What is Behavior-Based Repricing?

Behavior-based repricing is a pricing model that credit card companies use to attach interest rates to certain behaviors of an account holder, especially risky behaviors such as default in payments. Through a behavior-based repricing, the interest rate charged on a credit card can be adjusted according to the payment history or risky behaviors of the cardholder. Credit card issuers can charge cardholder higher interest rates if they fail to act right, for instance, if a cardholder does not make the required monthly payment on his card, a higher interest rate can apply. Also, behavior-based pricing is a positive thing for cardholders who have a good history of an established payment pattern, in this case, the credit card company can charge lower interest rates.

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How Does Behavior-Based Repricing Work?

Behavior-based repricing is a strategy used by credit card companies or issuers to evaluate the number of risks that a credit card holder poses. While this form of repricing is beneficial to cardholders with positive history, it is detrimental to those who have a negative history and have established a default record overtime. For example, if a consumer fails to make the monthly payment due, the interest rate for such consumers can increase, since such action triggers the annual percentage rate penalty. Typically, missed payments attract penalties which this repricing model seeks to achieve. The main idea behind a behavior-based repricing is to measure the amount of credit risk a credit cardholder shows by checking how well they pay their minimum monthly payments. This strategy deters defaults or delinquencies amongst cardholders. Behavior-based repricing offers advantages to responsible cardholders who make due payments by giving them lower interest rates.

Behavior-Based Pricing and the Card Act

Given the tendency of certain credit card issuers to use the behavior-based pricing to defraud card issuers, certain regulations exist to prevent that. The Credit Card Accountability, Responsibility, and Disclosure Act (2009) is a federal law that seeks to safeguard card issuers from unfair deductions, payments, and other lending practices. Although the behavior-based repricing is a lawful mode, the act restricts the way credit card issuers use it. For instance, credit card issuers cannot impose penalties such as an increased interest rate in cardholders until the delinquency on the account reaches 60 days. In other words, if the cardholder makes the missed payments before 60 days, he can be exempted from the penalty. The act also limits the amount credit card issuers can charge for default and stipulates that cardholders be duly notified before charges are made.