Now Is Not the Time to Rush to Variable Credit Cards, Consultants Say

Credit unions should not rush out to change their fixed-rate credit cards to variable-rate cards, a credit union consultant is advising, until after the overall card market settles down a bit.Jack Brick, president of Jack Brick Associates, a credit union consultancy headquartered in East Lansing, Mich., argued that many credit unions risk giving up a unique and powerful niche in the overall credit card market if they rush to change from fixed-rate credit cards to those with variable rates.He said that, like the historically lower fees and better customer service that have characterized credit union card programs, keeping a fixed-rate card available can only help a credit union card program shine all the more, particularly as other issuers move to variable-rate cards.“We know that fixed-rate cards are, by far, more popular with members,” Brick asserted. “It’s just not clear to us why credit unions should rush to give them up.”Under the most recent credit card reform law, credit card issuers are required to give cardholders 45 days before changing rates on fixed-rate cards, and even then, the new higher rate will only apply to credit card balances going forward. Balances at the older, lower rate, would still be revolved and paid off at the lower rate.Credit cards that carry a variable rate will see their rate move more freely following an interest rate index and cover the whole card balance. This has led some card analysts to urge credit union card issuers to switch to variable-rate cards to protect themselves from potential interest rate risk.But Brick pointed out that during past interest rate hikes, credit union card issuers either did not raise their card rates or, if they did, did not raise them to match the broader rate increase. He also noted that credit unions should have the wherewithal to manage a change in interest rates.“In general, as a financial institution, a credit union is going to have more tools available to help it handle an increase in interest rates than its members are,” Brick said, citing the fact that most credit unions members tend not to have flexible sources of income and often have more fixed expenses that leave them more vulnerable to interest rate changes.“Right now interest rates are at the low edge of their cycle. They won’t stay there forever, and when they start to rise, the fixed-rates cards are going to become even more popular with the general public and with credit union members,” he said.Brick pointed to the period between July 1, 2004 and June 29, 2006, a period of just under two years, the prime interest rate rose from 4.25% to 8.50%, an increase of more than 450 basis points. But during the same time period, when most credit unions had fixed-rates cards, most CUs did not change their card rates.He also pointed out that, when they did raise rates, credit unions usually took more than 45 days between telling their members that they were going to raise rates and actually raising them, making it unlikely that credit unions that decided to raise a fixed-rate card would be especially affected by the 45-day requirement contained in the latest card law.“Look, I am not a fanatic about fixed rate,” Brick said. “All we are advising our credit union clients to do is to wait. Don’t change your interest rates now. Wait for six months, nine months, a year. Let the card market settle down a bit and then evaluate what the best action would be. You can always go to a variable rate later.”Ondine Irving, president of Card Analysis Solutions, a credit union card consultant echoed Brick’s opinion, saying that she feared credit unions may have underestimated the degree of consumer anger and volatility when it comes to credit cards.“Credit unions are used to the idea of their members generally remain loyal to their credit union’s card,” she said, “but consumers are so sensitized and angry at the way issuers have been gouging them on their credit card accounts that they are really looking more at what issuers do than what they say in their card programs.”Like Brick, Irving looked back to history and noted that credit unions with fixed-rate cards, even during times of higher interest rates, had profitable card programs. In most cases, that was before they had tightened up on card expenses and reformed their fee structures. And before they could pick up additional thousands of accounts by sticking with their tried and true fixed-rate cards.“Nationwide, credit union credit card penetration is at roughly 23% or 25%,” Irving noted. “That suggests that many credit union members don’t carry their credit union’s card yet. That offers the credit union a huge growth opportunity if they can just take it. This is a chance for them to be heroes to their members.”–[email protected]