Credit Card Rewards on the Rise
Many consumers examine credit card features, such as low interest rates, fees, and cash advances, when deciding on the next card for their wallets; however, more credit cards are now offering benefits that could extend beyond bank accounts.
New rewards cards are entering the market, offering incentives, such as cash back, fuel discounts, airline miles, clothing, and gift certificates, as added inducements to choose plastic when making purchases.
Recently, a variety of companies, including Target, Toys 'R' Us, Qantas, Chase Bank, and GameStop, have come out with new rewards cards meant to spur customer loyalty for the upcoming holiday season. Some stores are teaming up with banks to get in on the action, such as Kroger supermarkets and U.S. Bank.
Citibank is even offering a new type of high-tech credit card, called the Redemption. While it looks similar to many traditional credit cards, it has built-in buttons that allow users to make payments with their rewards points.
Discover is offering new cards that give consumers zero-percent interest on balance transfers for the first 18 months. Citibank offers a similar program for customers that extends the benefit to 21 months, as well as cards that begin with 75,000 bonus airline miles.
These cards could be out of reach for most consumers, because companies are seeking to avoid charge-offs — debt that banks acknowledge will go uncollected. The charge-off rate was three percent in 2006, but it rose to 10.7 percent in the second quarter of 2010, and because of this, credit companies are increasingly looking to higher-end clientele to offset losses.
According to a recent report by Fox Business, 60 percent of Americans own a credit card that offers some type of advantage program. However, with debit overdraft fees no longer bringing in revenue, some worry that rewards cards could be the next big fee target, since the rewards aren't covered by recent consumer protection laws like the Credit Card Accountability, Responsibility and Disclosure (CARD) Act.
While improvements have been made to enhance disclosure, some argue that the agreements on these cards can be unnecessarily complex and weighed down in fine print.
Interchange fees on credit cards traditionally range from one to three percent of the purchase price; however, these fees can be much higher on rewards cards, according to a report by SmartMoney. These charges typically apply to merchants, who in turn keep prices elevated in stores to offset costs.
Despite the increase in disclosure provided by the Credit CARD Act, some critics argue that consumers are still in the dark about credit card practices. Advertisements often only mention benefits and avoid details such as annual and monthly limits, reward limits, and expiration dates, according to Forbes. Rewards cards also often list terms and conditions on a completely separate disclosure form.
Points can also be held hostage to late payments, Fox Business reports. In order to redeem rewards, consumers may have to pay reinstatement fees, which can cost around $30.
"It's another revenue generator," said Richard Bialek, former senior vice president of consumer credit products at Visa. "There's a cost related to rewards programs, and when the issuers don't see the payments coming in from the cardholder, they'll stop access to that."
Still, some see the Credit CARD Act signaling the end to these types of programs. With a loss in fee revenue from debit transactions, some predict that lenders will have to scale back on essential benefits like purchase protection, return protection, and, potentially, rewards on credit cards.
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