought-after customers, who often bounce their debts from card to card in search of low rates, would prefer to find a permanent home for their balances.

“Consumers are flooded with offers,” said Gerri Detweiler, education advisor at Debt Counselors of America, a debt counseling service. “Teaser rates are just not getting the response rates they once did.”

The three credit card companies are betting that the low-rate offers will give them an edge in the marketplace, where the lowest interest rate currently available on a widespread basis is 9.99%.

“The name of the game is to give people what they want,” said Diane Don, spokeswoman at Falls Church, Va.-based Capital One.

Providian hopes its card will win customer loyalty. “We are trying to attract people interested in a long-term relationship with us, not those people surfing around from card to card searching for a better rate,” said Laurie Cole, a Providian spokeswoman.

McKinley warned that the new low-rate cards usually come with stiff late fees, lower-than-average credit limits and other restrictions.

For example, Providian is offering the low rate only on new purchases, not for existing debts transferred from other credit cards. At First USA, the interest rate zooms to nearly 23% if a cardholder is late with payments twice during a six-month period.

The low-rate cards continue a shift away from the industry’s past. Virtually since modern credit cards were invented in the 1950s, interest rates have clung stubbornly to the high teens, regardless of inflation rates.

But in recent years, consolidation as well as risk measurement and fraud-detection technology have changed the way credit card issuers do business, and consumers are reaping some of the rewards.

Consider the growth of First USA. In the last two years, the Dallas-based issuer has tripled in size to $70 billion in outstanding credit card loans, thanks to mergers with Bank One Corp. and First Chicago Corp. “Consolidation has made us more efficient,” said Gary Marino, senior executive vice president at First USA.

Software programs that can weed out those customers who are likeliest to default or those who never incur interest charges (known in the industry as “free-loaders”) enable credit card issuers to price each customer based on his or her actual costs. In other words, while some customers enjoy lower rates, others pay more.

Consumer advocates stressed that cardholders should remember that terms and benefits on credit cards are subject to change. Issuers reserve the right to change the terms, including the interest rate, at any time and for any reason. Federal law requires companies to give cardholders 15 days’ notice.

To consumers, such changes can feel like bait-and-switch tactics. “I feel they outright lied to me,” said Marcel Blais, an engineer from Portland, Ore. Blais said he responded to Providian’s 7.99% invitation but that when the card arrived in the mail, the interest rate was 12.99%. He immediately canceled the account but still got charged $70 for one month’s interest and a credit insurance policy he said he never requested.

Providian officials said cardholders are evaluated individually. “We do change offers frequently, but we realize that customers can always vote with their feet,” Cole said.

The Times’ Investment Strategies Conference, to be held May 22-23 at the Los Angeles Convention Center, features a panel titled “Money Make-Over: Debt Management and Budgeting.” Times staff writers Kathy M. Kristof and Liz Pulliam are panelists. For registration information, call (800) 350-3211 or visit https://www.latimes.com/isc.