Chase Test Likely Targeting Rate Surfers and At-Risk Customers

 Here’s Chase’s problem. It has a lot of loans at low (promotional) rates that may be 1,000 basis points (or more if the cardholder has been repriced) below its go-to rates (what you get charged for normal retail purchases). Historically, it has offered promo rates to get you to use the card or transfer higher-rate balances from other issuers, in hopes that you’ll fail to pay off those loans before the rates go up. Don’t forget, if you’re not paying in full each month, you’re paying off the promotional rate loans with your monthly payments and continuing to incur interest on your remaining debt.

The problem is that people who take promotional rates these days are generally people who desperately need the money, very likely to keep current on other debts, or people who are surfing for low rates. The Chase card with the promotional rate is likely the lowest rate in the cardholder’s wallet, so he or she wants to pay that balance last (i.e., make minimum payments) and focus on the higher-APR debt. That puts Chase in the back of the line among customers who may well be the next to go delinquent on the road to charge-off. 

It’s actually not the worst card-issuer tactic in the current marketplace. The rate surfers who are getting free or low-interest cash will pay off just before the end of the promo-rate period. This gets them off the books more quickly and they become risk for the next issuer. At-risk Customers who’ve been making minimum payments are going to go to a higher rate at the end of the promotional period (most likely somewhere in the 12-to-16 month range) but under the Chase strategy, the balance that starts incurring more interest will be lower than it would have been. From a consumer standpoint, you could probably argue they’re doing cardholders a favor by getting them to a point where they’ll pay off higher APR debt sooner (although you could also argue that the higher minimum monthly payments could put a greater strain on their budgets). And frankly, the issuers don’t care all that much if the rate surfers complain (and they can tell who they are).

The Chase “test” is likely focusing on the concurrent runoff of “higher-rate” balances and the impact of this approach on delinquency rates with carefully segmented customer pools (i.e., whether it accelerates non-payment). To some degree, a successful test may well be higher runoff among lower FICO-score customers, because that means there will be less there to charge off or go delinquent.