Take Advantage of Reward Cards Now-- Changes May Be Coming

Take Advantage of Reward Cards Now--Changes May Be Coming

Smart credit cardholders are enjoying a buyer's market with reward cards.
Over the past few years, issuers have used rewards as bait to attract new
users. As competition increased, so did the rewards. Today's rewards
include everything from cash to payments on the principal on a mortgage.
However, the market could be in for some interesting changes in the near
future.

"Consumers should enjoy these rewards now, because they probably won't last
forever," says Bill Hardekopf, CEO of LowCards.com. "The credit card
industry is facing some challenges that will probably lead to a change in
the current business model."

The first challenge is the merchant and retailer uprising regarding
interchange fees. A variety of merchants, including the National
Association of Convenience Stores, have filed a complaint in the Eastern
District of New York against Visa, MasterCard and several merchant banks.
They charge that
Visa and MasterCard charge Americans some of the highest interchange fees
in the world--an average of 1.75% to 2% of each credit card transaction.
This adds up to billions of dollars per year, and the merchants claim this
is a hidden tax passed on to consumers. The case is expected to go to trial
in 2008.

"Regulating the interchange rate would be detrimental for consumers. All we
have to do is look at Australia for a case study in what would happen,"
says Hardekopf. "They regulated the interchange rate, which benefited the
merchants. But the credit card companies made up for this lost revenue by
increasing the annual fees that they charged consumers, reduced the rewards
offered, and trimmed the grace periods. So the consumers were hurt. In
addition, there has been little change in retail prices because the savings
aren't being passed along to consumers.

"The interchange fee is a sticky point because it also helps pay for the
credit card rewards and incentives that cardholders have come to expect.
While the rate has increased for merchants, so have cashback, airline and
hotel rewards and upscale benefits like concierge service. You could say
that the interchange fee paid on each credit card purchase helps subsidize
the benefits offered by reward cards," says Hardekopf. "Even though many
reward card users pay off their balance each month and pay nothing to the
issuer, the issuer still makes money from the interchange fee."

Even if the interchange fee system remains the same, credit card companies
face another challenge which could result in changes to the current reward
system-this one from users themselves. Two of the largest issuers, J.P.
Morgan Chase and Citigroup, reported lower first quarter earnings in 2006
because a larger than anticipated number of cardholders paid off their
balances. Federal Reserve statistics support this trend with its latest
report that the use of revolving credit, primarily credit cards, dipped at
a 0.2 percent pace in March, after a tiny 0.1 percent growth rate in
February.

"If this trend of paying off balances continues, card issuers will have to
create or expand fees in order to maintain their revenue," says Hardekopf.
"Rewards may also be one of the first areas where they make adjustments and
trim costs."