Video: Credit rules take effect

updated 3/7/2010 1:41:55 PM ET 2010-03-07T18:41:55

While millions of American card users received notices of interest rate hikes and new fees in recent months, a select portion learned they're getting new perks.

Citigroup Inc., for example, let certain customers with cards that carry the American Airlines logo know they now get 1.2 miles for each dollar they spend, up from a 1-mile-for-$1 ratio. JPMorgan Chase & Co. similarly upped the miles-to-dollars ratio for their British Airways card by 25 percent, to 1.25 miles for each $1 spent. Chase also boosted the ability to rack up rewards on Marriott cards.

The credit card industry calls these upgrades "earnings accelerators." They are designed to make it more appealing to use one card over another — to "place our cards at the top of their wallet," Citi spokesman Sam Wang put it.

But just because you have one of these cards, or a similar reward card from a different bank, doesn't mean you'll automatically get an upgrade. Citi, for example, limited its enhancements to customers with good track records.

It may seem like odd timing for banks to expand some rewards programs, after trimming many of them in the months leading up to the credit card reforms that kicked in last month. But the reason behind the enhancements is simple: Those reforms cut into banks' credit card profits by restricting tactics like over-the-limit fees and interest rate increases. Now, they're looking to replace some of those earnings.

New strategies
One strategy is to increase income from fees. And one big target for this is customers who use their cards frequently, but pay their balance off each month, meaning they pay little or no interest.

Most rewards cards carry an annual fee, usually topping out around $75. But the real moneymaker is the transaction fees that merchants pay. Every time a card is used, between 1 and 2.2 percent of the transaction is siphoned off in fees that get sent to the bank that issued the card. These fees totaled more than $40 billion in 2008, according to the Nilson Report, which tracks the card industry.

Another issue that's driving rewards program improvements is the general shift from credit card use to debit card use, which generate lower transaction fees.

Debit card transactions passed credit cards in 2005. Consumers still spend more with credit cards, but Nilson Report figures show credit use fell for the first time in 2009, dropping 11 percent to $1.92 trillion. Meanwhile, debit use increased 7 percent to $1.45 trillion. That trend is expected to continue, with debit spending passing credit spending in the next two years or so.

"All the money says the growth is going to be on the debit card side," said Brian Riley, a research director for the consultant TowerGroup.

Debit or credit?
But banks get higher fees from credit transactions, so they're looking to encourage customers to pick credit over debit, especially if they can pay in full each month.

Major Market Indices

"They're the ones who are most likely able to go to their debit card," Riley noted.

Meanwhile, banks also benefit another way if cardholders pile up rewards and don't use them.

Called "breakage" in the business, Robert Hammer, a Los Angeles-based bank card consultant, said the amount of unused rewards in any program will vary from 5 percent to 30 percent.

TowerGroup estimates the card industry spends about $2.6 billion a year on rewards programs, whether it's airline tickets or cash back, gift cards or merchandise.

Unused rewards return some of that spending back to banks, Hammer explained. "That falls to their bottom line."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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