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.”

It is almost summer vacation time. If you select the right card and have a points strategy, it’s not too late to find a reward card that helps save money on your summer vacation. For many households the best option is choosing a hotel reward card or one that offers entertainment tickets and travel.

“Reward cards options have expanded and are now a great deal if you use them correctly- many don’t even carry a monthly fee. However, now is the time to take advantage of the free ride because issuers may be forced to add and increase fees or reduce rewards in the near future” says Bill Hardekopf, CEO of Lowcards.com. Banks are faced with increasing pressure to reduce interchange fees charged to merchants that accept credit cards. “Interchange fees are a sizeable source of income for the issuers. Since many of the reward cardholders pay off their balance each month, the interchange fees are a significant source of income for reward cards. If the interchange fees are reduced, they will probably have to make up the income somewhere.”

The first step for selecting a card is to look at your own spending and how you use credit cards. If you pay off you balance each month, then reward cards are a good choice. Your credit card usage will also determine what rewards you can actually expect. “If you only charge $5,000 per year on your credit card, you probably will have limited choices for travel or hotels, and it will take 5 years to earn an airline ticket,” says Hardekopf. “Reward cards really pay off for vacation plans if you charge at least $10,000 per year. Now is the time to look at your spending and what can be paid with a credit card to maximize your rewards.”

Reward offers have expanded into offers that are attractive to users. However, the reward programs of most cards are limited compared to American Express Membership Rewards program. “Membership Rewards offers an impressive list of vacation experiences that actually seem like a reward for wise use of your credit card,” says Hardekopf. “Earning points does require a lot of spending- spending $6,500 to earn 1 $62 ticket to Sea World seems crazy, but the rewards are nice if you are not paying for them.”

Hotel cards may actually be a better choice than airline rewards and can offer free nights for vacation this summer. “Hotel reward cards are the fastest way to get a free hotel stay. They are more generous with bonus points and points for hotel-related purchases. The Hilton HHonors card offers 10,000 bonus points for signing up. That is almost two free nights right there, ” says Hardekopf. “The Starwood card from American Express offers 10,000 bonus points during the first year and they offer free nights in their lowest tier for 2,000 points per night. You will have free nights by Memorial Day.” The Starwood Starpoints also offers the 5th night free for upper tier hotels like the Walt Disney World Swan and Dolphins hotels, the Sheraton Waikiki or the Sheraton Manhatten Hotel.

Another advantage of hotel cards is flexibility. The hotel chains that offer loyalty cards have hotels everywhere from standard to upscale. “It is usually easier to use your points on the hotel that fits your travel plans than to find the flight that fits your schedule to get you there,” says Hardekopf.

While free airline tickets are more exciting, they are also harder to earn. 25,000 points typically earns one plane ticket. Since airlines have fewer flights and fewer available seats, it is a good idea to book your flights 6 months to 330 days before you travel. “Those just starting with an airline card are looking at a long wait to earn and actually use their miles,” says Hardekopf.

There are a few ways to accelerate point accumulation. If you typically travel exclusively on 1 airline, join the frequent flier program and get the credit card affiliated with that airline so you can combine the reward points with your frequent flier account. Most frequent flier programs also offer promotions and discounted flights to their members, so regularly check the airline’s website. Also look at their partner programs such as rental cars and hotels- if you use these regularly, this may be a big boost in miles.

If you typically take short flight trips- focus on a card with hotel or entertainment rewards. “If your airport has several competitors or you only take short flights, chances are you will save money shopping for a cheap flight and using your rewards for a nice hotel.” says Hardekopf.