If you're someone who runs a balance on your credit card and
even maybe pays late sometimes, heads up. Credit card issuers are
coming to call, and they're bearing gifts.
The goodies -- rewards for paying on time and reprieves from
late fees -- are intended to tempt you to sign up for a new card.
But think carefully before you take the bait to make sure you're
not just being lured into more debt.
American consumers have been cautious about getting back into
credit card debt in the wake of the financial crisis. Revolving
debt -- which is mostly made up of credit card debt -- has been
rising at a tepid pace in 2013, according to the Federal Reserve's
G.19 consumer credit reports
On one hand, the new frugality helps banks by lowering
delinquency rates. On the other, card issuers don't make any money
if consumers don't run up some debt. The new offers aim to attract
balance-carrying customers -- and their interest payments.
Rewards and reprieves
The deals fall into two camps. One approach rewards "good" credit
behavior, such as paying more than the minimum due, with carrots
such as cash back and discounts on interest payments. The other
spares the traditional "stick" -- read: fees -- usually used to
punish "bad" behavior, such as paying late.
Bank of America's Better Balance Rewards card is among the
former. If you pay more than your monthly minimum, on time, you
will automatically receive a $25 cash reward every quarter. You get
an extra $5 bonus per quarter if you have another qualifying
account with the bank, for a possible total of $120 a year. But you
must have a balance due every month of the quarter to qualify for
Bank of America
is not alone. Other major issuers dole out rewards for on-time
). None of the cards listed charge annual fees, and many promise
interest-free introductory periods.
In the other camp are cards that forgive "bad" behavior. For
example, Discover's "it" card charges no late fee the first time
you're tardy with a payment and won't increase your APR if you pay
late. Citi's Simplicity card will never charge you late fees or
penalty rates. Like the rewards cards, these cards are stripped of
annual fees and tend to offer temporary zero-interest terms.
Banks need debtors
Make no mistake, the banks have not come up with these products out
of the kindness of their hearts. Balance-carrying customers are the
bread and butter of the credit card business. Issuers are looking
for ways to hook them and to minimize the risk of delinquency at
the same time.
"These unique features are a direct reflection of new financial
regulations set by Congress, which limit the ability of vendors to
boost their revenues and bottom line by making significant profits
off delinquent customers," says Jon Ulin, managing principal with
Ulin Financial, a private wealth management firm.
Banks used to be able to make money off late payers by jacking
up interest rates as soon as a cardholder missed a due date. "If
you were even a day late making your monthly payment ... you
immediately got your rates wacked up close to nose-bleed 30 percent
levels, with no further negotiation to fix -- even if you had been
paying your bills on time," says Ulin.
The CARD Act of 2009 prohibits such rate hikes until a
cardholder is 60 days or more behind in payments. But even if banks
don't charge immediate penalties to late payers, they're still
benefiting from loans that are growing on their books. You may not
be charged interest initially, but once you get past that
introductory period, interest rates are as high as 23.99 percent.
That's why banks are marketing cards that appeal to higher-risk
What to look out for
If you're tempted to sign up for one of these cards, first consider
a few things. The most important is your credit record. With a
"reprieve card," you may not have to pay late fees, but don't let
that lull you into a false sense of security. "Watch out for late
payments on your credit report, as these aren't stopped by the
no-late-fee deal," warns Linda Sherry, director of national
priorities at Consumer Action. "Pay late and a notation may show up
on your credit report, which could bring your credit score
Also be aware that cards that offer carrots such as rewards
dollars for on-time payments still also employ the stick for late
payments. Late fees are generally $25 to $35 and if you're more
than 60 days late, your APR may increase as well.
Think about how much impact the card's incentives will have on
your long-term finances. The BankAmericard Better Balance Rewards
card, for instance, encourages paying more than the minimum and
meeting due dates, but it stops short of rewarding even better
habits. "The card doesn't necessarily encourage people to make a
serious dent in their balances, because the cardholder need only
pay any amount more than the monthly minimum due to get the cash
bonus," says Howard Dvorkin, founder of Consolidated Credit
Counseling Services. "A better incentive would be to encourage
cardholders to pay their total balance in full every month."
Discover's Motiva Card gives you 5 percent of your interest
charges as a cashback bonus each month you make an on-time payment.
That's a start, but it only rewards people who carry a balance and
have to pay interest. With any rewards card, the cost of carrying a
balance almost always exceeds the value of the reward -- in this
case by 95 percent.
If you don't carry a balance, evaluate the rewards you'll be
getting and shop around to see whether you might get a better deal
elsewhere. The Better Balance Rewards card has no annual fee, which
is a nice feature. But for heavy card users who pay off their
balance monthly, a standard rewards card that offers 1 percent to 3
percent cash back on purchases might give a better payout.
In fact, as with most credit cards, the people who will benefit
most are those who already have good habits. "These cards are ideal
for those who have a good organizational skill set and will pay the
bill timely, even if it comes late in the mail, as well as those
who have good willpower and avoid impulse purchases," says Dorothy
Barrick, group manager and financial counselor with GreenPath Debt
Just make sure to keep the caveats in mind so that you're not
trading in one stick for another.
Feds cap credit card late fees at $25
Even barely late payments can impact your credit