Most credit card customers know that they do not have to pay off the entire credit card balance shown in the statement. An average cardholder also knows that if he or she pays off the new credit card purchases by the due date shown, no interest is charged. So essentially the cardholder gets an interest free loan for 20 or more days.
Now imagine, the card holder buys a furniture for several hundred dollars and would really like to pay that purchase over few months. Almost all credit cards provide no such option. Customer’s choice is often either pay all purchases including the coffee, gas, hardware store, grocery etc. which are all under $50 (in our hypothetical scenario) over time or pay the entire purchase balance in the statement.
Many unassuming customers find this out the hard way after getting a lucrative no interest for 12 months (e.g.) balance transfer offer. Once the balance transfer is complete, all other transactions automatically stop giving customers the choice to pay off the regular purchase transactions every month without paying interest.
We need to ask why do credit cards work this way? Why can’t it be customer’s choice to pick and choose specific purchases he or she would like to pay over time?
It’s time that credit card as a product evolves to a better version of itself. First, every card should come with the feature where cardholder gets to decide which purchases or how much balance can be paid off by due date vs. how much to be paid off over time.
Second, the cardholder is given a choice to select the terms (e.g., 3, 6 or 9 months to pay off the balance and the interest rate or fee), e.g., longer the term, higher the interest rate or fee to protect the card issuer. Issuer still maintains control of what terms are offered.
Third, the card holder is shown the monthly payment for balance or purchases selected to be paid off over time at the chosen term. This is only possible if the loans are structured as installment loans, similar to personal loan at your friendly neighborhood banker or the ones pitched by FinTechs in recent years. The average daily balance method used in credit card is impossible for an average person to calculate and understand. I know because I explained to regulators these calculations, each sample statement required an elaborate excel to explain the calculations.
If you are thinking, surely cards work the way they do today because it is mandated by regulation. To be perfectly clear, these onerous “loss of grace” (industry speak for losing the interest free grace period, number of days a cardholder has for paying off a purchase before paying any interest) is not mandated by any regulation.
Isn’t the inflexibility due to those awful mainframe systems old banks and financial services use? Could be, but in my experience, even when the system could handle customer friendly options, credit card issuers rarely chose it. Recently some large banks have started providing options to pay selected purchases over a period to their well-heeled (read: good credit) customers but most US cardholders have no such luck.
Are we sure an average card holder will remember to choose which purchases or how much balance he or she wants to pay off immediately vs. over time? Absolutely they can choose, is my answer! Customer action can be easily achieved by a user-friendly mobile app with push notification to remind card holders the need to take action.
Research after research with card holders throughout my decades long experience have shown that “control” is a coveted feature of credit card users. Card holders always want product features that make them feel in control. Features like these are what they often lack, especially card holders who use it as a budgeting tool.
Credit Card issuers, I invite you to revolutionize the credit card product by adding customer-controlled installment feature and delight your customers.
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