In a perfect example of how credit card issuers have mastered the art of giving with one hand while taking with the other, Citibank is offering its credit cardholders a new way to avoid the worst sting of interest rate hikes: spend more.
According to the Associated Press, Citi Card holders who meet a minimum monthly spending requirement of e.g. $750 a month might get a rebate on their interest charges for that month. To qualify, cardholders would also need to make their monthly payments on time.
While all credit card companies have been increasing interest rates over the past six months, Citi Card holders have been hit with more aggressive rate hikes than most. Millions of Citi Card holders have been notified of interest rates increases as high as a 29.99 percent APR. Cardholders across the board have been affected, even those with good credit and a perfect payment history.
The aggressive interest rate increases at Citigroup comes at a time when the company continues to struggle with elevated losses from mortgage loans and credit card defaults. Citi is the only credit card company still propped up by government bailout money under the TARP program, which was instituted at the end of last year.
Under the terms of the new program, Citicard would issue a monthly rebate on some or all of the extra interest charges resulting from recent rate hikes. According to Citi, about half of cardholders would be able to shave half to all of their rate increase off through the rebates. Citi also said that the monthly spending requirements and interest rate rebates will vary, depending on the cardholder’s credit history.
“Customers who do more business with us will have the most opportunity to reduce their rates,” the company said in a statement to Associated Press.
Unfortunately, while the new deal looks like it offers a way to take the worst bite out of prohibitive rate hikes, it’s more likely to do harm than good. For cardholders who carry a balance, the new program effectively encourages mounting credit card debt, at a time when cardholders should be doing everything they can to get off the credit card habit.
The amount that each cardholder would have to spend to qualify for the interest rebates varies from cardholder to cardholder. Citi knows how much each cardholder typically spends on his or her card, so inevitably, the amount cardholders will have to spend to qualify will be higher than their typical, average charges.
If cardholders who are able to meet the monthly spending requirement by simply shifting charges from other credit cards and pay utilities and other fixed expenses with their Citi Card instead of writing a check, the program may offer some benefit. However, it’s all too easy to succumb to the temptation to charge an extra $50-150 each month to meet the spending requirement, and end up with mounting credit card debt.
From Citi’s point of view, the new deal offers several advantages. It gives Citi a way to woe back low-risk cardholders, who have gotten increasingly disenchanted with the company after the recent round of exorbitant interest rate hikes. It increases cardholder spending on the cards, increasing Citi’s earnings on the interchange fee, which merchants pay to credit card companies each time a customer pays with plastic. And lastly, it is likely to increase the balance that people struggling with credit card debt carry on their cards.
For consumers, on the other hand, the program is hardly worth it. If you have a good credit history, there are still plenty of low interest credit cards out there that will give you the same benefits without any of the hassle. If you have absolutely no other options, shifting fixed expenses to your Citi Card to meet the monthly spending limit may offer some benefits. However, do the math and look carefully before you leap.
