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Lower interest rates for clients with good credit card record
Gabriel Chen Thu, Feb 07, 2008 The Straits Times
CITIBANK has joined the likes of Standard Chartered Bank (Stanchart) and American Express in introducing a scheme to reward customers with a good credit record with lower interest rates for unsecured credit products. Under the scheme, known as tier pricing, Citibank will offer from April 1 annual rates of 18 per cent on rollover credit for its most creditworthy clients - below the industry average of 24 per cent. A Citibank spokesman declined to give more details, but the scheme will apply to Citibank Gold and Platinum cards initially. Customers are evaluated on a number of factors, including how long a customer has been a cardmember, usage and payment behaviour, the bank said.

An account is considered past due if the minimum payment due is not received in full before the payment due date.

This rate will revert to the usual 24 per cent a year once a customer's account is no longer twice or more past due in the last six months, it said.

'We want to be able to reward customers who have shown good payment behaviour over a period of time with a promotional lower interest rate,' said Mr Radha Suvarna, director of portfolio management and cross-sell, Citibank Singapore.

'The implementation of tiered pricing based on payment behaviour seeks to encourage all customers to adopt good payment practices and be rewarded for it.'

From the standpoint of a consumer, in particular a creditworthy one, using credit cards that offer different interest rates depending on spending behaviour and risk profile, or risk-based pricing in short, can be beneficial.

For one, a customer could save on interest charges.

Take Citibank's rates, for example. Your credit statement shows that you owe the bank $5,000 and you decide to pay off $1,000.

The prevailing annual interest rate of 24 per cent will see you being charged 2 per cent a month on the $4,000 outstanding balance. This works out to $80 in interest.

Now, suppose you are a customer who pays your bills diligently. With these changes, you will save money as you could possibly enjoy interest rates of 18 per cent a year, or 1.5 per cent a month.

This would work out to just $60 in interest instead.

In other words, you could save $20 as a result of this tier pricing system that, according to one banker, is already 'the norm' in countries like the United States.

Some bankers say the industry will move their unsecured credit products, such as credit cards, towards such a system in the near future, as 'tiered interest rates' catch on among customers.

'It's the next level of competition,' said Mr Kartik Taneja, Stanchart's head of credit cards.

'We've had competition on fees, and that has pretty much wiped out annual fees. Nowadays, you can hardly find any card that charges an annual fee.

'Typically, if you look at the evolution of the industry, once you stop competing on fees, then you start on the interest side.'

When contacted, the likes of DBS Group Holdings and OCBC Bank said they had no plans currently to introduce risk-based pricing on unsecured credit products.

According to OCBC's head of group marketing services and unsecured lending, Mr Andy Chan, their customers want a 'choice of financial tools to help them rationalise and consolidate their borrowings'. He also said the bank recognised that their customers have 'different credit needs and payment habits'.

gabrielc@sph.com.sg

DIFFERENT PRICING

'Tiered pricing based on payment behaviour seeks to encourage all customers to adopt good payment practices and be rewarded for it.'

MR SUVARNA, Citibank Singapore director

DIFFERENT LEVEL

'It's the next level of competition... Once you stop competing on fees, then you start on the interest side.'

MR KARTIK TANEJA, Stanchart's head of credit cards