Credit card policies for allocating payments

its impact on risk-based pricing and comprehension by consumers

Authors

  • Joshua M. Frank Center for Responsible Lending, Durham, NC

DOI:

https://doi.org/10.61190/fsr.v18i3.4950

Keywords:

Credit cards, Payment, Allocation, Pricing

Abstract

Credit card borrowers can have balances on the same card at several different rates at once. By choosing a favorable method of allocating payments to balances, issues can substantially raise the interest rates paid by borrowers. The impact of this policy on risk-based pricing is examined using computer-simulated accounts. It is found that the prevailing policy used by issues causes inverse risk-based pricing. In addition, a survey shows that few credit acrd users understand the impact of payment allocation. The impact of recent legislation on payment allocation policy is also examined.

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Published

2009-09-30

Issue

Vol. 18 No. 3 (2009): FSR Fall 2009

Section

New Original Submission

License

Copyright (c) 2009 Academy of Financial Services

Creative Commons License

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Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.

How to Cite

Credit card policies for allocating payments: its impact on risk-based pricing and comprehension by consumers. (2009). Financial Services Review, 18(3), 261-290. https://doi.org/10.61190/fsr.v18i3.4950