What Is Upfront Pricing?

Upfront pricing refers to the interest rates, fees, and certain other terms in a credit card issuer's initial agreement with a cardholder. In the United States, credit card issuers are required by law to make these disclosures and also subject to regulations governing when and how they can change the terms of the agreement.

How Upfront Pricing Works

Credit card issuers set interest rates, fees, and credit limits for each cardholder through a largely automated process called underwriting.

Underwriting attempts to assess how much risk a card applicant poses, based on their credit score, their debt-to-income ratio, and other factors. A typical credit card might come with a range of possible interest rates, with riskier customers assigned rates toward the high end and less risky ones paying lower rates. Some applicants may be rejected altogether for a particular card based on the underwriting process. This is often referred to as a risk-based pricing model, and it is used not only with credit cards but with other types of lending, such as car loans and home mortgages.

Under the Equal Credit Opportunity Act, card issuers are prohibited from considering an applicant's age, gender identity, sexual orientation, marital status, race, color, religion, or national origin in deciding whether to grant them credit and in setting the terms for it.

Upfront Pricing and Consumer Protections

Since the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, credit card issuers in the U.S. have had to follow a more uniform set of rules. The act's stated goal was to "establish fair and transparent practices related to the extension of credit," and it laid out a number of provisions covering both the underwriting process and pricing.

For example, credit card issuers once had a relatively free hand in raising the interest rates they'd initially established when a cardholder opened their account, often resorting to such tactics as "hair-trigger repricing" that allowed them to impose a higher, penalty APR on the account balance if the cardholder was even a day late with their monthly payment. In fact, cardholders could even be subject to a penalty interest rate if they were late on an entirely different credit account, a situation known as universal default.

The Card Act largely reined that in. "Prior to enactment of the CARD Act," the Consumer Financial Protection Bureau has noted, "the ability of issuers to reprice existing accounts and balances allowed issuers to 'correct' pricing if their initial assessment of risk proved incorrect. At the same time, because issuers were free to reprice it was not necessary to set interest rates based upon the issuers' upfront assessment of risk."

For example, under the CARD Act, issuers generally can't change the interest rate on a card during the first year that the account is open, except in certain limited circumstances, such as a rise in the index that a variable rate card is coupled to or the end of a low- or no-interest promotional period. They must generally provide 45 days notice if they intend to change the interest rate on future transactions and can only raise the rate on existing balances if the cardholder has missed two consecutive monthly payments, and again they must provide 45 days notice. In theory, at least, the 45-day period gives the cardholder some time to shop around for a card with better terms.

As a result of these changes, consumers can count on a card issuer's upfront pricing to provide a more accurate picture of how much the card will cost them, at least for a longer period of time than before. And credit card issuers have to be more conscientious in their underwriting practices, since current laws make it more difficult to attempt a do-over if they find they misjudged an applicant's credit risk.

The Bottom Line

Upfront pricing tells you the interest rate and fees you'll have to pay to use a particular credit card. Those terms can change over time, but the law requires that the card issuer give you adequate advance notice to avoid unpleasant surprises.