Upfront Pricing

Upfront pricing refers to the interest rates and limits established for a borrower in a credit card’s underwriting and issuance. In credit card underwriting a creditor will use automated technology to establish all of the pricing terms at the onset of the relationship. The details of a borrower’s upfront pricing terms are included in their credit agreement. Upfront pricing terms are generated from customized risk-based pricing methodologies which take into account a borrower’s credit profile and debt-to-income. Using these inputs the creditor will establish credit card pricing terms upfront for the credit agreement. Pricing terms generally focus on the borrower’s interest rate and credit limit.

Upfront pricing is a method used for credit cards that is based on risk-based pricing methodology. Risk-based pricing methodology has historically been used in the credit market for establishing all types of pricing for various loan products. Credit card companies use a modified version of this methodology to arrive at terms generated through underwriting systems that analyze information from a credit card borrower’s credit application.

Credit cards have their own pricing systems which can vary from non-revolving debt however both will use risk-based pricing as the primary underwriting methodology for establishing terms. Credit card pricing is typically generated immediately upon application submission with terms provided to a borrower in real time.

Most credit cards will have variable rates that assign a borrower a margin based on their credit profile and debt-to-income ratio. Credit card companies typically provide base rates of estimated interest for their pricing terms as a marketing tool for borrowers. Borrowers researching credit cards can find a lender’s standardized rates on a lender’s website typically found under taglines such as “pricing and terms,” “pricing information” or “rates, rewards and other info.”

A lender’s marketed rates will serve as a base for the establishment of upfront pricing terms in the underwriting process. Since most credit cards have variable rates, they will typically be based on the lender’s indexed rate plus a margin. This requires the credit card underwriting technology to generate a specific margin for each borrower. In the underwriting process a lender will also establish a credit limit. Lenders base the account’s credit limit on a borrower’s application information. Credit limits will typically vary for each borrower. For most credit cards the interest rate and credit limit are the two key upfront pricing variables. These variables are typically established instantaneously with a credit approval which also produces a credit card agreement that the borrower must sign to open the account.

Credit cards usually provide an immediate decision on a new credit card account which requires the creditor to rely heavily on the automated underwriting technology that processes an automated application and immediately provides a borrower with their upfront pricing terms in a credit card agreement. The credit card agreement also details other important factors for the borrower such as fees. Generally fees will be constant across all accounts for a specific credit card product. Credit card fees may include late fees, monthly account maintenance fees and annual fees.

A borrower can rely on the credit card agreement to provide all of the information about the account. The credit card agreement serves as a loan contract. It will include the product’s policies for late payments, delinquencies and defaults. It will also include all of the product’s procedures, specifically detailing how the product will charge interest.