BofA hopes to use its new card to encourage lower-income borrowers to pay… (AFP/Getty Images, Stan…)
In a novel twist on rewards programs, Bank of America Corp. is introducing a credit card that pays cash to borrowers who pay more than the minimum due each month.
Card users would earn $25 a quarter and an additional $5 if they have a BofA bank account, meaning the bank would pay as much as $120 a year.
Industry observers and consumer advocates said the product targets a very different customer than the usual candidates for rewards cards, who are higher-income borrowers with excellent credit who often pay their cards off in full every month. Those offers encourage spending more in order to maximize customers' cash back — while banks make more on fees from merchants who accept the cards because of the increased spending.
BofA hopes instead to encourage lower-income borrowers to pay on time and more than the minimum and to expand their relationship with the bank through other accounts and services. Although there's no minimum balance requirement to collect the cash from BofA's card, the bank expects the card's users will carry balances.
The bonuses can be paid into a bank account or applied to the credit card balance. The extra amount paid by the cardholder can be any amount above the minimum payment. A customer with a minimum payment of $55 could pay $56 and still qualify for cash back.
"I believe that Bank of America is targeting this card to consumers with fair credit," said Odysseas Papadimitriou, chief executive of CardHub.com, a credit card comparison website.
Papadimitriou said the only similar rewards card is one Capital One offers to students that pays them bonuses for timely payments. High-spending consumers with excellent credit, he noted, are offered cards that would net them much more than $120 a year in rewards.
"A customer who spends an average of $1,500 per month can get up to $360 per year in rewards," Papadimitriou said.
Tom Feltner, director of financial services for the Consumer Federation of America, also called the card unusual — in a good way, particularly for people who aren't high earners. He said many lower-income people aren't in a position to benefit from rewards programs tied to increased spending.
"It's a very positive development, because it encourages people to reduce debt and to open savings accounts," Feltner said.
Titi Cole, Bank of America's senior vice president for retail products, said the card was designed to reward responsible financial behavior. It has industry-standard features "to avoid hoops you have to jump through," she said.
The card has no annual fee and no interest for the first 12 card statements. After that, the annual rate varies from 11.99% to 21.99% depending on the creditworthiness of the borrower. If the prime rate goes up, so would the rate. Borrowers who don't pay on time could be penalized with rates as high as 29.99%.
Customers carrying an average balance of $5,000 normally would be charged $750 a year in interest if their rate were 15%.
Balances transferred from other credit cards will be charged no interest for a year, but a fee of 3% of the amount transferred is added.
Chi Chi Wu, an attorney at the National Consumer Law Center, said she hadn't had a chance to read the offer's fine print and expressed some skepticism. Banks make huge profits off customers who pay only the minimum required, she said, and the industry fought against a provision of the Credit Card Act of 2009 requiring disclosures of the total cost to consumers who pay only the minimum.
Cole said the new card ties into the bank's strategy of creating deeper financial bonds with its customers. It will be marketed mainly in BofA's branches and on its websites, primarily to existing customers, she said.