Credit card rewards programs have traditionally featured airline miles, gift certificates or 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 debts 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 rates for making on-time payments and for staying under their credit limits. (Users earn a 0.25-percentage-point reduction in their interest rates each time they make minimum payments for three months in a row; the reductions max out at 2 percentage points.)
- TD Bank's Simply Flexible card changes customers' interest rates depending on how much of their balances they pay off. If they pay off 10% or more of their balances, then they get the lowest available interest rates; paying between the minimum payment and 5% of the balances gets them the highest interest rates.
- 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, the 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 debts and attributes the company's relatively low delinquency rate to the product, which makes up almost half of TD Bank's new card accounts.
The Motiva card "motivates them to pay their (bills) on time, pay down balances and improve their credit," says Laks Vasudevan, the director of project management at Discover. She says the card, which was launched in 2006, is best for customers who carry balances and are trying to pay them down. Cardholders can also use Discover's online tools, such as its Paydown Planner, to calculate what they need to send in each month to pay off their entire balances by their chosen target dates.
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A balancing act for card issuers
Companies have an incentive to keep their customers from sliding further underwater in sour times. "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, a senior analyst at research and advisory firm Aite Group.
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 debts. Rewards programs that encourage customers to maintain balances while paying on time, such as the Motiva card, may help them strike that middle ground. According to Aite's research, 57% of customers with rewards cards pay off their balances each month. Meanwhile, 10% make only the minimum payment, and the remaining one-third of cardholders pay more than the minimum.
Who should use these cards?
According to consumer advocates and credit card experts, consumers who carry balances should look for the lowest interest rates, regardless of the rewards programs. With the Simply Flexible card, for example, customers who pay less than 5% of their balances face the highest annual percentage rates, currently near 20%, which is much higher than the average credit card rate of 15%.
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TD Bank's Copley says it's up to the customer to make the decision as to whether 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."
Such cards' incentives 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, the founder of indexcreditcards.com.Customers who rarely carry balances, he says, would be better off finding cards with more-appealing rewards programs.
This article was reported by Kimberly Palmer for U.S. News & World Report.
Published Sept. 18, 2009
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