Behavior-Based Repricing

DEFINITION of 'Behavior-Based Repricing'

The changing of a credit card holder’s interest rate based on his/her repayment activity. Behavior-based repricing usually refers to increasing a consumer’s interest rate after s/he misses a minimum monthly payment. Making a single late payment can be enough to trigger the penalty APR, which can be as high as 29.99%. Behavior-based repricing also means that if you incur the penalty APR but then re-establish a history of on-time payments, the credit card company may lower your interest rate.

BREAKING DOWN 'Behavior-Based Repricing'

Credit card companies use behavior-based repricing because they want to charge each customer an interest rate that reflects how much of a credit risk they are. When a consumer misses a payment, the credit card company doesn’t know if that person just got busy and forgot to pay their bill, or if they’re in financial trouble and won’t be making regular payments on their account anymore. Either way, this consumer appears to be less responsible than they were when they were making their monthly payments on time, so the credit card company is likely to increase their interest rate.

You can find out if a credit card you hold or are thinking about applying for uses behavior-based repricing by reading the credit card disclosures. Near the top, there will be a box called “Penalty APR and when it applies.” The box might say there is no penalty APR, as some issuers do not charge a penalty APR. Or it might specify an interest rate that is higher than the regular interest rate, then say something like, “This APR may be applied to your account if you make a late payment.” In the same box, you’ll also be able to see how long the penalty APR will apply. The disclosure might state, for example, “If APRs are increased for a payment that is late, the penalty APR may apply indefinitely.”

If you miss a payment and are carrying a balance, check your credit card account online or call the issuer to find out if your interest rate has gone up. If you’re in debt, it’s important to understand how much interest you’re paying to carry that debt. Paying 15% APR on a $1,000 balance means you’re spending about $150 a year on interest; if behavior-based repricing kicks your interest rate up to 30% after you miss a payment, now you’re spending $300 a year on interest. You’ll want to focus on paying this balance off as quickly as possible to get rid of your high-interest debt.