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Automatic Payment Based Interest Rate Reductions on Credit Cards?

I was reading my free issue of Cards & Payments [3], one of the many free trade publications available via Tradepub [4], when I saw an interesting program offered by Barclaycard, a European credit card issuer. Barclay’s Flexi-Rate program automatically rewards cardholders by lowering the interest rates on their cards the more they pay off their debt each month. The mandated minimum payment is 2% in the UK and so if card holders pay off more, their rates will be lowered automatically from the standard 16.9% rate. If a cardholder pays 5% of the bill, they pay only 12.6% in interest the next month and if they pay off 10%, then they are only charged 9.9% interest the next month.

The interesting bit of information that came out of this, and many personal finance bloggers are aware of this, is that when the magazine asked the American Bankers Associate, their spokesperson said “If a cardholder [pays his bills on time], and he thinks his interest rate is too high, he can call the issuer and have it lowered. It’s not automatic like Barclaycard’s. It takes a few steps and I haven’t heard of any issuers marketing it.” Well duh, it means less money for issuer. The difference in how much they earn is substantial too. If you owe $1,906 and make the minimum payment of 2%, it takes 23 years and $3,105 in interest. If you pay 10% on the same amount, it would be gone in 4.5 years and they only pay around $210 in interest. So… why are they doing it?

The reason is that by providing a financial incentive to paying off your debt faster, Barclaycard can collect more information and be able to separate who is risker than whom. Certainly earning a ton of money off a high interest rate from a perfectly ideal borrower is ideal, but as you probably have seen with many Prosper deals… not everyone borrowing at a particular rate is of equal creditworthiness.

Another reason, which parallels the US, is that UK card issuers have been beaten up in the public relations arena in that they’re seen as contributing to the high level of personal debt and this is their response. Whereas in the US we’ve passed laws, since lawmakers need to do something, the card issuers in the UK have taken it upon themselves to print interest rates and other associated information.

While it is on the other side of the pond, I think it’s worth taking a look at.

Source: Cards & Payments [3]