You've probably seen them in the mail. "Sign up, spend $3,000 in the first three months, and you'll get 50,000 bonus miles" -- it's a typical credit card offer.
It's called the credit card sign-up bonus, and over the past few years, it's become ubiquitous.
The Wall Street Journal reports that this surge in generous cash rewards, airline miles, and hotel points from big banks started after the recession, when struggling banks turned to the credit card market for new customers and more profit. Since then, they've been competing to offer bigger and better rewards.
And it worked. Credit card rewards programs are now more popular than retirement savings, according to a recent ValuePenguin report. But now that rewards programs are the norm, the question then becomes: How much longer will the big rewards last?
Credit card companies are losing money on their perks
Big sign-up bonuses may be free for customers, but they aren't free for banks. One of Chase's most popular travel credit cards has cost them at least $200 million to $300 million due to a generous sign-up bonus.
These initial costs are only worth it if customers stick around and pay interest and annual fees. A trend called "credit card churning," however, is encouraging consumers to get credit cards for the sign-up bonuses and then toss them a few months later to avoid any annual fees or interest fees. As more people learn how to game the system, banks may have to rethink the sign-up bonus.
That's exactly what happened recently with the generous price protection policies offered by major credit cards. Price protection reimburses customers for price differences when items they purchase go on sale, but due to the paperwork and time required to submit a request to the credit card issuer, few people took advantage of this perk.
A couple of years ago, apps were released that could automate the whole process of submitting requests for price protection reimbursement, and requests to credit card issuers skyrocketed. In early 2018, Chase, Discover, and Citigroup all cut back on benefits like price protection in order to lower their costs.
Rising interest rates are also causing credit card issuers to cut back on benefits. During a call with investors, Citigroup CFO John Gerspach said that Citi plans to shorten or remove the promotional period on certain credit card offers in the face of higher interest rates.
Credit card losses in general are still below the historical average over the last 30 years -- although, they have been increasing for the past two years.
The new rewards tactic: loyalty spend bonuses
Credit card companies will always offer rewards. However, incentives seem to be shifting in favor of customer loyalty over customer acquisition.
Two major U.K. issuers have already shifted to a loyalty spend system. These cards reduce or eliminate the sign-up bonus but replace it with bonuses based on annual spending, ensuring that customers remain for more than a few months. While you can earn more rewards over the course of a year under this system, it forces you to pledge loyalty to one or two issuers for a prolonged period of time.
Many rewards credit cards now offer valuable annual bonuses as well, rewarding users for keeping their card each year and paying the annual fee. As savvy consumers continue to cancel their credit cards to avoid annual fees, banks may offer fewer perks and benefits to customers who don't renew their card.
In addition to new rewards strategies, banks are clamping down on customers who apply for too many credit cards. Chase has implemented an unpublished 5/24 rule that denies credit card applications from anyone who has opened five or more credit cards in the past 24 months. Several other banks have similar approval policies.
That being said, bank executives are well aware of the loss involved in offering big bonuses, and sometimes those losses are by design. Upon announcing Chase's $200 million to $300 million loss on a popular sign-up bonus offer, CEO Jamie Dimon said he wishes it would have been $400 million. These losses are marketing costs, he explained, and he still expects to have a good return on the card.
It's unlikely that sign-up bonuses will disappear any time soon. That being said, folks who have been dreaming about churning through the best travel credit cards to vacation on the bank's dime may be out of luck. Changes are on the way, and they're likely designed to limit exactly that kind of behavior.