Credit cards offering rewards is not a new concept, as they have been around since Discover introduced the "cash rewards" concept in 1986. Since then, rewards programs have evolved tremendously and have become much more competitive with one another. This competition has ramped up over the past few years as American's are carrying much less credit card debt than they were before the financial crisis. People are being much more selective about what purchases they charge, so it's making the industry much more competitive.
When they compete, you're the winner
The major credit card issuers, including Amex, Citigroup, JPMorgan Chase, US Bank, and others are in a "perks war" right now. It's tough to say who will emerge the victor here, if anyone, but the annual fees charged plus the fees paid by merchants more than cover the cost of the perks given to cardholders. Credit card companies seem to have figured out the best weapon they have to attract and retain their customers is with great introductory offers as well as continuous perks. Because of this, all of the companies who continue to offer up bigger and better reward programs will see their income and profits rise as the trend continues.
...but you get more for your money
Even though the rewards are covered by fee income, that doesn't mean consumers can't get some great deals. Remember, you only pay part of the card company's income with your annual fee. The rest comes from the fees charged to merchants who accept the cards. In order to lure in the most customers, the companies are willing to share their profits with cardholders in the form of rewards and perks.
Better perks and more choices
American Express (NYSE: AXP) offers some pretty good perks through its exclusive partnerships with other companies. For instance, if you want to receive Delta miles and perks, or earn free nights at Starwood hotels, American Express is the only game in town.
Another advantage of American Express' business model is the variety it offers. Those customers looking for Delta-branded cards have four levels to choose from, ranging from a basic card which simply earns miles, to a "reserve" card which features a free Sky Club membership, free bags, priority boarding, and the ability to earn "status" with the airline.
While American Express does well by offering choice and exclusivity, a lot of other companies are trying to "one-up" each other with their introductory offers.
bWith airline cards, 20-30,000 miles was the standard welcome bonus. However, this year alone I've seen 40, 50, even 100,000 mile (or point) introductory bonuses, like with the Citibank (NYSE:C) Executive Aadvantage MasterCard. In addition to the 100,000 mile bonus after meeting the spending requirement, the card also comes with a free membership to the Admirals Club and lets cardholders earn elite status miles as well. This is clearly meant to "one up" AmEx's Delta Reserve Card, which comes with similar perks, and the same annual fee, but with a lower sign-on bonus.
The best investment of all
It's tough to say who will be the winner in the end, but there are some things that give certain companies the edge.
American Express does have an advantage with its exclusive partnerships and wide variety of cards to choose from, but I think the ultimate winner will be whoever offers the most to customers, like Citibank is trying to do.
In the meantime, why not take advantage of this competition? There is nothing wrong with opening a card for its introductory "gifts", then closing it after a year and doing it again, as long as you play the game responsibly.
Don't get attached to any one card, unless you have a really good reason to. This way you can take the "gifts" and move on. Don't carry balances, if you can help it. That's what the card issuers are counting on, and it's what will swing the profitability in their favor.
If they don't make a dime in interest off you, that's when the perks are really worth it. If you already have balances on your other cards, find a card with 0% interest on balance transfers. I've seen offers of up to 15 months with no interest. If you currently have $10,000 in credit card balances, this could save you thousands.
And, really do your homework and find the offer that is best for you. 100,000 airline miles doesn't mean a thing to you if you don't travel much! There are cards offering virtually every kind of award you can think of: miles, hotel stays, rental cars, rewards at your favorite stores, or simply cash back. Take advantage of the best deals, but search for what matters most to you.
I do believe investing in any of these companies is a very good move for the long term, but don't use all of your money to buy their stocks. After all, being able to score a free trip or a few nights at a nice hotel for the payment of an $89 annual fee as you can do with several cards could be the best investment of all.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.