Viktorcvetkovic / Getty Images Learn what upfront pricing is, and how it affects both consumers and credit card issuers.
Definition of Upfront Pricing
Upfront pricing is the legally required pricing system used by United States credit card issuers that prevents them from increasing a cardholder’s annual percentage rate (APR) or fees without adequately disclosing the increases to the cardholder and meeting other requirements. Before upfront pricing was mandated by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act), credit card issuers could increase a customer’s interest rate at any time and for any reason. With upfront pricing, however, credit card issuers can only increase a customer’s interest rate in certain situations.
How Upfront Pricing Works
Upfront pricing prevents credit card issuers from increasing a cardholder’s APR or fees except in specific situations.
Sufficient Disclosure
A credit card issuer may increase a cardholder’s APR if it clearly disclosed that the lower APR would only last for a specified time period, and that a new APR would take effect after that time period elapsed. For example, a credit card might come with a 0% promotional APR for six months, but the APR will increase once that introductory rate expires.
Variable APR
An increase in variable APR is permitted if that APR is based on a publicly available index that is not controlled by the credit card issuer.
Hardship Arrangement
A credit card issuer may temporarily reduce a customer’s APR and/or fees under the terms of a short-term hardship arrangement. When the arrangement ends, the issuer may increase the APR and/or fees back to previous levels.
Late or No Payment
If a customer is more than 60 days late on their minimum credit card payment, the credit card issuer may increase the customer’s APR or fees as a penalty. However, this increase must not last longer than six months if the customer brings their account current within the six-month period beginning on the date of the increase.
Upfront Pricing vs. Repricing
Prior to the passage of the CARD Act, repricing practices were common among credit card issuers. For example, common repricing practices included:
Applying a penalty APR when a cardholder was behind on their balance with that credit card issuer, or on any other credit card account.Increasing a customer’s APR at any time and for any reason.Periodically reviewing customers’ accounts to reevaluate their risk, which often resulted in increased APRs.
These repricing practices are not permitted under upfront pricing, which requires sufficient disclosure for APR and fee increases, and only permits such increases in certain circumstances.
Criticisms of Upfront Pricing
Upfront pricing protects consumers from unwelcome surprises by preventing credit card companies from arbitrarily increasing APRs and credit card fees. However, critics have argued that if a credit card issuer is no longer allowed to use repricing practices as a revenue source, it will simply increase consumer costs in other ways, such as setting higher APRs for all customers or reducing the availability of promotional APR rates such as introductory 0% APR offers. Limiting a credit card issuer’s ability to penalize high-risk credit behavior through increased APRs and fees could also encourage high-risk borrowers to continue engaging in risky credit behaviors. Additionally, some critics suggest that prohibiting credit card issuers from pricing risk into their APRs and fees significantly disincentivized extending credit to high-risk borrowers. In fact, the Federal Reserve found that bank card holding declined among high-risk borrowers after the CARD Act was passed, suggesting that they turned to other forms of credit.
