If a lender thinks the outstanding debt will be repaid, they can increase the interest rate on a customer's card with 30 days' notice.
Although a customer can choose to reject the increase, they then have to close their account and repay the full amount of the debt.
Credit card customers can limit risk-based repricing by keeping on top of their credit accounts and making payments on time, but the decision is ultimately the provider's.
What is risk-based repricing?
Risk-based repricing occurs when we have a credit card with a lender and they decide to recalculate the interest rate on the card.
Credit card providers do this when they judge a borrower is becoming a riskier prospect and may not be able to repay their debts or handle their personal finances effectively.
This type of risk-based repricing is different to general repricing, something credit card companies do when there is a change to the costs of providing credit. So, if the economy is struggling, credit card providers may reassess prices across the board.
If a provider reassesses an individual or group of individuals with similar characteristics but doesn't make general changes to their pricing, they are likely making changes based on risk-based repricing.
Every credit card provider has their own method of assessing risk and they will regularly make changes to the way they calculate how risky lending to certain groups of people are.
While there is no definitive list of factors that go into decisions like these, credit card providers pay attention to whether a customer:
- Misses a payment or multiple payments on their credit card accounts (or other accounts)
- Starts paying less off their outstanding balance each month
- Takes out more credit or increases the amount they owe
- Frequently makes cash withdrawals with their credit card
Taken in isolation, these factors may not lead a provider to increase a customer's interest rates, but they can add up to mean that an individual is more of a risk in the eyes of a credit card company.
There is a flip side to risk-based repricing - it could theoretically work in our favour if our risk profile improves and a lender thinks we pose a reduced risk of defaulting or falling into difficulty.
However, lenders tend to err on the side of caution, so it's more likely we'll see our interest rates rise rather than fall.
Promotional or fixed rates
It's important to note that changes to an interest rate based on the end of a promotional period or following the end of a fixed rate are not the same as risk-based repricing.
In those cases, customers have agreed to a specific interest rate for a set period of time in the knowledge that the interest rate would increase following that term.
If that was a 0% purchase credit card, for example, the interest rate would increase after the promotional period had worn off.
How risk-based repricing affects borrowers
Credit card companies must give customers at least 30 days' notice before implementing an interest rate change as set out in the Consumer Credit Directive.
An interest rate increase on a credit card has some immediate issues for customers:
- It means future borrowing will be charged at the new rate
- It means existing borrowing will be charged at the new rate (unless it was specifically borrowed at a special promotional rate)
Risk-based repricing applies to existing borrowing as well as new borrowing because it's based on the risk a customer may not be able to pay the money back.
So, the decision by a lender to suddenly increase the interest rate on their balance means that customers will face higher bills immediately and be required to pay more money per month to stay on top of their credit card repayments.
Rejecting an interest rate increase
Customers can choose to reject the rate increase on their credit card by closing their account with their lender within 60 days.
The credit card provider will give a customer this option when they inform them of the changes to their interest rate, but it's important to realise that the outstanding balance will need to be paid off in full for the account to be closed.
When a customer receives a letter informing them of an increase to their interest rate, that letter must be written in clear language and be easy to understand.
It should include illustrative examples of how much borrowing was costing before the change and how much customers will pay after the change comes into force.
For many borrowers, though, it simply isn't an option to pay off all their outstanding credit card debt in one go.
It could be worth looking at balance transfer credit cards to see if those are an option or look at ways to reduce debt overall.
Learn more about where to get help with debt if you're struggling.
How to reduce your chances of risk-based repricing
There is no single way to avoid a credit card company altering interest rates on the grounds of risk-based repricing.
However, there are some steps customers can take to keep their credit card record as clean as possible:
- Pay monthly credit card payments on time
- Reduce the amount owed on the credit whenever possible
- Keep up with payments on other types of credit such as personal loans
- Don't go over agreed credit limit
- Consider closing other credit accounts that are no longer used or needed
These are good practice tips for generally staying on top of our borrowing but sticking to these principles can help prove to our lenders that we're in control of our finances.
Customers should also keep an eye on their credit rating to understand whether they might be subject to risk-based repricing in the future.
In the UK, there are three major credit reference agencies that lenders consult before making a decision on whether to provide a credit card:
Not all companies report to or check all three credit rating agencies, so a good score with Experian might not mean we have a good score with TransUnion, for example.
If our credit card provider then uses TransUnion to make their decisions, this could explain why our risk-based pricing has changed.
Wherever possible, try to keep an eye on your credit score and see whether anything can be done to improve it.
There are free trials with credit reference services available, plus Experian have an ongoing basic version that updates a customer's credit score (without all the associated detail) each month.
It's also worth checking whether your bank includes any credit score checking with their current account - NatWest and Monzo have partnerships with TransUnion, although the checking service is only available to customers on Monzo's paid tier.
What are the rules around risk-based repricing?
Lenders follow certain principles when they reassess a customer's risk profile. These are not set in stone by any regulations, but they are agreed by the credit card industry.
Some of these we've covered above yet it's worth listing them all:
- A card provider must give a customer at least 30 days' notice before increasing their interest rate.
- A customer can choose not to accept the new interest rate. If this is done within 60 days, the card provider will close the account and the outstanding balance will need to be paid back at the existing interest rate. If a provider also offers other credit products (such as personal loans), they may allow the balance to be transferred to one of those instead, but that is at the discretion of the lender.
- Card providers will not increase a borrower's interest rate within the first year in connection with risk-based repricing. However, general repricing can still have an impact on interest rates in the first year.
- Card providers will not generally increase an interest rate more than once every six months unless there are exceptional circumstances (such as a shift in the economy).
- When a card provider informs customers about the change in interest rates, they will use clear language how it will change, what it will cost and what options a customer has.
So, credit card providers will usually stick to these industry rules, but there is no way for customers to argue the decision to implement risk-based repricing - or even to find out why it's happening in many cases.
Some lenders may enter into discussions to explain their reasoning or to offer repayment plans if a customer cannot pay their debt off in full immediately, but the decision to raise interest rates will be based on company practices and cannot be easily avoided.
Summary: Is risk-based repricing fair?
Risk-based repricing is one of the tools available to credit card providers to manage their customers effectively, although there is no indication how widely it is used across the industry.
Several lenders including Santander and Barclays have a factsheet on credit card repricing available on their websites, suggesting there's a possibility it can be used. In addition, we also have anecdotal evidence from other popular credit card companies that indicate they follow the practice too.
From a customer perspective, risk-based repricing seems inherently unfair. It feels as though it reneges on the agreement they initially made with their credit card company, shifting the goalposts almost without warning.
Yet it could be argued that, from a credit card provider's point of view, they are seeing activity that doesn't match with the profile of someone who is going to meet all their obligations and that's why they have to act to cover themselves.
However, targeting people who seem at risk of missing payments by increasing their interest rates and making them pay more seems counter-productive, especially if customers feel they are being unfairly singled out in light of updated regulations.
Since 2018, credit card companies have been required to keep track of customers who are in persistent debt and offer them help to break the cycle.
The Financial Conduct Authority (FCA) warned providers in 2020 that they should treat customers fairly and not impose blanket bans on credit card use for those struggling to pay their debts.
Even so, it remains a possibility that the tightened rules around customers in 36 months of persistent credit card debt and the option to impose risk-based repricing on groups of customers deemed to be a risk could be working together to the detriment of borrowers.