"A soldier will fight long and hard for a bit of colored ribbon" - Napoleon.
What strikes me about this is the behavioral decision making aspect. The airlines - and many other loyalty rewards programs - have tapped deeply into the human tendency to accumulate currency, however meaningless. And as someone who is well aware of this tendency, I still gleefully watch my credit card points balance increase every month, even though it really means I'm spending a ton of actual money. I don't begrudge the airlines at all for this technique. It intrigues me than in our advanced society, we are easily fooled by simple measures.
Yes, I had the same realization and now try to view "US Dollars" as a Government run loyalty program, and accumulate cash-back dollars instead of relatively less valuable airline miles. But the psychological amplification of an airline mile's true value (not to mention risk of devaluation) is hard to kick.
>and now try to view "US Dollars" as a Government run loyalty program
This is a very deep and totally novel perspective, and you are really onto something. So, if we view it from this perspective, the Government's loyalty program sucks! You get nothing if you accumulate ten thousand, a hundred thousand, or a million points. There is zero Government reward of any kind for any use of points: the value of the points is ENTIRELY in their market value (what you can buy for a dollar) and as a 0.0000% component, any direct or indirect acknowledgment, praise, plaque, or even stuffed animal.
While it MAY be silly that the government would give a teddy bear with a manacturing cost of as little as 80 cents in exchange for using its loyalty program, and paying taxes on it, in the amount of tens or thousands of the same, in fact private industry proves this is not at all so!
Obviously the US government is not a private enterprise, the social contract (and constitition), and general good taste gives it some powers but not others, but some considered steps in this direction certainly might well end up a net positive for everyone.
(As I wrote this comment I felt that it's so unusual and counterintuitive, even absurd, that it might sound like a satire/parody, so just to be clear the train of thought I expressed above is serious/in earnest.)
The US government has other "loyalty programs", for example if you buy a 10 year treasury bond instead of holding cash, they'll pay out a bonus every six months.
Another way to look at it is return on investment vs risk vs liquidity. Since inflation is 0-2%, cash is worth less every year, but it is easy to buy things with it. So if you have lots of cash coming in, choosing where to store it gets more tricky: http://www.asymco.com/2012/01/24/apple-added-38-billion-in-c...
Yes, the treasury bond you mention is an example of a "loyalty program" or its "points" in the sense I mention. However what percentage of the population buys treasury bonds? (Serious questions). Most users simply do not have any special rewards by the government for particular use of their points.
Being able to withhold something from taxes is one of the major ways that the government incentivizes certain spending, and it works. But to be very clear, I am specifically talking about "ribbons" and plaques and non-monetary types of acknowledgment that the U.S. Government could give in exchange for certain uses of its points, i.e. certain specific uses or accumulation of its cash. Acknowledgments that have no monetary value.
So in this sense the Government doesn't do much. Do they even send you a "thank you" letter if you buy a 10-year treasury bond? This is what I'm talking about.
Entirely non-monetary things that only exist in the realm of points and acknowledgment -- not things with actual true monetary value.
This is a powerful train of thought that is unexplored entirely.
> However what percentage of the population buys treasury bonds? (Serious questions)
Basically, if you invest in any ETF or 401k with "government bonds" (including Acorns), you are holding treasury bonds.
The top holder by far is U.S. citizens and American entities, such as state and local governments, pension funds, mutual funds, and the Federal Reserve. Together they own the vast majority -- 67.5% -- of the debt.
Nugget's point is very interesting, and I think it's actually a very effective loyalty program. You get a lot of economic and psychological benefits as you accrue points. ;-)
I pay all my bills/groceries/expenses with a credit card, and get points. I use to use my debit card. Might as well get something out of a process I'm already doing.
Then get a cash-back card back where you get legal tender USD back, instead of some psudo-currency that arbitrarily expires, has a shitty exchange rate, and can only be spent at limited locations.
I don't really see the difference between direct cashback, and accumulating points and cashing out every year at 2 points to a $.
Rewards cost less for the company to deliver to you, so they "give" you more of them by advertising their cost as the public listing price, and not the price they actually paid for it.
Cashing out, if fair, essentially gives you the money they set aside to buy select rewards with.
> I don't really see the difference between direct cashback, and accumulating points and cashing out every year at 2 points to a $.
I don't think that's an option I have.
My credit card's points can be redeemed for points with an airline of my choice (I've heard Krisflyer points are the best value?), or used at a special overpriced online store.
Hell, even in the states, I haven't seen a cash-back card with a reasonable rate (~5%) in years. Most cash-back cards I see are slightly less than 2% back, while with 'rewards' cards (e.g. Amazon) you can easily find 5%. If anyone can point me towards a nice cash-back card I'm def game, though!
I think you neglect the power of the consumer that credit cards yield: I can dispute charges when retailer/service provider fails to deliver.. It definitely balances the power out. Can't do that with cash.
The money doesn't only come from the transaction fee, it also comes from all the people who sign up for a credit card thinking they'll get points, fail to pay in time and pay enormous fees because of that.
You know that those cashback and airline miles rewards are all paid out of interchange (which is part of what the merchant pays), right? The Dodd-Frank Reforms, specifically the Durbin Amendment limited interchange on Debit transactions, killing debit rewards cards.
Meanwhile, Visa's interchange rates keep getting beaten down, they're passing through 1.8% to whoever your bank is on average across all cards, with the higher end rewards cards being of limited issuance. If they issued everyone a Visa Signature Preferred card (at 2.10% interchange) like the Chase Sapphire Prefered, Visa would get sued by Walmart, Kroger and the like. Interchange keeps falling due to regulation and lawsuits, up in Canada Walmart even stopped accepting Visa.
Bank of America Travel Rewards is about 2.6% back in points that can be used to offset future travel expenses (airline and hotel). You have to qualify for BOA's highest tier of service, but this can be done by keeping $100k in a brokerage account. It's not pure cash back but pretty close, and importantly, the points never devalue or expire.
To be fair though, I used to pay $8,000 a year in plane ticket fees now I pay $2,000 a year and use miles, so it's a significant saving for people like me who travel a lot. But I agree that, for most people, cashback is a better value proposition than miles.`
I don't understand. I read about half of the article and it doesn't explain how that works.
I mean money has to come from somewhere, I assume the tens of millions of credit card holders. But credit card holders do their usual spending, and in fact save between 1% and 3% on their monthly bills instead of paying more.
Unless.
- They increase their air travel frequency.
- They get addicted to collecting airline miles, because it gives them the feeling of free air travel.
- And as a result they increase their average spending (so no longer the 'usual' spending), and buy useless stuff, just so they can collect more and more miles.
Is that the real story or something more/different?
One way normal credit card companies makes money is this way: They charge the merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the customer. They make profit on the difference.
With a deal with an airline, the company doesn't have to do the 1-2% cashback, instead they give 0 to the customer. The airline company will give them miles though. Now the airline company can say to the credit card company: "look these thousands of customers you have them only thanks to me, so let's split your profits from the merchant 50/50 (or at least give me that 1% cashback you don't have to pay the customer), plus at some point I'll have to actually offer a plane ticket to those customers who earn enough miles"
What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. (Plus the money the credit card company give them is today, whereas the plane ticket might be in one year or more, so the present discounted value of that ticket is even less)
> What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there.
Your math is way off. If it's 7 miles per dollar spent on the card, that is 7% back by your math, compared to 1-2% cashback, this conflicts with "they're also saving money there."
With that math, you're saying that it's a great deal for the consumer. Perhaps the other things you mentioned still add up to being in the airlines favor, but whats really going on?
The marginal cost of a single passenger is fairly low to an airline. That's why they have blackout days, and restriction on where you can actually fly with earned credit-card miles... in order to make sure the cost of your flight is always to their benefit or at worst break even.
Most cards give you two miles per dollar spent, not seven. If you did get seven, then that carrier would value those miles even less than they currently do
This is a great explanation -- so clear. Now the article makes sense. Business magazines never seem to give straightforward explanations like the above, especially with topics like currency exchange, trade balances, or inflation. I suspect that business authors make processes sound mysterious and complicated to cover up the fact that they don't understand it themselves.
And tech magazines rarely give a straightforward explanation of why memory speed is important when talking about DDR5.
This is likely because they presume most of the readers reading a Bloomberg article about whether or not airlines are undervalued due to the revenue stream of their loyalty programs are passingly familiar with many of the core concepts.
> Consumer website estimate that in the best of case, a mile is equal to $0.01,
Can you give a source for this? I've definitely gotten much better value out of my miles than this (though not always). And I'm talking about normal coach fare, not wasting miles on first class tickets that only seems like a good deal because the list price is so exorbitant.
It's an average bloggers come up with based on potential and actual redemptions. They even do really dumb stuff like counting the face value of a seat nobody would pay cash for. Like "I got this $6,000 seat for 100,000 miles, so they were worth 6 cents per point."
What value you personally actually get out of miles is individualized and taking a valuation from a rando blogger at face value is incredibly stupid. Especially from bloggers like The Points Guy (which was linked), because they get kickback when you use their referral links to sign up for credit cards.
If you offered me the choice between 10 AA miles and 1,000 Delta miles, I'd choose 10 AA miles, no matter what bloggers say. I'll always use AA miles and I would have trouble doing anything with Delta miles.
For instance, I fly over 100,000 miles per year with one airline alliance which puts me in the highest earning category for earning award points. Essentially they give you a an 11x multiplayer of award miles for every actual mile (domestic, overseas is more complicated). At lower levels it may be be 9x or 7x, etc. That means the difficulty of earning miles scales significantly with frequency, which if course changes the value.
Now, rather then trying to figure out the price of a ticket and comparing it to #of miles spent, which is difficult because of black out dates, variable pricing, destination/date premiums, and a ton of other factors, I found out you can just buy gift cards.
Specifically, you can buy Amazon gift cards at about 15,000 points per $100 gift card. While not as fungible as USD, given my spending habits and Amazon's large selection, it becomes a pretty good stand in. That means for me, a mile is always worth around 0.006 cents at a minimum. At around 250,000 award miles a year that's around 1,600 dollars per year which isn't that bad. At the very least it's better then some random blogger picking a number based on ticket prices.
I don't think "~1%" is a fair summary of that link, especially not "in the best case". You're trying to breakdown what happens to a 4% fee, and many of the airlines have miles valued at >2% at that link.
I also don't know where you're getting that 7 miles/dollar number from.
The 7 miles per dollar comes from the delta Amex marketing flyer sitting on my pile of mail, but I didn't look at the fine print, I got curious and looked into details : actually it's only 1 mile per dollar for usual purchases, you get one additional mile on "delta purchases", then you can get 5 extra more on money spent on flights itself. So yeah on average it's close to 1 mile per dollar, I can't edit the original post. So the math makes more sense with those numbers :)
- buying more useless stuff (to collect miles) that they would otherwise won't buy.
- making outrageous travel plans (using those miles) that they otherwise won't make (e.g., fly to europe over the weekend if you're feeling bored; or world tour for honeymoon).
And of course a bunch of those miles will expire, or some customers will never reach enough miles to make a flight. And at least in the past some airlines have had pretty high fees for redemption flights ("fuel surcharge") that might even cover most of the cost
"I mean money has to come from somewhere, I assume the tens of millions of credit card holders."
No, the money comes from merchants.
When you charge something at a merchant (the seller) with a rewards card, the merchant pays a higher percentage fee to the card issuer for that transaction.
So when you sell things, and you accept credit cards, there is actually a fairly large variance in cost between different cards that your buyers might use ... it might be quite cheap for you if your buyer used a plain old visa card with no rewards ... and it might be 3-4x that fee if they use some crazy cash rewards super bonus miles card ...
In that case the cost burden is primarily from the buyers using non-rewards credit cards or cash with those merchants, since they are typically paying the same $ price without getting the utility of the credit card cost factored into whatever they are paying.
I guess a lot of people pay the same price for a product or service and don't use every aspect of it.
Cash has embedded costs as well. Precautions are taken against employee theft or robberies. Somebody with an armored vehicle is also getting paid to drive the cash to the bank at the end of the day and bring enough coins and paper currency in proper denominations so that cashiers can make change the next day.
That's right. But the merchants tolerate it because the people with high-end cards tend to spend more money per person compared to a bare-bones cardholder. On the miles cards, the merchant hopes to make out by getting larger sales, albeit keeping a smaller percentage.
I found it very confusing, too. In particular, the headline makes no sense at all -- ultimately the "miles" they sell are for the very same "seats". Framing it as though the "miles business" is distinct from the "flying business" is nonsensical.
What I think it's getting at is: airlines are increasingly selling their services (i.e. seats on planes) indirectly, via loyalty programs instead of directly, via ticket sales.
Selling via the loyalty programs has benefits probably because consumers over-value the miles they receive, because (a) some portion of the miles will expire or never be redeemed, and consumers don't internalize that fact, (b) the airline collects from from the bank as soon as the issue the miles, but they don't have to pay for the seats until some point in the future, and (c) they can take advantage of some psychological factors/gamification by encouraging people to earn "gold" or "platinum" status, etc.
Importantly however, and what is being noted, is if I use my Delta credit card, Delta has an income stream whether or not I'm flying. Eventually, someday, perhaps those miles will be used for seat, but it's a different revenue stream that's likely not perfectly correlated.
Right, and that's what I was trying to get at when I mentioned that "some portion of the miles will expire or never be redeemed", but I guess it should be emphasized since it's the main benefit to the carriers.
If you have a Delta credit card and you never redeem the miles, the rational thing for you to do would be to switch to a credit card with a different rewards program.
The reason you'd keep using your Delta credit card is because you anticipate that you will redeem the miles for air travel later. The value of the miles still ultimately derives from their "flying business".
> ultimately the "miles"
> they sell are for the very
> same "seats"
No figure to support the following claim, but I'd expect 50% of miles to expire without being redeemed.
But also: I recently stayed at the Conrad Rangali "for free" having accumulated enough points. Food, a small upgrade, transfer to the island, etc conspired to add an extra $5,000 of spend on a five night stay. Don't underestimate the upsell!
But in an urban setting? What is there to spend money on at the hotel that isn't better off-property? Especially at Hilton properties where anyone with enough points for a redemption at least has gold status and gets free breakfast and likely lounge access.
112 nights in Hilton properties last year, about 20% redeemed. I eat at the hotel restaurants a lot because it's convenient (and occasionally good — Trianon Palace probably having the best Hilton restaurant), I generally get them to book my airport transport because it's convenient, I often raid the minbar for water because it's convenient, and I usually have room service at least once.
The headline reflects airline's point of view, not consumers'. The money quote on credit card subdivision: "it accounts for more than half of all profits for some airlines, including American Airlines Group Inc., the world’s largest"
It's not about the amount of the money. It's more about the nature of the money, liquidity and risk.
One of the ways to look at it is that banks pay to attract stable, low-risk customers. They're losing money on each individual cards, but they gain money in the long run buy attracting high-income people who will continue to spend during an economic downturn.
Most of the modern economic system is not about making money out of thin air, but about managing risk.
Yes. But how do banks make money? Surely they're not paying airlines for miles and distributing the miles free-of-charge to their card holders out of the goodness of their hearts. What are they getting in return? Either what I said above or something more/different (annual fees is another possibility?).
To be clear: the interchange fees (~2.7%) paid by the merchants are the cost that is always there and completely covers the kickbacks to the consumer. The other things are certainly money makers, but they may or may not be negligible depending on the card and the consumer.
Interchange fees dont go directly to bank providing the card afaik. Visa/Mastercard network take a cut, I recall reading 0.25% on CC in Europe? Then the merchant bank takes a cut (merchant services and shouldering last man standing chargeback/fraud risks - hence why sometimes merchants pay 4%+) and then hmm anyone else?? I doubt any more than 1% is remitted to the bank providing the card given I know some physical retailer (small) paying ~1.4% in UK.
In the UK they also market you for $. They ain't sending you that exclusive "loyal VIP customer" introduction/bonus offer for virgin wine, or some fitness club, or breakdown out the goodness of their heart..Which is probably another nice earner on top of everything else
Very few merchants pay that, notice how there are dozens of segmentations on that page? They have general retail and general e-commerce, your business will slot into one of those two categories worst case. If your merchant processor doesn't put you in one of those two, they are not the sharpest tool in the shed.
Most of the stores I work with average around 0.83% to 0.85% of credit card/debit card volume going to transaction fees, with processor pricing hovering between $0.10 a trans and 10 basis points to 25 basis points.
This is not what I've heard from the handful of store owners I've spoken with. Do you know if data about industry-wide averages rather than the folks you work with?
> This is not what I've heard from the handful of store owners I've spoken with.
Are you well versed in interchange? Have you seen there merchant processing statement? What was their average ticket, Visa/MC/Amex/DC breakdown, total volume, and pricing (basis points, trans fee, plus hidden fees)?
If your a restaurant, you are going to take many more premium cards. My example is from grocery, where debit cards are common, and the retailers are extremely aggressive and sue companies like Visa on a quarterly basis.
>Do you know if data about industry-wide averages rather than the folks you work with?
Lololololol, that is a good one! No, this is an extremely fractured industry with literally hundreds of players, operating using pyramid scheme brainwashing tactics, and in ACN's and CDS's cases, as actual pyramid schemes (the latter pushed via a church).
Industry players don't share, and there are contracts & regulations preventing First Data, Tsys & Elavon from aggregating and distributing that type of info about their ISOs portfolios. Akin to the firewall in Investment Banking between analysts and bankers, it isn't about to come tumbling down.
What I can tell you is running a bit below 1% cost is fairly common in the supermarket vertical. Restaurants and other retail trend higher, due to their poor lobbying power, but still you should be well within 2.5% if not 2% if your clientèle aren't all exclusively using top tier cards and you aren't processing through some racket like Card Data Services where your fellow parishioner sold you payment processing that is 150 basis points over interchange.
Right, so "Most of the stores I work with average around 0.83% to 0.85%" is not very representative. I'm pretty happy with my initial characterization, whose roughness I emphasized with a tilde. Thank you for the interesting comments about the industry.
Correct. Merchants pay about 2% on credit card charges. The other big earnings stream for banks are finance charges on cardholders who carry a balance (ie, borrow money from bank).
Every cardholder who uses their card borrows money; carrying a balance is a matter of not paying it back within the grace period, but you are borrowing money either way.
Most attempts at pointless pedantry are incorrect. In this case, I have at least one credit card where I've put down a deposit of twice the spending limit of the card. At no time am I in debt to the bank, or borrowing money to them. Yes it's a credit card, not a debit card.
Anyways, you were still borrowing money they just had you put up collateral first. You were still in debt to the bank, the fact they were holding collateral for the debt is irrelevant.
It's like if I had a fedora collection worth $30,000 and I go to the pawn shop and they give me a $10,000 loan and hold my Fedora collection as collateral for that loan.
Forgive me if I'm missing something obvious, but what exactly is the point of a secured credit card - how is it really different from just paying in cash?
(I'm from .au, where secured credit cards apparently don't exist, but I've read about the concept on the internet in the American context)
So if you have no history of paying back loans the bank doesn't want to loan you money unless you put up collateral. You use it to build up a credit history without risk of default to the bank - if you default they keep your collateral.
Secured cards aren't intended to be used long term. They are only for when you don't have a history (or poor history) of paying back debts. Many (most?) secured cards automatically convert to a non secured cards after a while, like six months or so.
Thanks. Interesting to know - I wonder why banks over here don't think they're particularly necessary. (I got my first credit card, unsecured, when I was still an undergraduate working part-time and receiving government welfare payments...)
> Thanks. Interesting to know - I wonder why banks over here don't think they're particularly necessary.
I suspect that there are probably regulatory or other systematic differences that make them not worth offering; while they are sold here as ways to build credit they don't seem to actually be necessary to that purpose. Even without credit cards, most people seem to be able to build a history of having and paying financial obligations that will result in sufficient credit to qualify for regular (if low-limit) credit cards in a reasonable period of time without secured cards.
My card was issued somewhere I have no credit history. The point of the card is to have access to a credit card -- with its benefits -- without needing to borrow from the bank.
It's nothing like that, as money is fungible and fedoras are not. I suppose you'll tell me that if I prepay my credit card to a positive balance, and spend that money, I'm also borrowing?
Yes, money is fungible which makes it seems like a nonsensical dance ("can I borrow $10? here's $20 collateral.") but I promise you, it's exactly that. As silly as it sounds you really are borrowing money with money as collateral. The money you borrow even comes with an interest rate and you get charged interest if you don't pay the balance in full (only minimum)!
If you weren't actually borrowing money then it wouldn't effect your credit score, full stop.
For example, read the terms for Discover's secured card:
>If you are in default under the Cardmember Agreement or the Account is closed for any reason, you authorize us at any time(s) to withdraw all or any portion of the Funds from the Security Deposit Account and apply them to reduce your Obligations. Any such application of Funds will not constitute any part of the Minimum Payment Due under the Cardmember Agreement. You will continue to be responsible for making payments as required under the Cardmember Agreement and for repaying any outstanding Obligations.
> Most attempts at pointless pedantry are incorrect.
That wasn't an attempt at pedantry (ironically, it was actually abbreviated to avoid pointless pedantry; the original draft had "of conventional credit cards who have not paid on the account in advance of spending" after the "cardholders".)
> In this case, I have at least one credit card where I've put down a deposit of twice the spending limit of the card.
As a sibling comment and it's descendants point out, using such a secured card is still borrowing money in the same way that using an unsecured card is, and still subject to interest charges on the debt if not paid within a specified time just like unsecured cards. That you are putting up collateral to limit the banks default risk (and typically getting a better interest rate on any carried balance than anyone without excellent credit would get on an unsecured card because of that) doesn't alter that fact.
> At no time am I in debt to the bank, or borrowing money to them.
Yes you are; the bank just has possession of some of your property and a right to seize ownership of that property, as well as the possession it already holds, in the event of default on the debt. This is similar to what happens when you borrow money against property at a pawn shop.
airlines sell a mile at an average of 1 cent, banks charge merchants 3.5 cents for every dollar.
consumers can win if they pay their credit card off on time. many of them are able to churn by putting business travel from their employer on their credit card and getting it reimbursed in time.
banks can win double and triple if consumers don't pay their credit card balance completely one time, just once.
since the credit card aspect was already there whether there were good loyalty programs in existence or not, its actually a decent ecosystem!
1. There's a reason high margin businesses are so rare- generally, competition will bid the prices down to more reasonable levels of profit. I understand each airline has their own branded credit card, which they have pricing power over. But besides branded cards and direct mileage purchases, why would mileage margins stay so good? Surely the mile buyer would have negotiation power between the airlines. Why can't these mileage buyers (banks, rental car companies, etc) get lower prices for the miles, given the high margins? Is it possible there is mileage price collusion among the airlines?
2. How do airlines account for the cost of mileage seat redemptions when calculating their margins? Do they just use their marginal cost of carrying that passenger (very small)? In my mind, the cost of selling a seat with miles should be at least as much as the lowest price they charged other paying customers. If a plane flies 100% at capacity with mileage redeemers onboard, certainly the airline could have sold the mileage seats for at least about the same as the lowest ticket price paid onboard. I'm skeptical that this how they account for it though...
3. Like others have mentioned, the miles game really is fun for many people. It's fun to collect points, to win things, and get the satisfaction of free travel. In general for me psychologically, the price of airline tickets is the bar for whether a trip is worth taking or not- regardless of the other trip expenses. When you get a vacation with free redeemed airline tickets, it somehow feels so incredibly satisfying.
1. It's a matter of reference. Even with the 40+ margin airlines put over the miles price, banks put even more. In the end the one who is paying for it is the consumer. Also, this mileage programs are made by contract over a period of time, and airlines usually don't have contracts with different banks. This lack of "liquidity" makes it harder for banks to have an upper hand in negotiations.
2. Airlines have different ways of calculating the cost, but usually they use the normal price as a proxy for the redemption price. Airlines actually can charge less than the cheapest fare because they segment their consumers by travel patterns and (sort of) split the flight total seats into this different segments. So they have a certain quantity of seats alloted for redemption passengers at X price, another for Y price. This would become a long reply if I explained in detail, but I suggest you search for "Revenue Management" or "Yield Management", as it is very interesting to see how airlines do their pricing.
3. Yes. Absolutely! Even after being in the industry (I worked with Revenue Management for a Latin American airline), I still love a good mileage program. I even choose my banks over it.
I think this industry won't last for very long. Mile-earning cards are dependent on merchants paying high fees. In most of the developed world, interchange fees have been capped (e.g. 40bp in the EU). Once that happens, these rewards credit cards disappear overnight (which is what happened in the UK shortly after the IC regulation).
Eventually, I think the US will have its own cap on interchange fees. Credit card rewards will then cease to exist. It's fundamentally inefficient.
(But perhaps lobbyists are more powerful here than in the EU / Australia?)
I don't think that will happen for multiple reasons:
1. Australia and UK still have mile earning credit cards. In fact, in my experience, countries that cap the maximum amount of late fees and interests tend to have lower mile earning possibilities through credit cards than countries that cap the interchange fees.
2. Lobbies in the US are powerful and consumer protection in the US are traditionally less strong.
3. A move to reduce credit card rewards would likely be unpopular (it's very easy for lobbyist to spin any move to cap interchange fees as politicians taking away the rewards from credit cards)
I believe that credit card rewards are a form of tax on people who mismanage their money to benefit the ones who are good at managing their expenses and money. It's subsidized by all people paying interest on their balance, paying late fees and the interchange fees.
I was going to say that it's a tax on the poor to benefit the rich but I know people with high income that never seem to manage to pay their credit card balance in full and I believe it's really those people that generate revenue for the banks.
Credit card rewards are also indirectly subsidized by people who pay with cash or debit cards, since merchants effectively charge these people more than the people who pay with credit cards.
>Doesn't their business depend on the high fees they charge merchants?
I've got local businesses that charge extra for all cards -- except Amex. So no idea how this stuff works except for the fact that it's all over the show.
Lobbyists are pretty powerful and Americans like the rewards, so I don't think it will change any time soon.
In any case I would assume that merchant fees follow the same pattern as tax incidence. Just like taxes on goods, they are passed on to the consumer or merchant in relation to the supply and demand of the product:
https://en.wikipedia.org/wiki/Tax_incidence
If you use these airline cards thoughtfully, they're a great deal for the consumer. Last year United offered both myself and my wife 50K miles to sign up with no annual fee for the first year. Then they threw in some club passes and more miles when we added each other, spent some amount, etc. We ended up each getting 55K miles or so. Then United had a mileage sale for tickets to Australia - 60K miles per roundtrip ticket. Combined with the miles we already had, we ended up with two free round-trip tickets from the US to Australia. Of course we never carried a balance on the cards and cancelled them before the yearly fee came in. Now we'll wait a year and sign up again.
I've never found the airline credit cards to be the best deal for purchases. I can get 1.5-2% cash back on some cards (even higher on certain types of purchases), but the best value is either Chase Sapphire Reserve (essentially 3% back on travel/dining, and potentially more if you redeem for miles), or SPG Amex (2.2-3%, minimum, and sometimes higher).
Airline cards are worth it for status, and for the bonus for on-airline purchases, but not for general purchases.
Here in Australia, US-style cashback cards basically don't exist - there have been a handful of banks that have tried things like a 2% cashback on debit cards for using Visa PayWave, a few cards which have introductory (e.g. first three months) cashback deals, and of course you can use Amex points to pay off your Amex debt, but usually at worse rates than you can exchange to airline miles. But nothing like US-style permanent cashback deals.
Of course, over here we have far lower interchange rates than the US, and courtesy of new Reserve Bank regulations, interchange rates will drop even further on Visa and MasterCard purchases later this year, which I suspect makes it rather harder to do a cashback offer profitably.
> I've never found the airline credit cards to be the best deal for purchases.
So don't use them for regular purchases. However, if you like things like first bag for free or free in-flight wifi (because of the mileage bonus), then the airline-branded card can be nice to have. It's not like you're only allowed to have one kind of card.
Does it not make sense to evaluate the offering in total?
Also, rewards cards usually try to optimize perceived value vs actual value. So miles, for example might have perceived value of 4% but only cost the bank 2%. Cash reward is 1:1.
Of the big three US airlines -- American, Delta and United -- no credit card that I'm aware of grants automatic elite status in the frequent-flyer program.
There are cards available which, if you hit a spend threshold, will convert some of the redeemable miles into status-qualifying miles, and this can assist with reaching status, but the thresholds are set high enough that this is out of reach of many people.
The closest any card that I'm aware of comes to automatic status is the Delta Reserve Amex; if you spend $60,000 on the card in a calendar year, it converts enough redeemable miles into Delta MQMs to award the lowest tier of status in Delta's frequent-flyer program. But the cost of this is spending $60,000 each year on the card, and all you get in return is near-worthless Silver Medallion status.
In general, the airlines have learned their lesson on this one: redeemable miles are an inflationary currency they can give away by the millions and not have to worry since they can adjust the redemption charts any time they like. But genuine elite status in the frequent-flyer program is more expensive to give away, and they've worked to make that hard to get.
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For those unfamiliar with the world of airline programs, the general idea is (again, in terms of the US big three -- America, Delta and United):
* Elite status is what gets you things like free first-class upgrades, access to the fancy lounges, etc.
* There are two classes of miles you can earn. Redeemable miles are simply what the name implies: you can exchange them for a ticket to fly. Redeemable miles are handed out like candy.
* Qualifying miles ("Elite-Qualifying Miles" or "EQM" on AA, "Medallion-Qualifying Miles" or "MQM" on Delta, "Premier-Qualifying Miles" or "PQM" on United) are how you get to elite status. Within the frequent-flyer community they are often referred to as "BIS" miles, short for "Butt-In-Seat", as actually purchasing a ticket with cash and flying is the primary way they can be earned. There are other ways to earn them, but not many and the amount you can earn is usually too limited to be a viable way to earn/maintain status.
* All three now also impose a requirement of qualifying dollars; remember I said the airlines learned their lesson? There is now a minimum dollar amount per year you must spend on tickets in order to obtain each level of status, and that amount is weighted by fare class to prevent hitting the threshold from super-discounted fares.
* Airline-branded credit cards which earn miles will only earn you redeemable miles. Some high-end cards (as mentioned above) convert fixed quantities of redeemable miles to qualifying if you spend a lot of money on the card. Most cards will also either get you a credit toward a qualifying-dollar threshold, or waive the qualifying-dollar threshold, which can make qualifying for status easier.
* Airline-branded credit cards can give you some perks which resemble those of elite status -- priority boarding, free checked bag, etc. -- but this is not the same as having status and many of the nicer benefits are not available in return for simply holding a credit card; you must actually fly enough to achieve the upper status tiers.
* Low-level status (AAdvantage Gold, Delta Silver Medallion, or United Premier Silver) is close to worthless. Your upgrade privileges -- for both first-class and for extra-legroom economy seats -- are largely theoretical at this level, the additional redeemable miles earned are not enough on their own to justify maintaining the status, and the other benefits typically are all available to credit-card holders.
Nice summary; thanks for taking the time to write this.
I'll never qualify for a first class upgrade, but I am willing to spend redeemable miles to do so if it's say a vaction trip with my spouse. It's a wholly different flying experience.
Beyond the cash, carriers reap something else from the cards: These deals remain lucrative in both good times and bad, as they are immune to economic cycles. That’s because of the addictive nature of miles, a dubious commodity that tens of millions of Americans, particularly those who fly for their jobs, will probably never quit.
“In a recession, that [bank] business will go down, but it should provide a very high cushion to the airline,” DeNardi said in an interview. “That’s the real benefit here: It speaks to downside protection for the industry better than anything else.”
So they earn money by selling miles to the CC companies who give the miles to customers who spend. So if spending goes down won't there be fewer miles to buy?
Or is the point that general spending with CCs isn't correlated with people buying airfares?
Indenting to get fake-blockquote style makes your comment completely unreadable on mobile, and in this case also on desktop without a lot of annoying horizontal scrolling. Please consider not doing it. If you need to indicate a quote, you can always do paragraphs in italics, or use quotation marks, or just say you're quoting and indicate where the quote ends.
When people have money troubles they cut down their spending. Non business airline travel would be an expenses they would cut first. But the airlines are still making money from them even if they aren't travelling because with the cards they still make money from them when they buy food.
Heh, I just bought a ticket from SLC -> CHI for around a $100. AA had a nice little add(?) showing it would cost me $0 (minus tax and other fees) if I got their card. I was just thinking how crazy that was.
I've personally never found the use for a credit card from a specific airline to be useful for a casual traveler. I generally like to shop around for the cheapest price between all available carriers. There is no incentive for me to stick with a single carrier to get those miles simply because I can't afford to travel that much.
I also don't have those credit cards from walmart, Khols or <insert business name here> though. When I first came to USA, someone told me having multiple cc can lower your credit score and credit score is life. So I am still scared of credit cards.
> When I first came to USA, someone told me having multiple cc can lower your credit score and credit score is life.
That's strictly the opposite of true.
Now, carrying a balance on multiple credit cards, or paying multiple cards late, is worse than the equivalent with a single card. And applying for lots of credit cards quickly can hurt you.
But just having multiple credit cards, that get paid off every month—or don't carry a balance at all—helps your credit score: the "positive side" of your credit score is computed as (effectively) the amount of money that people are currently contractually obligated to give you if you ask (i.e. the limit of all your credit accounts + loans + equities added together.) If you can get more companies to extend you credit, that has the same positive benefit as getting your limit raised on a card you already have.
I'm not sure that the "don't carry a balance at all" helps your credit score. I've heard some places say that a utilization of 1%-9% and the balance being paid at end of each billing cycle will help increase one's credit score more than 0%.
> On the other hand, using a low percentage of your available credit can have a positive impact. In some cases, a low credit utilization ratio will have a more positive impact on your FICO Scores than not using any of your available credit at all. [1]
The difference in credit score if I were to have a small balance at a statement is literally < 1% of my score. I've done it as an experiment (having a non-$0 balance on statements to show utilization, not carrying a recurring balance and paying interest), and the difference has been typically 2 or 3 points. In my case, that's a fraction of a percent improvement.
That is not a meaningful difference that would affect interest rates I could get from a lender. I would get the same rates at 828 as I would with 825 as I would with 790 as I would with 770. There is no meaningful positive difference that having a non-zero utilization provides to your FICO score.
People tell you lots of things. People are wrong. If you hear someone say anything about finances there's an 80% chance they are wrong. Don't listen to what people say.
I currently have over 20 open credit cards. Score is great and banks keep approving me. I just got my most recent a few weeks ago and I'm planning on getting another one once I'm done getting the introductory bonus on this one. Repeat.
If you have too many cards the banks worry that you'll charge them all up and then declare bankruptcy. I believe it doesn't hurt you as long as you don't carry a balance on more than one.
“These deals remain lucrative in both good times and bad, as they are immune to economic cycles.” So were tech stocks and real estate until they weren't. This time is different because loses will only affect banks, no big deal.
At the end of the day, it is the merchant that pays upto 4% of their transaction as fees to these banks, and that money travels through several pockets before some hits the consumer back.
I know I'm about to move out of the US. So I signed up for several high rewards credit cards and racked up their signing bonuses and travel rewards. The hit on credit score is not bothering me either :-)
Essentially free money to me for using credit cards for stuff I would have done anyway.
~$3500 in free money so far and counting..
Oh and I pay those bills in full on time. So no fees to them. Feels good to score against the banks :-)
> Oh and I pay those bills in full on time. So no fees to them. Feels good to score against the banks :-)
It's weird, but the reality is the rewards from credit cards can be ridiculous, whether percent-cash back, miles (for heavy travelers) or signup bonuses. For those unaware, there are people who try to maximize the signup bonuses in particular through a process called "churning", mostly to travel for near or at no cost at all. There's very detailed guides on how to maximize the signup bonuses.
I don't churn, but I do try to maximize what I can get back for things I buy anyways.
* One card gives me 6% cash back at grocery stores. I do eat food after all (I cook 99% of my meals, and rarely eat out). I also use them as my pharmacy. 6% off food and medication -- two things I can't live without -- is pretty good. There is a fee for this card, but the cash back puts me at +$285 back a year after the annual fee.
* Amazon gives me 5% back off what I get through them. Sure, I'll take another 5% off.
* One gives me 5% off gasoline. I tend to need gasoline at the moment. Sure, I'll take that!
* Two have rotating 5% categories, that tend not to overlap. So sometimes I can get 5% off something I needed anyways. Great!
* One gives me 2% back that goes into my IRA. If I had kids, I could put it in their 529 instead. Automatic planning for the future on anything where I'd normally get just 1% instead. Sweet!
* This year I moved and planned on getting a new dishwasher, washer and dryer. So I searched for cards with a cash-back on spend signup bonus. Found one that best matched, which was $300 back if I spent $3000 in the first 90 days... plus 1% cash back on the card. Got $334 back in total on money I was going to spend anyways, which was a 10% discount. Sure thing!
I realize merchants pay higher fees to give me these rewards. If these huge rewards go away, that won't bother me. I'll still use the cards with lower rewards, because something is better than nothing, the issuers fight harder than my bank would if I used debit and things happened, and I haven't ever paid a cent in interest on a credit card.
I know what each card you mentioned is except the gas one. Which card gives you 5% on gas?
Also, with the Fidelity card you can, if you choose, open up a cash management account (totally free) and get that 2% in cash without any restrictions at all.
PenFed has a card that does 5% on gas (although there are more strings attached now versus the card I have) [1]. Additionally it has no foreign transaction fee. It's well worth becoming a member if you will ever want to finance a car, their rates are typically very good.
Otherwise, the only card that I regularly use that isn't on the parent comment's list is from Golden1 [2]. 3% on restaurants and grocery.
Both of these are a little more work than usual to sign up for (especially Golden1) and their websites are pretty basic, but as they're both credit unions their terms are a bit friendlier. The cash back is immediately credited to your account each month, and their phone support is typically quite helpful.
I have the 2% Fidelity card deposit into a Fidelity Cash Management account, which is just a checking account with no restrictions or fees. It refunds ATM fees, which has been huge for me.
The parent isn't talking about not using banks. They are saying that using debit cards (or cash) to do transactions when you could be doing the same transaction on a credit card and getting free points is akin to leaving money on the table.
This year I made several hundred dollars worth of points for which I did not have to alter my spending behavior at all. I am buying plane tickets and staying in motels and filling gas and renting cars and eating out and blah blah, credit card or not, points or not. It's ridiculous to not want to get back 1-3% of that money as long as you have even a bit of control on your spend. If you actually have a decently paying job so that you don't have to rely on credit cards to borrow money that you can't return, it's perfectly rational to have credit cards and pay the points game.
Airlines don't really use expiration as a way to control this anymore; while they haven't all moved to non-expiring setups, it's usually easy enough to keep current that it won't matter (i.e., in many cases miles expire based on a period of inactivity on the frequent-flyer account, but adding miles through card usage counts as activity).
The way they prevent it being too large a loss is by periodically devaluing, so that the cost in miles/points to purchase a ticket goes up over time.
Collecting miles is an art. (See Flyertalk).
In my experience:
- You can collect the miles but it is very difficult to use them. I think I had this problem with AA, if I remember right. They were rated last in a Frequent Flyer Miles Ranking I once saw.
- It is easy to use the miles (Lufthansa, can use for every flight, even pay taxes with miles) but they don't give you the miles. Lufthansa was #1 in the ranking. I flew something like 100k miles and they credited 10k miles based on Booking Class and cross carrier miles crediting (Star Alliance).
If you get reimbursed for your flights, some airlines give you much more miles if you buy a ticket (Economy has many sub classes) that is slightly more expensive (e.g. 100 Dollar more, double miles). This is a "nice" way to collect miles and have somebody else pay for it.
What strikes me about this is the behavioral decision making aspect. The airlines - and many other loyalty rewards programs - have tapped deeply into the human tendency to accumulate currency, however meaningless. And as someone who is well aware of this tendency, I still gleefully watch my credit card points balance increase every month, even though it really means I'm spending a ton of actual money. I don't begrudge the airlines at all for this technique. It intrigues me than in our advanced society, we are easily fooled by simple measures.