The four biggest U.S. banks are encouraging their most creditworthy customers to take on more debt, mailing credit-card balance-transfer offers with rates as low as zero percent even as they add fees for other services.
Bank of America Corp., the largest U.S. bank by assets, is offering some customers a teaser rate of zero percent plus transaction fees through June 2012. Customers who receive the promotions with balance-transfer checks may deposit the checks to use like a short-term loan, rather than paying off a balance at another financial institution. There is a one-time fee of $10 or 4 percent, whichever is greater, per transfer, according to the terms reviewed by Bloomberg News. JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are sending similar promotions.
The offers come as the banks add fees for checking accounts to make up for lost revenue from federal rules on debit-card swipe charges. The rates may be a good deal for customers who can precisely follow the terms, as the average rate for an unsecured personal loan is 13.96 percent, said Greg McBride, senior financial analyst for Bankrate.com, which provides consumer rate data.
“It’s a pretty inexpensive way to use other people’s money,” McBride said.
Some customers of JPMorgan, the second largest lender, who receive such offers may write a balance-transfer check to themselves for as much as $5,000 to take out a zero percent loan for as many as 15 billing cycles. Citigroup, the third largest, is offering some customers 0.99 percent on balance transfers through February 2013. Existing customers may deposit balance-transfer checks into their bank accounts to use as cash, according to the terms reviewed by Bloomberg News.
There’s a one-time fee of $5 or 3 percent, whichever is greater, per transaction, according to Citigroup’s terms. Wells Fargo is extending similar offers at rates from zero percent to 6.9 percent, according to spokeswoman Lisa Westermann, who declined to provide further details citing proprietary concerns.
Customers should avoid such transfers unless they’re sure they can meet all minimum monthly payments and pay off the balance in full before the promotional rate expires, said Travis Plunkett, legislative director of the Consumer Federation of America, which advocates for consumers.
The Bank of America offer jumps to 22.99 percent at the end of the teaser-rate period in June, and the Citigroup promotion switches to 14.99 percent on unpaid balances in February 2013.
“It looks like they’re giving away the farm,” with the offers, said Ben Woolsey, director of marketing and consumer research for CreditCards.com. “On the small percentage of people who don’t pay it off on time, they make a killing.”
Investors who had a credit line large enough to write a $20,000 balance-transfer check for zero percent to cash and invested the proceeds in the average long-term U.S. government-bond mutual fund over the last three months could have earned more than $4,000, after accounting for up-front transfer fees of 4 percent, according to average bond-fund returns from Morningstar Inc. The Vanguard Long-Term Treasury Fund returned 22.33 percent for the three months through Oct. 7, for a possible gain of almost $3,500 after fees, for example.
The balance-transfer rates are competitive with a home-equity line of credit and require less paperwork, said McBride of Bankrate.com, a unit of Bankrate Inc. The average rate on a $30,000 home-equity line of credit was 5.42 percent as of Oct. 5, according to Bankrate.
“The ease of use is really the key selling point,” McBride said. Banks are likely only making the offers to customers with top credit scores, he said.
Capital One Financial Corp. has been sending balance-transfer checks with teaser rates to some of its “more creditworthy” existing customers and those clients may deposit the money in their bank accounts or use it for other purposes, said spokeswoman Pam Girardo.
Bank of America’s balance-transfer offers are generally sent to customers with better credit histories, said Betty Riess, a spokeswoman. She declined to specify the average size of their lines of credit.
Banks have been sending more balance-transfer mailings to prospects in addition to existing customers, said Woolsey of CreditCards.com. In the six months through August, about 71 percent of credit-card offers to potential new customers came with teaser rates on transfers, compared with 66 percent of mailings in the same period last year, according to Mintel Comperemedia, which tracks marketing trends.
Customers with significant financial assets may be able to find better rates using margin loans against their portfolios, said Cathy Jameson, a managing director of Silvercrest Asset Management Group, a New York-based investment adviser and family office whose clients generally have $5 million or more in investable assets.
Jameson’s clients are able to access margin loans on their investment portfolios for as little as 1 percent and have used the loans to pay for home improvements, she said.
“There’s definitely cheaper money around, assuming that people have access to it,” Jameson said.
One client pays about 50 basis points for margin loans to purchase “recreational equipment” that he then leases, said Jeffrey Thomasson, chief executive officer of Oxford Financial Group Ltd., an investment adviser and family office based in Carmel, Indiana, which oversees more than $16 billion. He declined to say what the client buys for confidentiality reasons. A basis point is 0.01 percentage point.
Reliance on Cards
Margin trading is regulated by the Federal Reserve, the Financial Industry Regulatory Authority and securities exchanges, and many brokerage firms have margin requirements that are stricter than what regulators require. The loans are generally made by securities firms to investors and use financial assets such as stocks and bonds as collateral.
Consumers have been increasing their reliance on credit cards to pay for staples such as groceries, said Silvio Tavares, senior vice president of global information and analytics at First Data Corp., a payments processor that tracks trends among payment types. Consumers spent 6.8 percent more on their credit cards at food and beverage stores in August compared with a year earlier, he said.
“There are small but important indicators that there might be an increase in unsustainable credit-card debt,” said Plunkett of the Consumer Federation.
Banks are struggling to replace lost fee revenue. About 45 percent of U.S. customers’ checking accounts are free, compared with about 65 percent last year, with an average monthly fee on non-interest-bearing accounts of $4.37 a month, according to a study released in September by Bankrate.
Bank of America next year plans to start charging some debit-card users a monthly fee of $5 for making purchases with their cards. Wells Fargo plans to test a $3 monthly debit-card usage fee among certain customers starting Oct. 14. JPMorgan began testing a $3 monthly fee for certain customers with debit cards in two states in February.
Citigroup plans to raise monthly fees on its Basic Checking accounts to $10 from $8, which customers may avoid by maintaining a $1,500 minimum balance combined in their checking and savings accounts or by making certain transactions.
Since Oct. 1, banks may receive no more than 21 cents per transaction plus 5 basis points of the purchase price for debit-card transactions, according to a rule issued by the Federal Reserve in June.
That rule will cost the industry about $6.6 billion annually in lost revenue and comes on top of about $5.6 billion in yearly losses from rules that took effect last year prohibiting the companies from automatically enrolling customers in overdraft-protection programs, said Beth Robertson, director of payments research for Javelin Strategy & Research, a market-research firm.
“It’s driving banks to try to move more customers into using credit more regularly,” Robertson said of the debit-fee cap. “It’s more profitable for them.”