Wednesday, May 20, 2009

The Sky Is Falling (On Credit Card Rewards)

Here we go again. Both the House and Senate have quickly passed legislation that will attempt to curb some of the credit-card industry’s current practices in the areas of fees, interest rates, late-payment penalties, and the like. Of course, The Pundits are out in force, proclaiming (to paraphrase): “The end of rewards cards as we know them,” “Annual fees will reappear for most cards,” and our favorite, “Use your rewards/miles/points now before you lose them.” (Some examples: Recent articles from the Wall St. Journal, New Credit Rules, New York Times, and Barron’s.)

With enough spin from The Pundits, this might provide travelers with a new worst enemy to focus on instead of the airlines. Realistically, we expect that, yes, there will be some changes in terms and rewards. But the credit-card landscape is incredibly competitive. Despite any new legislative caps on fees or disclosure rules or other regulations, the credit-card companies will still want you to spend more and more on their cards. They only make money when you use your plastic, not when your card sits unused in your desk drawer.

Sure, some credit-card rewards may be reduced (as is apparently already happening with some cards), but we also wouldn’t be surprised to see some sweet new offers coming along. Again, compare this to the airline industry, which is now throwing frequent flyer miles around for shopping, bonuses for flying certain routes or times, signing up for newsletters – all in a competitive effort to retain and gain business.

Make no mistake, the credit-card companies do not want you to switch your spending to cash (unless you are one of their defaulting customers). They do want you to carry a balance, since even somewhat lower interest rates on outstanding balances make them lots of money.

As the Chinese proverb says: May you live in interesting times. The proverb should also add: Pay your credit-card bill in full every month.

UPDATE 5/21/09: A couple of other sensible and non-sensational views on the (proposed) new regulations on credit card companies, and what the changes mean for reward cards. View From The Wing and Upgrade: Travel Better.

UPDATE 5/22/09: Obama signed the law today, which takes effect in 9 months. It will be interesting to see which of the many viewpoints noted above turn out correct.

UPDATE: 5/23/09 A purported “expert article” on Yahoo Finance (really just a cut-and-paste roundup of other articles) offers still more views on this topic. The Words of The Pundits keep flowing.