American Express Co., the lender that lost one of its biggest retailer partnerships and suffered a defeat in an antitrust lawsuit this month, is raising interest rates on a swath of credit cards for the first time in more than five years.
AmEx told more than a million customers this month that their annual rates will climb an average of 2.5 percentage points to at least 12.99 percent, following a review last year, said people briefed on the move. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles,” according to a copy obtained by Bloomberg News.
Such moves have become uncommon at major U.S. lenders. Banks typically make large-scale changes in response to broader shifts in interest rates or risk, said Oliver Ireland, a former Federal Reserve lawyer who monitored industry practices there and is now at Morrison & Foerster LLP. The Fed has kept its benchmark rates near zero since 2008 to spur the economy, and borrower delinquencies dropped to historic lows in that period.
“It says they mispriced that portion of their portfolio,” Ireland said. “There are very few instances of banks doing something like that. I can’t think of any.”
Rate changes are a normal part of business, said Elizabeth Crosta, a company spokeswoman. The planned increases will affect a variety of variable-rate products, including some of the New York-based firm’s proprietary and co-brand credit cards, she said. Rates will apply to new purchases and balance transfers, and they’re no higher than consumers would get today if they apply for a comparable AmEx card, she said.
“We analyzed our credit-card portfolio last year and found customers that had APRs considerably lower than market rates, sometimes as low at 3.25 percent,” Crosta said.
Cardholders affected by the review are a fraction of AmEx’s total. It had about 42.6 million of its basic cards in circulation across the U.S. at the end of 2014, according to a company filing.
This month’s letters were a second batch after a much smaller round last year, when AmEx told a few hundred thousand customers their rates will change, according to one of the people, who asked not to be identified discussing the communications. The industry’s average rate on variable credit cards was 15.76 percent last week, according to data from Bankrate.com.
AmEx, whose business was built on charge cards that didn’t allow consumers to carry balances, is seeking to recover lost revenue after ending its co-brand credit-card agreement with Costco Wholesale Corp., a deal that generated 20 percent of the firm’s loans and 8 percent of spending.
The lender is at risk of losing more revenue after a federal judge found last week that its rules barring merchants from steering customers to cheaper cards violates U.S. antitrust law. The company has said it plans to appeal.
A 2009 law known as the CARD Act limited banks’ ability to raise interest rates and established rules for notifying customers of changes. Lenders must tell clients at least 45 days before a rate increase, and customers can opt out or end their relationship.
AmEx shares are are down 13 percent this year, the most in the Dow Jones Industrial Average.
While severing the Costco partnership next year may initially slow revenue growth, AmEx can lessen the impact by encouraging customers to boost spending on other products and focusing on efficiency, its leaders told analysts on a Feb. 12 conference call.
“We have a number of different ways to drive growth going forward,” Chief Executive Officer Kenneth I. Chenault, 63, said on the call. AmEx will elaborate on its strategy at an investor event next month, he said.