In what appears to be a sort of odd answer to Congress' anger over credit card interest rate hikes, Citibank has introduced a new policy that allows some customers to reduce their interest fees -- if they use their card a lot. The idea is that cardholders who meet a minimum spending threshold each month will qualify for an interest rebate, essentially lowering their interest rates. While the move would almost certainly result in greater profits for Citi, it's bad for consumers across-the-board.
There are basically two kinds of credit card users: those who use for convenience and those who use for a short-term loan. The first category pays off their balance each month; the second category runs a balance, incurring interest fees. From Citi's standpoint, you want both of these kinds of consumers to use the card as much as possible. For the convenience users, more usage will result in higher interchange fees -- which are the only way you make money off those customers anyway. For those who use cards for short-term loans, more spending increases the time (and cumulative interest) it takes to pay off their balance.
Let's consider this example from the Associated Press' report:
Of course, consumers could need to spend more than they otherwise would to qualify.
That's the case for Lindsey Pappas, a 25-year-old public relations professional in San Francisco. She received a letter from Citi Wednesday that her interest rate was being hiked to 19.99 percent, up from 14.99 percent.
If she spends $750 a month, however, she can get a refund for part of the higher interest rate charges.
The problem is that Pappas is trying to pay off a $5,000 balance on the card, so she tries not to charge any money on it.
This gets tricky. Let's say she can afford to charge $500 in regular expenses on her card each month, so would have to spend an additional $250 to lower the rate. For the first month, if that $250 would have paid down her balance at the 20% rate, she'd owe around $80 in interest the next month. But if her balance grew by $250, she'd only owe $65, despite the larger balance, since the interest rate declined.