Credit card rewards programs have traditionally featured airline miles, gift certificates, and cash back for customers who spend enough on their cards to rack up points. But recently, credit card companies have started offering a different kind of gift: They're handing out lower interest rates, refunding interest payments, and using other strategies to provide incentives for cardholders to pay down their debt and make on-time payments. The deals, however, don't always work in consumers' favor.
The new Citi Forward card gives cardholders points and reduces their annual interest rate for making on-time payments and for staying under their credit limit. (Users earn a 0.25 percent reduction in their interest rate each time they make a minimum payment for three months in a row; the reduction maxes out at 2 percent.) TD Bank's Simply Flexible card changes customers' interest rates depending on how much of their balance they pay off. If they pay off 10 percent or more of their balance, then they get the lowest available interest rate; paying between the minimum payment and 5 percent of the balance gets them the highest interest rate. And Discover's Motiva card gives cardholders one month's worth of interest back after six consecutive on-time payments.
Card companies say the idea behind the new rewards is to help customers get on top of their finances. "It's all about promoting financial fitness and giving customers the choices they need to help them manage their debt," says Michael Copley, senior vice president of retail lending for TD Bank. He says he thinks the Simply Flexible card motivates cardholders to pay off more of their debt and attributes the company's relatively low delinquency rate to the product, which makes up almost half of all new accounts.
"[The Motiva card] motivates them to pay their [bills] on time, pay down balances, and improve their credit," says Laks Vasudevan, director of project management at Discover. She says the card, which was launched in 2006, is best for customers who carry a balance and are trying to pay it down. Cardholders can also use Discover's online tools such as the Paydown Planner to calculate how much they need to pay each month to pay off their entire balance by their target date.
Because of the continuing recession, companies have an incentive to keep their customers from sliding further under water. "This is in response to recognition on the part of issuers that they have to help their cardholders do a better job of managing their money ... so customers keep those cards for a long time," says Ron Shevlin, senior analyst at Aite Group, a research and advisory firm.
[See Putting a Price on Rewards.]
The challenge for companies, he says, is to balance the profitability of consumers who maintain a balance, and therefore pay interest fees each month, against the increased risk that those cardholders pose because they are more likely to default on their debt. Rewards programs that encourage customers to maintain a balance while paying on time, such as the Motiva card, may help them strike that balance. According to Aite's research, 57 percent of customers with rewards cards pay off their balance each month. Meanwhile, 1 in 10 makes only the minimum payment and the remaining 1 in 3 pays more than the minimum.
According to consumer advocates and credit card experts, consumers who carry a balance may be better off selecting a card with the lowest interest rate rather than participating in one of these rewards programs, although they can help consumers improve their credit. "In general, I think these cards are great for people who don't have great credit and regularly carry a balance on their cards," says Adam Jusko, founder of www.IndexCreditCards.com. Customers who only occasionally carry a balance, on the other hand, would be better off finding a card with a more appealing rewards program, he adds.
Those who carry a balance but aren't able to pay off big chunks of it each month should probably shop around for the lowest interest rate card possible: With TD Simply Flexible's card, for example, customers who pay less than 5 percent of their balance face the highest annual percentage rate, currently close to 20 percent, which is much higher than the average credit card rate of 15 percent.
TD Bank's Copley says it's up to the customer to make the decision as to whether or not the card is a good idea. "We wouldn't approve them unless we knew they could pay the minimum," he says, adding, "Whether or not they want to pay more than the minimum payment is their call."