Who Really Gets Rewarded by Rewards Cards?

No matter how you feel about the credit card industry, you have to give them credit for being extremely smart. They simply don't do things that don't make them big money.

This is especially true when it comes to rewards cards. Cardholders usually feel like they're getting such a great deal when they earn airline mileage rewards, bonus points or cash back for their credit card spending. But these rewards serve a distinct revenue purpose for credit card issuers.

The July issue of The Nilson Report included an article about Visa's sophisticated use of rewards cards. Visa Signature is using analytical models first developed for fraud detection to track spending and assign targeted rewards to over 74 million cardholders. Someone who spends $200 a month at Golfsmith might be rewarded with premium tee times the next month. Someone who goes to Whole Foods everyday might be rewarded with a Sur La Table gift card.

The payoff for these sophisticated rewards? A huge increase in credit card spending:

Average Monthly Spending By Credit Card Type
$465 - Traditional No Rewards Card
$890 - Traditional Rewards Card
$2,214 - Visa Signature (Targeted) Rewards Card

The rationale behind credit card rewards programs are pretty clear! As the article says "The higher the rewards level, the greater the monthly spending." That's great for the credit card issuer; they earn merchant fees even if you pay the balance off in full each month.

Next time you reach for your rewards card, remember who is really being rewarded by your spending.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit scores, loans and personal finance as the CreditBloggers.com moderator.

Comments

[Lazy Man and Money]

I'm sure that without the rewards, people just reach for their cash or debit card a little more often. After all there's really not much difference.

However, if I'm getting 5% back on gas and groceries, you know I'm not going to put that on a debit card. The result is what you see here, a higher credit card bill. It doesn't mean more spending has taken place, just the distribution of spending has changed.

[Jess]

I don't think that reward credit cards are so bad! Yeah, they are more beneficial for banks than for consumers. But at least, they let you earn a little while using a usual credit card you have only to pay off your bills. Besides, if credit cards with rewards gave no benefits to customers, would they get in the list of top up credit cards?