The average interest rate on credit cards in the U.S. hit 23.98% in May 2023, according to LendingTree. That marked the highest level seen since the company began tracking card rates in 2019. Other research further establishes that this average is a record.
Yet TD Bank is offering a new credit card called TD Clear that charges exactly … 0% on revolving balances.
This is not a loss leader. Neither is this a charge card, like the traditional American Express Green Card, which requires monthly repayment unless the cardholder taps a special credit line. Instead of charging interest, TD Bank assesses a monthly fee in exchange for providing a bare bones credit line.
For $10 per month, consumers can obtain a $1,000 line with a $45 minimum monthly payment. For $20 per month, the cardholder gets a $2,000 credit limit, with a $70 minimum payment. (Some perspective: The average credit card balance per consumer hit $5,733 in the first quarter of 2023, according to TransUnion.)
The bank launched TD Clear as part of a larger revamp of its credit card lineup. It enhanced the rewards offered on two existing cards and rolled out two new types of cards. The other new offering, TD FlexPay, charges interest, but allows cardholders to skip a payment once a year.
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The Subscription Model Is a Credit Card First
Some observers refer to TD Clear as a “subscription” credit card and it’s believed to be the first such offering in the United States. The bank itself isn’t using the word “subscription” in promotions thus far, though Jennifer Garrett, head of product development and loyalty in the credit cards and unsecured lending division, says it’s been helpful to use the term in describing the new product to the media.
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Subscription-based marketing, a long-running pricing model for publications from magazines to book clubs, has seen a resurgence as ecommerce took off. Numerous consumer goods, streaming services, computer software, online services and packaged services such as Amazon Prime rely on subscriptions now.
“We aren’t specifically focused on driving home the message of Clear as a subscription,” says Garrett, a card-industry veteran. “But Clear is so unique in the market that the analogy helps folks understand what it is.” She points out that the concept of a no-interest period as a temporary promotion running for a set number of months is common in credit card marketing. For TD Clear, however, no interest is a permanent feature.
TD Bank expects to learn as it goes with the interest-free card. Garrett says the bank is open to applying the “subscription” approach to other products depending on how well the card is received.
Consultants and other banking experts have been pushing the idea of a banking answer to Amazon Prime for years, with a subscription fee covering a package of multiple products. The general concept isn’t brand new; it has roots in the checking account “packages” that were popular years ago and that some marketing companies still work with banks to promote. Where the packages of yesterday featured accidental death and dismemberment insurance, some modern versions include cell phone insurance.
All four of TD Bank’s cards include roadside assistance, along with phone coverage, if cell service is charged to the card.
TD Clear’s Target Audience: Credit Card Revolvers
TD Bank didn’t design its no-interest card product to target a specific generation, according to Garrett. The intent with all of its cards was to appeal to consumers with a certain mindset.
It anticipates the enhanced rewards cards will be a draw for transactors (those who pay off their cards in full each month). TD Clear and TD FlexPay are meant for credit card revolvers (those who carry a balance on their cards).
“The impetus for FlexPay and Clear was to be able to meet the needs of customers who are looking to buy something today and pay over time,” says Garrett.
Inflation is forcing many consumers to manage their use of credit and their cash flow more carefully. TD Bank anticipates some of these consumers would rather pay a monthly fee, which is billed to the card, and know that will cover their borrowing costs, rather than guestimate the interest that will be due on a month’s worth of charges.
“Clear is for those consumers who want to have certainty, understanding and control,” says Garrett. “In some ways, Clear puts guardrails on their borrowing costs.”
Though buy now, pay later programs also appeal to consumers feeling the pressure of inflation, TD Clear and TD FlexPay were not created to compete directly with BNPL, according to Garret. One advantage with TD Clear is the ability to compartmentalize borrowing costs.
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What They’re Saying About TD Clear
“When you do the math on this product, some consumers are going to be better off and some consumers are going to be worse off, from an effective interest perspective. But it is a very simple, easy-to-understand product,” says Craig Rismiller, a senior vice president at Amount, a digital banking solutions vendor, and a Capital One veteran.
Andrew Davidson, chief insights officer at Mintel Comperemedia, says the fee approach is familiar to U.S. consumers in some other contexts. Fintechs like Revolut charge a monthly fee for premium account levels. And credit cards serving subprime customers have charged monthly fees — versus annual fees — in addition to interest, for years. (In its write-up of TD Clear, NerdWallet recommends that applicants have a credit score of 690-850, which is considered good to excellent.)
Still, for more mainstream cards, simplicity and transparency have appeal, Davidson says.
Those benefits don’t necessarily come cheap, though. Davidson points out that some bloggers are making a case that TD Clear’s monthly fee could work out to the equivalent of 24% APR, which is right up to the record average set in May.
The timing of TD Clear’s debut is ironic, he adds. It carries no late fees and arrives amid the Consumer Financial Protection Bureau’s aggressive push to chop credit card late fees as part of a broader Biden Administration attack on so-called “junk fees.”
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Could the No-Interest Credit Card Be a Hit?
Both Rismiller and Davidson say the rest of the industry is watching TD Clear closely. But they expect competitors to hold back until they see how well the no-interest card goes over. This gives TD Bank a head start, should the gambit play out.
The systems changes necessary to implement a no-interest approach would take time to put in place anyway, Rismiller says.
Though Rismiller is also in the wait-and-see camp, he sees TD Clear as more of a niche card for a subset of consumers.
Davidson suggests it’s likely a fit for those who carry a balance on a higher-rate card. But he says consumers are so schooled in rate shopping that a no-interest card is a change of pace.
He’s eager to see the results. “I wouldn’t suggest this is the way everything is headed,” but it could be significant, he says.
On the other hand, Mintel’s research indicates a third of consumers are trimming subscriptions in light of inflation. Whether a credit card with a flat monthly fee is thought of in that context remains to be seen.