On December 16, 2015 the Federal Reserve made a decision to increase the current Prime Rate by .25%. These changes will affect the current variable APR for Barclaycard Ring cardmembers and may also impact your minimum payment due. See our Prime Rate FAQs blog for additional information about these changes.
No matter which projection of the Prime Rate you look at, the consensus says that the Prime Rate will start to do something in 2015 that hasn’t happened in more than 6 years -- go up. When and by how much remains uncertain, but the reality is the economy is doing well enough to warrant the change according to the Federal Reserve Board, which effectively decides such things. The Federal Reserve Open Market Committee met earlier in March and Fed Chair Janet Yellen said the central bank has not ruled out a rate hike in June while it continues to evaluate progress on the employment and inflation fronts. [Forbes]
The Prime Rate, currently 3.25%, is the rate at which banks lend money to their most creditworthy customers, usually other stable banks. The rate is closely pegged to the Fed Funds Rate, which is the actual rate the Fed controls.
What does this mean for Barclaycard Ring cardmembers? Your Barclaycard Ring APR is a variable rate, set at 4.75% + the Prime Rate. This means that when the Prime Rate does finally increase, your APR will as well. For example, if the Prime Rate increases to 3.50% your APR will increase to 8.25%. An increase in the Prime Rate will also impact how we market Barclaycard Ring in the future.
Marketing Impacts if Prime Rate Increases:
Many of you who read the blog regularly already know that Barclaycard Ring has tested a few APRs in addition to the standard marketing of our initial 8% variable APR. Because of these marketing tests, there are a number of cardmembers who don’t have the same APR as most of the other cardmembers. The Prime Rate increases we may experience going forward could result in an even more diverse mix of APRs among depending upon IF the marketing message (and variable APR) for Barclaycard Ring is changed.
There are really two paths forward as we consider, at Barclaycard, how to handle any Prime Rate changes.
As an initial option, we could strive to maintain the simplicity of the 8% variable APR (a nice round number) as our target marketing message for as long as possible, while potentially absorbing a hit to the profitability of the product. The advantage of this first path would be the ability to maintain the streamlined and simple message about the product’s APR. However, with this ‘round number strategy,’ as the Prime Rate rises, we’d eventually have to increase the APR to the next highest round number, i.e. a 9% variable APR in order to maintain appropriate levels of profitability.
As an alternative option, we would change the marketed APR offer in conjunction with the Prime Rate changes. So, when the Prime Rate increases from 3.25% to 3.5% we would market the Barclaycard Ring variable APR at 8.25%.
Pros and Cons
The first option increases the complexity from an operational point of view due to constantly changing underlying margins of the product (i.e. currently Prime Rate is at 3.25% + 4.75% = our 8% variable APR. If Prime Rate increases to 3.5% we need to reduce our rate to 4.5% to maintain the ‘round’ number of 8% variable APR). Each rate change on our end requires work behind the scenes to keep our systems up-to-date and in sync with the market.
The first option would also result in people having slightly different APRs in the community. Some new cardmembers would have an 8% APR while existing cardmembers would be at 8.25% or 8.50% for example (because existing cardmembers APR rate is based on the Prime Rate + 4.75%).
The second option would result in consistency of price for all cardmembers and be easier to manage internally. We would just need to change our marketing message to include numbers that had decimal points. Since Barclaycard Ring is focused on providing the best long term value possible, our marketing message becomes a little less simple to maintain.
If you have any thoughts we’d love to hear them. For now we just wanted to let you know what we’re thinking about here in Wilmington, Delaware. We’ll definitely keep you posted as things evolve.