Vision Credit Education, Inc.

For years, Sears allowed cardholders to apply additional payments toward future billing cycles. This helped cardholders prevent running short in lean months as long as they had paid extra the previous month. Ever since Citigroup’s purchase of the Sears credit card portfolio in November of 2003, this policy has remained the same. Citi has now changed the policy.

Citibank has ended this practice from Sears cards which was relatively unique among credit card issuers. For most credit cards, if you pay more than your minimum payment, it does not substantially reduce your minimum payment calculation for the following month. Instead, that minimum payment is calculated as the total of all finance charges and fees plus approximately 2% or more of the balance.

How it Worked

If your minimum payment was $30 and you paid $60, then your minimum payment for the following month would have been $0. No minimum payment would be required for that month. Now, it will still be approximately $29 or $30 depending on the balance. This is in line with other major credit card products.

Citibank has released the following notification to its Sears card customers:

INFORMATION UPDATE:

Please note: You may no longer make minimum payments in advance. You must pay the Total Minimum Due each billing cycle. We will no longer apply any portion of payments made in current billing cycles to Total Minimum Due amounts in future billing cycles.

If you did not see this notice, understand that it was mailed in the same envelope as the annual privacy notice. Most cardholders summarily throw these away without paying any notice to what is actually contained in the envelope, so it is possible you did not see your notice.

Reason for Change

The reason for this policy change is simple. Citibank would have earned less on late fees and subsequent penalty rate increases on Sears cards. It was “too easy” for cardholders to stay current on their credit card accounts.

The result should be an increase in delinquency rates and in the number of Sears cardholders that experience increases in their interest rates due to late or missed payments. Citi’s accounts receivables will increase as a result of this policy change. What is unknown is whether the accompanying increase in customer defaults will offset this increase in fee revenue.