Behavior-Based Repricing

Behavior-based repricing is the practice of credit card issuers adjusting a credit card holder’s interest rate according to their payment history. Typically, behavior-based repricing involves increasing a consumer’s interest rate after a failure to make a minimum monthly payment on time. Making a single late payment can be enough to trigger the penalty annual percentage rate (APR). Conversely, behavior-based repricing can be positive for the credit card holder if they work to establish a history of on-time payments and give the credit card company reason to lower the interest rate charged.

Behavior-based pricing is a tactic credit card issuers use to benchmark how much credit risk a credit card holder shows. The idea is to measure how responsible a credit card holder is when it comes to paying their statement balances. Mistakes happen and card holders miss payments, but what the credit card companies want to do is establish some sort of baseline expectation of repayment in an effort to deter delinquency. One of the ways they do that is with behavior-based pricing.

Prior to establishing a line of credit with an issuer, doing due diligence into a credit card company’s use of behavior-based pricing may be an informative exercise. For card holders, paying a 15 percent APR on a $500 balance equates to spending $75 per year in interest. Should a late payment occur and behavior-based repricing causes the APR to jump up to 30 percent, annual interest paid rises to a not insignificant $150 per year. Typically, the credit card issuer's policy on behavior-based pricing is easy to find in their disclosures sections; the card companies outline a separate, clearly delineated Penalty APR section to explain the consequences of a missed payment. 

As outlined in the Credit Card Accountability, Responsibility and Disclosure Act of 2009, a federal law that protects credit card users from unfair lending practice by card issuers, there are restrictions that credit card companies must adhere to with behavior-based pricing. In particular, they are not allowed to apply a Penalty APR to an existing balance until delinquency of the minimum payment reaches 60 days. 

The act also limits what the credit card issuer can charge for universal default, or the practice of raising interest rates on all future balances in following a late payment. The law also requires that cardholders be adequately informed of how long it will take them to pay off an existing balance at the minimum monthly rate.