As credit card users figure out new ways to maximize rewards points, banks are taking counteractions to keep the programs profitable for them by scaling back certain point-accumulation hacks — like signup bonuses — and creating additional sources of funding for the programs.
One of the main sources of reward program funding is credit card interest. Credit card interest rates are at their highest in history. Americans now pay an average of 17% interest on their credit cards. These rates could lead to increased debt for people who don’t pay off their balances each month.
Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, D-N.Y., have posed a potential solution with The Loan Shark Prevention Act in May. The bill would authorize states to cap interest rates at 15%.
The bill has garnered some praise for its effort to curtail consumers’ personal debt. But credit card experts warn that an interest rate cap could have unintended consequences, including the elimination of credit card rewards programs.
What would happen if credit card rewards programs went away? Here are some things to consider when imagining a world without bonus cash or airline miles.
Rewards aren’t free
That flight and complimentary hotel room you paid for with points may seem free, but at the end of the day someone is subsidizing it.
One of the primary sources of credit card rewards funding is interchange fees charged to retailers for credit card transactions. In order to lessen the sting of the 2% to 3% fee per transaction, merchants often pass this fee onto the consumer by raising the price of goods or imposing a credit card fee or minimum.
Enticing rewards that require big minimum spends incentivizes you to spend more than you can afford, potentially leading to missed payments, fees and high interest payments.
It would negatively affect people who use credit cards responsibly
“Lower interest rates wouldn’t positively impact the people who pay off their balances every month, but it would negatively impact their rewards,” said Patrick Hanzel, certified financial planner and advanced planning specialist for Policygenius. “From the other side of the spectrum, people who abuse credit cards and don’t pay off their balances would benefit from the lower interest rates.”
Consumers who stand to benefit the most from the interest cap are the people paying the very interest that funds these reward programs.
“The interest charges from those people are why banks are able to give rewards to the customers who don’t abuse the system,” Hanzel said.
Most living expenses can’t be paid for with credit cards anyway
Some living expenses with the biggest spend potential — like car payments, mortgages and insurance — already aren’t paid for with credit cards (not that you’d want to pay off your car or house with another form of debt anyway). So a good chunk of the money that’s going toward your monthly spend (other than food and clothing) are being spent on nonessentials to hit reward requirements.
If rewards went away, you’d be less incentivized to spend money on things you don’t need.
It wouldn’t mean the end of rewards
There are other ways to earn rewards that aren’t dependent on credit card spend. The end of credit card rewards would mean the end of the most lucrative perks, but there are still a number of other ways to earn rewards:
- Airlines: You can still earn points or miles simply by shopping with a particular airline.
- Cash-back websites: There are a number of cash-back websites, like ShopAtHome.com, Swagbucks.com and Mypoints.com, that wouldn’t be impacted by the slashing of credit card rewards.
- Spare change apps: While not the same thing as rewards, spare change apps like Acorns can help you maximize the value of each purchase. Read our review of Acorns here.
Image: Blake Wisz