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First USA Falling Profits May Dampen Credit Interest War

By Edmund Sanders
LOS ANGELES TIMES -- Falling profits at First USA, one of the United States’ leading low-rate credit card issuers, could trigger a slowdown in the industry’s raging interest-rate war, much to the disappointment of consumers who have been the primary benefactors of the competition.

First USA officials raised a white flag of sorts on Wednesday, saying its aggressive strategy of winning customers by offering low interest rates -- including one card that offers a permanent rate of 7.99 percent -- was cutting into earnings.

As a result, the nation’s No. 2 credit card issuer said rate hikes are on the horizon for new and existing customers.

“We think we can raise rates, still be below the industry (average), but have a better contribution to (our profit) margin,” First USA Chairman Richard Vague said in a conference call Wednesday.

Vague said First USA has already raised rates on new credit card offers and would begin hiking rates for some existing cardholders later this year. But at the same time, rate cuts would be offered to certain of the company’s best customers, he added.

In light of the changes at First USA, which has long been the industry leader in offering super-low interest rates on a national level, rival credit card issuers are likely to reexamine their pricing, analysts predicted.

“It’s a watershed event,” said Robert McKinley, president of CardWeb, a Frederick, Md.-based credit card analyst. “When the No. 2 player says, ‘Enough is enough. We’re not able to achieve our numbers,’ you are going to see a short-term retrenchment in the offers from other companies. It’s bad news for consumers.”

Since the interest rate battle began four years ago, average fixed-rates have plummeted from 18 percent to 13 percent this year, according to, a Florida-based interest rate research firm. Introductory rates, also known as “teaser” rates, have fallen from an average 5.9 percent last year to 2.9 percent today.

First USA’s accounts for nearly half the profit of its parent, Chicago-based Bank One Corp., which announced late Tuesday that problems at its credit card unit would cause 1999 earnings to fall 8 percent below what analysts were expecting. The news sent Bank One’s stock tumbling 23 percent on Wednesday to $43 a share, down $12.63 in New York Stock Exchange trading.

“This shows that walking a tight rope on interest rates is a dicey game,” said Bruce Brittain, head of Atlanta-based Brittain Associates, an industry consulting firm. “I’m sure it will scare the bejesus out of everyone else. You can bet that chief executives at other credit card companies are on the phone today to make sure the same thing doesn’t happen to them.”