Credit Card Firms Slashing Rewards to Cushion Losses

Not long ago, Americans were being offered as much as $100 just to sign up for a credit card. Now, up to $300 is being dangled as an incentive for them to give up their plastic.

U.S. credit card issuers—from Citigroup to JPMorgan Chase to Capital One Financial —are slashing rewards, raising interest rates and increasing fees as loan losses mount.

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"All these (actions) are ways to maintain a certain profit level in the business," said Moshe Orenbuch, an analyst at Credit Suisse.  "The combination of rising losses, funding costs, which at the end of 2008 were high, and difficulties borrowing money put pressure on profits."

Last month, American Express —the largest credit card company by sales volume—took the extraordinary step of offering some clients $300 to pay off their credit card balances and close their accounts.

What a difference a credit crisis makes. Citigroup, the nation's largest credit card issuer, used to offer up to $100 in gift cards to anyone who enrolled in its "Thank You Rewards" program and spent even a trifling amount on its cards.

Now the bank is clamping down on those rewards, circulating a detailed letter explaining to customers how accumulated rewards can be revoked any time the bank sees fit.

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To cushion losses, credit card issuers are also lowering credit limits, tightening credit standards, and closing inactive accounts. The companies say the moves are triggered by the riskier economic environment.

Analysts estimate credit card chargeoffs—debts the card companies believe they will never be able to collect—could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $75 billion in 2009, Orenbuch said.

"You want to raise revenue from your existing customers because you have a lot of customers that are not paying anything," said David Robertson, publisher of The Nilson Report, which specializes in payment systems.

Reward programs are expensive for credit card companies—for example, Discover Financial Services posted revenue of $5.7 billion in 2008, while the net cost of its rewards program was $710 million—so issuers want to make sure they are worthwhile.

In a recent presentation to investors, JPMorgan said cardholders using its reward program showed a faster increase in spending, generated higher revenue and had lower credit loss rates.

But that does not mean card companies will keep offering freebies to attract customers. "They are trying to determine which customers are good bets," said Bill Hardekopf, chief executive of lowcards.com, a website that tracks credit cards.

In addition, lenders are trying to pass on part of the cost of reward programs to merchants by offering joint promotions that could bring new businesses and customers to battered retailers.

Fewer Rewards

Not only have rewards been cut back—it has become more difficult to cash them in.

Citigroup has modified its Thank You Rewards program, requiring many more rewards points to be redeemed for domestic flights, and JPMorgan has limited the spending categories from which customers receive cash back on Chase Freedom cards, Hardekopf said.

Discover once offered 12,000 bonus airline miles to lure new customers; now, new cardholders can earn 1,000 miles each month they make a purchase, for a total of 12,000 miles at the end of the first year.

And when cardholders finally have enough points to book a flight, they can run into other problems. Airlines increasingly limit the number of seats available to reward programs, said Hardekopf. "The programs still exist, but it takes you a lot more to cash it," he said.

Still, losing a few rewards may be the easy part. Other credit card companies are raising interest rates and increasing fees, or simply closing down accounts entirely.

Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010—and fewer Americans will be offered new cards.

"The business model has changed in the sense that (card companies) are becoming much less likely to take on people with average or less-than-average credit," Hardekopf said.

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But this strategy could backfire: Higher costs and fewer rewards could frighten clients away, reducing the risk of default but also cutting into card company revenue.

"The people who have better credit quality have more offers, and if you raise their rates too much they will in fact leave you for somebody else," said Orenbuch.

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