Should Credit Cards Reward Good Behavior?
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There's a new credit card in town, and it wants to give you a helping hand. Bank of America launched the BankAmericard Better Balance Rewards card earlier this month.
Here's how it works: You can earn $25 in cash rewards each quarter if you make your payment on time and pay more than the required minimum payment.
So, for a three-month period, if you pay an amount that exceeds your minimum required payment each month, you can earn up to $100 per year. If you have more than one eligible account with Bank of America, then you get an extra $5 each quarter, which means you can earn up to $120 a year. (See also: 6 Ways to Get Paid for Saving Money)
This Isn't the First Credit Card With Good Intentions
This Bank of America card takes a pretty unique approach by rewarding consumers who pay more than the minimum payment. But it isn't the first card to want to give you a big hug.
The Discover Motiva Card and the Citi Forward Card come to mind. Discover doesn't promote the Motiva Card, but you can still find it online if you look hard enough. This card gives you back 5% of your monthly interest charges as a Cashback Bonus.
The Citi Forward Card is no longer available, unless you're a college student. This card reduces your interest rate up to 2% if you pay your bill on time and stay under your credit limit.
Then we have the Citi Simplicity and the Discover it Card. These cards want you to know that if you make a mistake, they'll still love you. Well, the Discover it Card will still love you after one late payment. But make another mistake, and you're in the doghouse with a late fee.
Are These Credit Cards Good for Consumers?
I'm really fascinated with the response to the BankAmericard Better Balance Rewards card. Some consumer advocates and experts have said cards like this encourage irresponsible behavior. With the Bank of America card, the argument would be that it encourages consumers to carry a balance.
With the Citi Simplicity and the Discover it Card, the concern is that it encourages people to get lazy about paying on time. I can see both sides of this argument. It would be a little too easy to relax about your payment if you think there isn't any punishment.
But if the late payment is reported to the credit bureaus, your credit score gets punished. I haven't seen anything in the fine print that promises you won't be reported to the credit bureaus if you make a late payment. And since this also means you're carrying a balance, there's that annoying compound-interest thing to worry about.
But let's take a look at the other side of this argument. What if you suddenly lose your job, your kid just got braces, and your car needs new tires? Your cash flow this month is shaky, so you take advantage of the window to pay a little late. In a case like this, the "forgiving" credit card doesn't intend to change your payment behavior. It's just there as a safety net to catch you if you suddenly fall.
Not Everyone Who Carries a Balance Is Irresponsible
OK, so this brings me to another point. Not only does the media tend to focus on the negative side, but they sometimes imply that those who carry a balance are irresponsible. See, I don't think that's fair.
Sure, there are many people who are in credit card debt because they're irresponsible. But in my experience, these people often "own up" to it when they realize what they've done.
But we all need to remember that there's another segment of the population that's still in trouble from the recession. These folks are using their cards to pay the rent and the grocery bill. And to buy their kid shoes.
The post-recession world we're experiencing now is a little different from what we've seen before when a recession ends. Even if all the economic indicators point to recovery, the dark days aren't automatically over for everyone.
How the Bank Benefits
I make a living keeping my eye on the banks and their products. So believe me, I do see how these cards benefit the banks. The extra $5 that consumers get if they have more than one Bank of America account? Clearly, Bank of America is encouraging consumers to open more accounts. But I don't see anything deceptive about their approach. Bank of America is trying to increase customer loyalty, which all for-profit companies do. If you don't need another account, don't open one.
And, of course, when consumers pay late, the banks still make money from interest even if they forgo the late fee. But let's drill down to the main question — do these credit cards help any group of consumers? My answer is yes, they do. So whether or not the bank benefits doesn't concern me, unless of course, they use deceptive tactics.
So what do you think? Do you think credit cards that reward good behavior are helpful? Or do you think they encourage bad behavior?