TD Bank has launched a credit card for customers who are responsible, but not too responsible. It rewards customers for paying on time, but not in full — the incentive for an on-time payment is a reduction in the interest rate for carried balances.
Similarly, Capital One Financial Corp. has a new card rewarding students for on-time payments, but imposes strict, low credit limits.
A number of credit cards rewarding consumers for more responsible financial behavior have been rolled out since the financial crisis as issuers seek to woo back potentially credit-wary customers with strategies that hedge risk on both sides.
"Banks are trying to figure out how to expand their universe of customers," said Judy Cohen, vice president at EMI Strategic Marketing. "Banks don't want to abandon students or near-prime [credit score] customers," so they are developing products that reward people for making the right moves, including paying bills on time and also paying specific percentages of outstanding balances, she said.
TD Bank, a Cherry Hill, N.J., unit of Toronto-Dominion Bank designed the TD Payment Plus Visa card specifically for customers who carry balances from month to month. It offers customers who pay at least 10% of their outstanding balance a 50% reduction in that month's interest rate-based finance charge. As long as the payment is received on time, the credit appears on the following month's statement.
Cardholders also may opt to receive 25% off the finance charge for any month when they pay 5% to 9.99% of their balance on time.
The card, which has no annual fee, offers no rewards for routine purchases. Its annual percentage interest rate is 21.24%, which is somewhat higher than many cards. Payment Plus cardholders paying 10% on a $1,500 balance on time each month will receive a total credit of $65 over six months.
Payment Plus is the first card of its kind and has received "substantial interest from consumers" since its Feb. 1 rollout, a bank representative said. TD Bank is marketing the card online and through direct mail offers with a promotion for no interest for the first six months on balances transferred from other cards.
One analyst is skeptical.
"The best credit card customers will not be tempted by this offer," said Brian Riley, senior research director at TowerGroup. "There are better APRs out there that also offer rewards on purchases, so this card will naturally attract higher-risk customers who can't qualify for the lowest APR. By definition, customers for this card will be riskier in an issuer's portfolio."
TD Bank counters that its card is not targeting credit-challenged customers as much as it is providing fresh incentives for responsible cardholders who carry a balance.
"We're in a very competitive market, and we want to attract customers who carry a balance and realize they have a choice about what card to use," said Michael Copley, TD Bank executive vice president. "This is all about financial fitness."
Paymentflex Technologies Inc. of Larchmont, N.Y., built the software that allows TD Bank to calculate cardholders' rewards based on the percentage of their balance they pay off each month.
Capital One on Feb. 17 launched a card that also rewards consumers for making on-time payments. The Journey Student Rewards Visa is a "credit card with training wheels" for college students "with limited or average credit," Capital One said.
The card, which has no annual fee, provides 1% cash back on all purchases and an additional 25% of the total cash-back reward each month cardholders pay their bill on time. A website promoting Journey offers information for parents and a "Credit 101" section with information for first-time credit card users.
The Journey card offers an introductory credit limit of $300 to $500, depending on creditworthiness, with a variable APR of 19.8%, tied to the prime rate. Cardholders will be eligible for "conservative credit line increases" if they use the card responsibly, a Capital One representative said, stressing that they will not be allowed to exceed credit limits.
The card replaces Capital One's Student Rewards credit card.
Capital One and TD Bank are not the first to offer a card rewarding customers for on-time payments.
Citigroup Inc. in May 2009 launched the Citi Forward card, which gives customers 100 of Citi's ThankYou Rewards points for each billing period in which payments are received on time and cardholders stay under their credit limit. Citi Forward also cuts cardholders' APR by 0.25% on new purchases after three consecutive billing periods with on-time payments while staying within the credit limit.
Discover Financial Services in 2007 introduced the Motiva Card, which gives cardholders one month's interest back for every six consecutive on-time payments.
