Citi is the latest credit card issuer to get creative in encouraging customers to make big payments — or just go away.
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If you’re the type of person who would rather have cash in your pocket than credit in your account, Citibank might be the right credit card issuer for you. Citibank is stepping up its Citi Payment Partner program, an invitation-only promotion that lets customers earn as much as $550 off their credit card bills.
The catch: They have to give up using their cards for up to 11 months and agree to have their credit limits reduced.
The move by Citi is the latest example of how credit card issuer are trying new tactics to encourage cardholders to make big payments — or just go away.
Citibank’s cash-back program on its Citi cards has been around for several years, in one form or another. But despite the lure of a lower credit card bill, having your card sidelined — and your credit limit slashed once it’s back online — isn’t something to take lightly.
How it works
The mechanics of the deal are relatively simple. Citibank will give customers a “statement credit” — a reduction in the amount owed — equal to 20 percent of the amount paid above the minimum. The credit is capped at $550. A customer looking to earn the full $550 statement credit must pay at least $2,750 more than the minimum during the enrollment period. Enrollment periods range from three to eight months.
Offer not for everyone
Be cautious, though, because taking the deal may not be wise.
While customers can earn up to $550 off their bills, the offer has negatives:
- If a customer has a smallish limit to start out with, the reduced credit limit won’t accommodate much spending.
- With a reduced credit limit, your credit utilization ratio will go up, making your credit score go down. Using up most of a card’s credit limit will reduce your credit score.
- During the enrollment period, customers will not be allowed to use the credit card for purchases.
- If the card is used during the enrollment period, Citibank will terminate the offer and the customer will forfeit any accrued earnings.
- After paying out the $550 statement credit, Citibank then slashes the cardholder’s credit limit by the amount paid over the minimum — plus the statement credit. A customer who earns the full $550 will suffer a minimum credit limit reduction of $3,300.
- You owe taxes on the amout of debt reduced.
Also keep in mind that Citibank says that your limit will be reduced by whatever amount you pay over the minimum. A participating customer would be smart to pay down $2,750 — to max out the $550 reward — but not more because there’s no additional bonus. You could pay the balance down by, say, $4,500. You’d get the maximum bonus of $550, but now your limit would be cut by $5,050 ($4,500 plus the reward of $550).
And check out this warning: “Please note that removal from this program for any reason or voluntary withdrawal from this program will still result in a credit limit reduction as stated above,” Citi’s offer states. That means a customer who fails to complete the program and earn the statement credit will still see a reduced credit limit.
There is also a tax issue that customers must take into consideration. Technically, the $550 statement credit is akin to debt forgiveness. “If debt forgiveness exceeds $600 then a 1099-C is required to be issued” by Citibank, says Jack Broyles, a CPA in Washington state. “This is likely why Citibank capped the statement credit at $550.”
That said, the instruction on form 1099-C says that taxpayers must report all canceled debts, even if less than $600. A consumer would report the canceled debt on the “other income” line of form 1040. “I am sure Citibank will be reducing their income or increasing their loss by the amount of balance reductions granted,” Broyles says. “If the IRS wanted to be a particular pain, it could require Citibank to identify who received these — and by how much — and then cross-check to see if the taxpayer reported the ‘income.'” Broyles’ point is that Citibank customers who take advantage of this offer should play it safe and report the income.
If that sounds like a great deal, act fast. Customers who receive Citibank’s invitation-only offer only have until May 15 to sign up.
If you sense that Citibank isn’t forking over $550 out of the goodness of its heart, give yourself a gold star. In fact, it’s trying to ensure that its riskiest customers settle on what they owe without racking up more debt — and then agree to curb their own spending ability. The $550 come-on merely is what amounts to a credit card demotion. “This is definitely risk management” on Citibank’s part, says Bruce Cundiff, director of payments research at Javelin Strategy & Research, a Pleasanton, Calif.-based research firm. “They’re killing two birds with one stone. They’re increasing repayment and reining in lines of credit.”
Other ‘get-lost’ offers
Citibank isn’t the only card issuer dangling cash incentives to get paid back, but it’s one of the more generous. In February, American Express offered some customers a $300 gift card to pay off their balances and close their accounts within two months. Citibank’s offer reminds Cundiff of American Express’s offer back in February. “This is very similar to the American Express deal, which was a brilliant move,” Cundiff says. Card issuers are seeing the default process accelerate, Cundiff says. So, “this makes a lot of sense,” Cundiff adds.
In addition, Majestic Visa recently offered customers a statement credit of up to $36 for paying off as much as $1,825 of their outstanding balances.
Just $36 for paying off the balance? It’s a sign of the times. Asset-backed debt used to be a huge source of liquidity for card issuers, but the market for such debt has dried up. And credit card charge-off rates are booming — keeping in line with a ballooning unemployment rate. Citibank’s $550 incentive, in the end, reflects a harsh reality. The card issuers are strapped, like everyone else, and they have to get creative in how they manage to pull back their credit lines.
Not long ago, the card issuers seemed all too eager to lend credit. Now it turns out they actually want their money back.
See related:Cardholders beware: Terms, they are a-changing, FICO scores stable despite slashed credit limits, study says, How to keep credit scores up when limits are slashed, Debt forgiveness is income and may trigger a 1099-C and increased taxes