The first rewards credit cards were introduced in 1986. Today, approximately 60% of all credit cards earn some type of reward for each purchase in the form of cash back, frequent flier miles, or loyalty points. In 2016, the competition between rewards programs has intensified in several areas as companies continue to expand credit card benefits to attract new users. The 21st-century credit card rewards program is like the “Taj Mahal” when compared to the initial ones introduced thirty years ago.
Why the Fierce Competition?
As more customers transition away from cash, they are using a credit or debit card to pay for purchases instead. With each purchase, the credit card issuer collects a small percentage of the revenue called an interchange fee. With millions of credit card transaction occurring each day, there is a lot of money to be made which sparks fierce competition.
One visible effect of the competition is that several retailers have recently switched credit card issuers. USAA Bank switched from MasterCard to Visa. In 2015, the wholesale giant Costco announced the switch from American Express to Visa because American Express would not agree to the increased benefits Costco was going to introduce. Just from these two new accounts, Visa’s market share received a healthy boost in 2016. Just as consumers are switching credit cards, merchants and banks are swapping their partnerships as well to maintain and secure their growing consumer followings.
Another reason for the fierce competition is the relatively untapped Millennial generation, as only 35% own a credit card. In August 2016, Chase showed the industry the untapped eagerness of millennials waiting for a credit card that offered a plethora of benefits when it launched the Chase Sapphire Reserve, a premium travel credit card with an annual fee of $450. But, it came with a sign-up bonus worth $1,500 in travel rewards, an annual $300 travel credit, and airport lounge access to name a few perks. Chase met its first-year sales goal for the Sapphire Reserve almost immediately.
A credit card that costs $450 per year is probably a tad expensive for most households, so the various credit card companies have also boosted the benefits and rewards of cards with little or no annual fee as well.
Rewards vs. Benefits
The overwhelming number consumers choose a credit card for the rewards. The rewards can be earning 1.5% cash back on every purchase, frequent flyer miles, or hotel loyalty points. Most major retailers, airlines, and hotels have also put their hat in the ring to reward their most loyal customers, by giving bonus rewards for every purchase made at their locations.
Approximately 24% of consumers switch credit cards because of additional card benefits. Referring back to the Sapphire Reserve, people are not paying a $450 annual fee for to earn 3 points for every $1 spent on travel and restaurants. Chase has also thrown in a few incentives to “seal the deal” by offering a $300 travel credit that can be used to offset the price of plane tickets, airport lounge access, and primary rental car waiver insurance.
All these benefits add value to a credit card, but, the cardholder has to proactively use them for them to be beneficial. One reason for the Sapphire Reserve’s unexpected popularity is because a competitor had recently cut additional benefits like three free rounds of golf and American Airlines lounge access. For the same annual fee, the Chase credit card was a better product than the competition.
Most credit cards are not going to offer you free golf or plane tickets because the annual fee is significantly lower than the premium travel cards that do. So how do credit card companies that charge a $49 or $95 annual fee convince potential customers not to sign-up for a credit card without an annual fee? In one word, benefits.
Airline loyalty cards allow cardholders to check one piece of luggage for free and priority boarding while hotel loyalty cards might offer a free night each year. If you plan to use the benefits enough to offset the annual fee, you might actually be saving money long-term. Regarding hotel credit cards that offer a free night annually, the actual cost of the hotel room ($100+) is usually more expensive than the annual fee.
The best credit card for you will largely depend on your spending habits. Chances are there is a credit card to maximize your buying power.
What is a Sign-Up Bonus?
Another tactic that credit card companies use to attract a new customer is a sign-up bonus. After spending a minimum amount of money within a specified time period, you can receive a cash statement credit, loyalty points, or free hotel nights at a reward rate that is significantly higher than the normal reward rate for the same spending amount. As an additional bonus, some cards also waive the annual fee for the first year. Just like additional benefits might persuade a person to apply for a certain credit card, the one-time sign-up bonus can be just as important.
Cash Back Credit Cards
Anybody can benefit from a cash-back credit card. It used to be that a good cash back credit card would max out at 1%. Today, there are several that earn 1.5% or 2% and pay out the rewards in the form of a statement credit and do not charge an annual fee. The purchase awards alone are normally more valuable than other rewards cards that charge an annual fee. Some cards offer a flat rate for all types of purchases, other cards have a tiered reward rate that might pay 5% for gas but only 1% on everything else.
Some student credit cards give bonuses for maintaining a 3.0 GPA or above.
Hotel & Airline Credit Cards
There is a lot more variety in hotel credit cards. All the major brands have one, and all purchases will earn loyalty points that can be used for a free night. Several, but not all, of the cards that charge an annual fee offer one free night stay per year. This benefit alone can justify the annual fee, but some brands like Hilton, require so many credit purchases to earn the free night. If you cannot meet the minimum annual spend, it might be a better option to go with one of their no-fee offerings that will still allow you to earn the same amount of Hilton loyalty points for each purchase as their annual fee cousins.
Airline credit cards have more variance in rewards and benefits because of the broad range in annual fees. Entry-level airline credit cards will cost approximately $95 annually and the most common benefit is a free checked bag. The more expensive versions can cost $195 to $450 per year but can provide additional benefits like travel credits, free Wi-Fi hotspot access, or lounge access. Plus giving you a higher membership status within the frequent flyer program.
There are lots of great rewards credit cards to choose from and the continued competition continues to make most brands even better. The current rewards programs are thirty years in the making and consumers are the winners from the continual benefit increases. One drawback from the competition is that the choices can be overwhelming. But, there is one thing that all the credit card companies know. Most consumers want a no-fee credit card with a reward rate of at least 1%. Some are willing to pay an annual fee to earn extra rewards and benefits when spending their money with a specific retailer or spending category.
Author: Jeff Gitlen
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