Rate-Jacking: Risk-Based & Opportunistic Pricing in Credit Cards

The CARD Act has made rate-jacking a thing of the past for consumer credit cards. Instead of allowing retroactive underwriting, it requires card issuers to ensure that the cardholder is able to repay before a card is issued or a credit limit is increased, and thus to price the risk correctly upfront. The end of rate-jacking and other changes wrought by the CARD Act might have had a negative impact on some disciplined and sophisticated consumers. But if the JPMorgan Chase static pool data is indicative of the larger cardholder population, few consumers are consistently pure transactors who are unaffected by credit card billing tricks and traps.

Instead, sooner or later, most consumers were likely to experience an episode of “gotcha” by incurring an unexpected fee or a rate-jack. Whether the “gotcha” pricing was generally offset by the benefit of lower rates prior to the “gotcha” moment is unclear. What is clear is that “gotcha” pricing was widely felt to be unfair and abusive, contributing to the popularity of the CARD Act’s reforms. Post-CARD Act, the credit card market remains far from perfect, but the elimination of rate-jacking is a critical move in making credit card pricing more transparent, and thus fairer and more competitive.