Carrots Offered, Sticks Abandoned: Card Issuers Lure Late Payers

If you're someone who runs a balance on your credit card and even maybe pays late sometimes, heads up. Credit card issuers are coming to call, and they're bearing gifts.

The goodies -- rewards for paying on time and reprieves from late fees -- are intended to tempt you to sign up for a new card. But think carefully before you take the bait to make sure you're not just being lured into more debt.

American consumers have been cautious about getting back into credit card debt in the wake of the financial crisis. Revolving debt -- which is mostly made up of credit card debt -- has been rising at a tepid pace in 2013, according to the Federal Reserve's G.19 consumer credit reports.

On one hand, the new frugality helps banks by lowering delinquency rates. On the other, card issuers don't make any money if consumers don't run up some debt. The new offers aim to attract balance-carrying customers -- and their interest payments.

Rewards and reprieves

The deals fall into two camps. One approach rewards "good" credit behavior, such as paying more than the minimum due, with carrots such as cash back and discounts on interest payments. The other spares the traditional "stick" -- read: fees -- usually used to punish "bad" behavior, such as paying late.

Bank of America's Better Balance Rewards card is among the former. If you pay more than your monthly minimum, on time, you will automatically receive a $25 cash reward every quarter. You get an extra $5 bonus per quarter if you have another qualifying account with the bank, for a possible total of $120 a year. But you must have a balance due every month of the quarter to qualify for the bonus.

Bank of America is not alone. Other major issuers dole out rewards for on-time payments (see chart). None of the cards listed charge annual fees, and many promise interest-free introductory periods.

In the other camp are cards that forgive "bad" behavior. For example, Discover's "it" card charges no late fee the first time you're tardy with a payment and won't increase your APR if you pay late. Citi's Simplicity card will never charge you late fees or penalty rates. Like the rewards cards, these cards are stripped of annual fees and tend to offer temporary zero-interest terms.

Banks need debtors

Make no mistake, the banks have not come up with these products out of the kindness of their hearts. Balance-carrying customers are the bread and butter of the credit card business. Issuers are looking for ways to hook them and to minimize the risk of delinquency at the same time.

"These unique features are a direct reflection of new financial regulations set by Congress, which limit the ability of vendors to boost their revenues and bottom line by making significant profits off delinquent customers," says Jon Ulin, managing principal with Ulin Financial, a private wealth management firm.

Banks used to be able to make money off late payers by jacking up interest rates as soon as a cardholder missed a due date. "If you were even a day late making your monthly payment ... you immediately got your rates wacked up close to nose-bleed 30% levels, with no further negotiation to fix -- even if you had been paying your bills on time," says Ulin.

The CARD Act of 2009 prohibits such rate hikes until a cardholder is 60 days or more behind in payments. But even if banks don't charge immediate penalties to late payers, they're still benefiting from loans that are growing on their books. You may not be charged interest initially, but once you get past that introductory period, interest rates are as high as 23.99%. That's why banks are marketing cards that appeal to higher-risk customers.

What to look out for

If you're tempted to sign up for one of these cards, first consider a few things. The most important is your credit record. With a "reprieve card," you may not have to pay late fees, but don't let that lull you into a false sense of security. "Watch out for late payments on your credit report, as these aren't stopped by the no-late-fee deal," warns Linda Sherry, director of national priorities at Consumer Action. "Pay late and a notation may show up on your credit report, which could bring your credit score down.

Also be aware that cards that offer carrots such as rewards dollars for on-time payments still also employ the stick for late payments. Late fees are generally $25 to $35 and if you're more than 60 days late, your APR may increase as well.

Think about how much impact the card's incentives will have on your long-term finances. The BankAmericard Better Balance Rewards card, for instance, encourages paying more than the minimum and meeting due dates, but it stops short of rewarding even better habits. "The card doesn't necessarily encourage people to make a serious dent in their balances, because the cardholder need only pay any amount more than the monthly minimum due to get the cash bonus," says Howard Dvorkin, founder of Consolidated Credit Counseling Services. "A better incentive would be to encourage cardholders to pay their total balance in full every month."

Discover's Motiva Card gives you 5% of your interest charges as a cashback bonus each month you make an on-time payment. That's a start, but it only rewards people who carry a balance and have to pay interest. With any rewards card, the cost of carrying a balance almost always exceeds the value of the reward -- in this case by 95%.

If you don't carry a balance, evaluate the rewards you'll be getting and shop around to see whether you might get a better deal elsewhere. The Better Balance Rewards card has no annual fee, which is a nice feature. But for heavy card users who pay off their balance monthly, a standard rewards card that offers 1% to 3% cash back on purchases might give a better payout.

In fact, as with most credit cards, the people who will benefit most are those who already have good habits. "These cards are ideal for those who have a good organizational skill set and will pay the bill timely, even if it comes late in the mail, as well as those who have good willpower and avoid impulse purchases," says Dorothy Barrick, group manager and financial counselor with GreenPath Debt Solutions.

Just make sure to keep the caveats in mind so that you're not trading in one stick for another.