In a 2009 article by KEITH BRADSHER of The New York Times, the Australian credit market was brought as a comparison to the situation with swipe fees in the U.S. Since than, debit card swipe fees have been capped at 21 cents. As a result major banks have cut debit card rewards programs in U.S. Can this happen to credit cards?
In 2003, the Australian wing of Visa and MasterCard cut their swipe fees to less than 1 cent. And American Express and Diner’s Club lowered their fees to 2 cents, following an outcry among Australian retailers. The following resulted loss of about 1 billion Australian dollars, equal to $919 million in U.S. currency. Card companies “have turned to Australian consumers to make up the revenue.” – the article states. Today, an Australian finance website says that one in five credit cards carry an annual fee high enough to cancel out the rewards they offer, and that one third of rewards credit cards give less than $20 per year in value.
Mozo, a financial analysis website out of Australia, was quoted in Melbourne’s Herald Sun in a report by Sarah Michael. The article said that rewards cards are only worthwhile for high spenders, and that of 67 rewards credit cards they surveyed, only five cards paid out more than $100 in rewards each year, based on annual spending of $16,000.
Rohan Gamble, managing director of the site, said, “If you’re not a high spender on your credit card, just forget rewards cards exist.”
Hey Big Spender
To counter the offensive of those who bring Australia as an example against lower swipe fees, let’s look at what “high spender” really gets these days in the United States.
Let’s first analyze if the U.S. “high-spender” outmatches Australians in spending.
A look at the U.S. Department of Labor’s most recent data on spending, from 2010, shows how the average household’s yearly budget breaks down. (Note that the “average household” in the study is composed of 2.5 people.)
- Restaurants $2,505
- Gas $2,132
- Apparel and services $1700
- Groceries $3,624
- Entertainment $2,504
- Miscellaneous spending $3,379
That’s right in line with the $16,000 used in the Mozo study. But how much would a consumer have to spend in order to get significant value from a rewards credit card today?
Consider this: the National Retail Federation estimates back-to-school spending alone at $689 per student this year, and a Gallup poll showed that the average household anticipated spending $712 on holiday shopping in 2011.
Using rewards credit cards in just those two categories alone, assuming an industry-standard one-percent-cash back return, would net shoppers a $14 return on their money. Not a lot, but with a no-annual-fee cash back credit card like the Discover More or Chase Freedom card, it’s $14 of free money. What’s more, both these cards offer a higher percent back in seasonal categories. Discover gives five percent back on holiday shopping from October through December – meaning cardholders would get $32 back on that $712.
Three Credit Cards Worth the Annual Fee
Even when it comes to credit cards that carry an annual fee, many of them are worth the fee and will pay back in rewards greater than the annual fee. Here are three credit cards that give more than they take:
American Express Blue Cash Preferred – This card carries an annual fee of $75 that’s easily offset by the cash back offered: a whopping six percent back on groceries and three percent on gas (one percent on everything else). Using the average gas and grocery spending from the above chart, that’s over $280 in cash rewards. When it comes to cash back, customers who have the excellent credit required for this card can’t make a better choice for cash back.
Citi Platinum Select AAdvantage Visa Signature – A good choice for frequent flyers of American Airlines, this card’s annual fee of $95 is canceled out by taking advantage of the $100 American Airlines Flight Discount offered each year (earned with card renewal and $30,000 in purchases). Even for folks who don’t spend enough on the card to get the flight discount, the cardholder and up to four companions get a bag checked for free every time they fly American Airlines. A family of four taking one trip per year will save $100 this way, and also get priority boarding and 25 percent off in-flight purchases.
Escape by Discover Card – The only Discover card to charge an annual fee, this credit card makes the fee worthwhile by offering up to $250 in rewards. Each month customers make a purchase for the first 25 months, they’ll earn 1,000 bonus “miles” that can be redeemed for travel purchases of any kind, including flights on any airline (no blackouts or restrictions), cruises, car rental – or for gift cards, cash, or other rewards. Each 10,000 “miles” is worth $100 – and the annual fee for this card is only $60.
Contemplating on the Future of the U.S. Credit Card Market
So, imagine that U.S. banks resort to the Australian scenario, and cut all these generous rewards to offset losses caused by another potential credit card reform. One thing is for sure, major banks will never eliminate reward programs completely. Credit-Land.com industry analysis shows that over 60% of credit cards carry rewards, a significant insight on the level of competition among banks for acquiring a new customer. Maintaining a profitable customer may be an even higher priority for credit card issuers. According to “Customer Retention Strategies for the New Economy” – a recent Experian report points to a higher cost of acquiring a new customer in comparison to maintaining an existing one.
This fear of loosing customers to competition is not baseless – a study by J.D. Power & Associates shows that large, mid-sized, and regional banks experienced attrition rates at 10 to 11.3% in 2011, which is in stark comparison to attrition rates experienced by credit unions and smaller banks, who have seen a mere 0.9% attrition, on average, down from 8.8% a year earlier.
With Occupy Wall Street sentiment still fresh, and a resentment towards “bank’s greed” still alive; any push towards devaluing credit card rewards and adding new fees may cause a domino effect for all major banks. Just as last year, many consumers may switch to credit unions and small bank.
For now, all the talk about higher fees may just be a scare tactic by the card issuers, meant to warn us against supporting retailers like 7-Eleven and others who have complained and sued for lower fees. However, since anything can happen in this day and age, we recommend to take advantage of current credit card rewards and use them while they last.