Giving Up a Card for Cash? It's a Gamble

If you're the type 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: You'll have to give up using your card for up to 11 months -- and agree to have your credit limit reduced.

The move by Citi is a tactic meant to encourage cardholders to make big payments -- or, barring that, just to go away. For consumers, the lure of a lower credit-card bill and the promise of extra pocket money must be weighed against having your card sidelined -- and, once it's back in action, having your credit-limit slashed too.

The mechanics of the deal are relatively simple. Citibank gives customers a "statement credit" -- a reduction in the amount owed -- equal to 20 percent of the amount paid above the minimum, up to $550. A customer looking to earn the full $550 must pay at least $2,750 above the minimum during the enrollment period, which ranges from three to eight months. Be cautious, though: taking the deal may not be wise. A customer who already has a low limit will be able to spend even less once the enrollment period ends and the credit line is reduced. Worse, the customer's newly lowered limit will raise his credit utilization ratio, hurting his credit score. And spending most of a card's credit limit also hurts scores.

During the enrollment period, customers cannot make purchases with the card; for those who violate the rule, Citibank terminates the offer and cancels the customer's accrued earnings on the deal.

Once the three-to-eight-month period ends and Citibank pays out the statement credit, it then slashes the cardholder's credit by the amount paid over the minimum -- plus the statement credit. So a customer who earns the full $550 will suffer a minimum credit-limit reduction of $3,300.

A customer participating in the program would be smart to pay down $2,750 -- to earn the maximum $550 reward -- but not more: there's no additional bonus. So paying the balance down by, say, $4,500 would still earn a maximum bonus of $550 -- and reduce the credit limit by $5,050.

And check out this statement from Citibank's offer: "Removal from this program for any reason or voluntary withdrawal from this program will still result in a credit limit reduction as stated above." A customer who fails to complete the program and earn the statement credit will still have their credit limit slashed.

Now, if that still sounds like a good deal, act fast. Customers who receive Citibank's invitation-only offer 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, the bank is 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 amounts to a credit demotion.

"This is definitely risk management" on Citibank's part, says Bruce Cundiff, director of payments research at Javelin Strategy & Research in Pleasanton, California. "They're killing two birds with one stone: increasing repayment and reining in lines of credit."

Citibank isn't the only issuer dangling cash incentives to get repaid 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, Cundiff says, "is very similar to the American Express deal, which was a brilliant move," given that card issuers are seeing the default process accelerate.) And 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.