Simply put, the higher the balance you carry, the more likely you are to default. And if you do default, the larger the hole you blow in the bank’s balance sheet.

Even worse, from the bank’s viewpoint, is that this type of offer causes “adverse selection”. The good customers will switch to other cards that offer lower rates, or at the very least will not charge up their cards to get the lower rates. The bad customers will rack up the balances to get the lower rates (and will probably end up in default), and by doing so will be paying less in interest (and be less profitable for the added risk).

This is Citi mispricing risk once again. And deliberately doing so.

This is one of those side effects I mentioned earlier about government intervention. If Citi weren’t getting bailout dollars from the federal government, they either would not offer this or would go out of business for doing so. Instead, the federal government is backstopping Citi’s losses with taxpayer money, so they are actually being rewarded in some ways for taking losses.

This is exactly right because the value of rewards cards go south very fast if one is hit with interest charges because of carrying a balance.

I agree that Citi is being completely predatory. Shame on them and also the companies that implement mandatory arbitration clauses. Just another way to prey on consumers. No comment on the utensil CC…that’s just silly!