Credit card companies used to love borrowers who racked up big debts or paid only the minimums because those customers forked over so much interest. Now some of those same borrowers are being offered cash incentives to pay down their debts.
Rachel Harrington Cassady of Midlothian, Texas, got one such offer. She owed $6,000 on a Chase credit card, and the lender told her it would give her $200 if she paid off $2,400 of the balance in the next six months.
"There are no penalties if we default on the agreement. We just won't get the $200," Cassady wrote on my Facebook page. "They also said this would not be reflected in a negative manner on our credit report to participate in the program."
Other issuers have experimented with similar incentives, including reduced interest rates for paying down debt.
"They reduced my limit and gave me a $500 break to pay it off," Fletcher said. "I paid $6,000 of it off and then moved the other $2,000 to another account that was interest-free. . . . Works for me."
For card issuers, a bird in the hand
Issuers began experimenting with incentives last year as delinquencies (late payments) and defaults (no payments for six months or more) began to climb. The credit card default rate peaked at 9.14% in April, according to the Standard & Poor's/Experian Consumer Credit Default Indices.The default rate eased to 8.8% in June, but that was still up substantially from 5.8% a year earlier and the sub-4% rates prevalent before the recession. Incentives to pay down debts are seen as a possible way to reduce future losses, because any money that's paid back will be safely in creditors' pockets even if the borrowers ultimately default on the remaining balances.
"We're continuing to see credit issuers get creative as they trot out new ways to reduce their exposures to risk," said Dan Ray, the editor-in-chief of CreditCards.com.
Among them:
- American Express was one of the first to experiment with cash incentives when it offered some customers $300 to pay off their balances and close their accounts.
- Citibank offered statement credits of up to $550 to some customers if they paid down their debts, accepted credit limit reductions and promised to stop using their cards for up to 11 months.
- Wells Fargo offered to reduce interest rates for some customers who paid down their debts. The bigger the payments, the lower the rates.
- Chase is offering some customers statement credits, often of $100 to $200, to pay down chunks of debt over six to nine months.
Some of the people receiving the Chase offers had their accounts closed after Chase took over their original lender, Washington Mutual. Others with open accounts were told they couldn't make any additional charges for the duration of the deal. One reader said she was offered a $200 statement credit if she paid $400 a month for eight months, while another was offered a $100 credit for $150 payments for each of the next nine months.
Continued: Don't try this at home