{"id":6330,"date":"2009-05-26T20:00:40","date_gmt":"2009-05-27T00:00:40","guid":{"rendered":"\/\/www.askmrcreditcard.com\/news\/?p=6330"},"modified":"2009-05-26T20:00:40","modified_gmt":"2009-05-27T00:00:40","slug":"the-future-of-rewards-and-credit-vs-debit","status":"publish","type":"post","link":"https:\/\/www.askmrcreditcard.com\/news\/the-future-of-rewards-and-credit-vs-debit\/","title":{"rendered":"The Future of Rewards and Credit Vs. Debit"},"content":{"rendered":"

In the aftermath of the successful passage of the Credit Card Bill of Rights,\u00a0 there has been much speculation on the future of the industry vis<\/em>a-vis<\/em><\/em> reward cards (pun intended). \u00a0 On one side, you have myself and others who feel that the credit card industry was just throwing up so much smoke regarding having to cut back on reward programs.\u00a0\u00a0\u00a0 On the other hand, you have industry propaganda and some commentators declaring that era of reward cards will soon be over.<\/p>\n

The Argument Against The Future Of Reward Cards<\/strong><\/p>\n

This argument boils down to looking at credit cards as a single market.\u00a0\u00a0\u00a0\u00a0 In this view, it has been the people paying interest and late fees that have been subsidizing those who don’t.\u00a0\u00a0\u00a0 Now that late fees and interest charges will be curtailed somewhat, the credit card companies will have to go after the people with high credit ratings who don’t generally fall victim to interest and fees.\u00a0\u00a0\u00a0 Ezra Klein, the Washington Post’s newest commentator has been espousing that view.\u00a0\u00a0 Last week, he made that argument here<\/a> while this week he elaborates here<\/a> while speculating that debit cards are actually our future.\u00a0\u00a0\u00a0 Klein argues that all of the money is being made at the lower end of the market in order to subsidize the higher end.\u00a0\u00a0\u00a0 Therefore, the industry is now going to flatten out it’s risk profile and start trying to make more money off of the higher credit score, reward card holders.<\/p>\n

The best evidence I can conjure for this expectation is the insurance market.\u00a0\u00a0\u00a0 When insurance companies suffer losses in one area, they usually raise rates in another.\u00a0\u00a0 A hurricane hits Florida and causes a billion dollars in damage, people 50 miles inland see their home insurance rates go up.\u00a0 After 9\/11 when four large commercial aircraft were destroyed, aircraft insurers took the opportunity to raise rates on small, private aircraft.<\/p>\n

The Argument In Favor Of The Future Of Reward Cards<\/strong><\/p>\n

I suppose it is possible<\/em> that some banks might reduce reward card offerings to super-prime customers after the Bill of Rights goes into effect, but I doubt it.\u00a0\u00a0\u00a0 Credit cards are far more competitive than the insurance industry, and far more segmented.\u00a0\u00a0 If the sub prime were truly subsidizing the super-prime, as Klein contends, why do credit card companies solicit super-prime borrowers so heavily?\u00a0\u00a0\u00a0 The whole point of rewards is to entice prime borrowers.\u00a0\u00a0 It would be very easy for companies to not target people with high credit scores, yet most of their mailboxes are inundated with offers.\u00a0\u00a0\u00a0 Simply put,\u00a0 if I owned a business with with two products, one in which I made a profit and one in which I didn’t, why would I continue to stock, advertise, and sell the unprofitable one in order to subsidize the other?\u00a0\u00a0\u00a0 There is the concept of a loss leader,<\/a> a product sold below cost just to get customers in the store, but that doesn’t apply to most reward cards, except perhaps the phenomenal Schwab<\/a> card.<\/p>\n

Ron Lieber, a New York Times consumer affairs reporter put it best when he wrote last week<\/a>: “So will credit card companies kill reward programs or drastically scale most of them back? Of course not.”\u00a0\u00a0\u00a0 Lieber recognizes that the business model for the super-prime, reward card holding customer is largely unchanged in the aftermath of the new law.<\/p>\n

Credit Vs. Debit<\/strong><\/p>\n

Klein argues in favor of debit cards over credit cards.\u00a0\u00a0 Frankly, I think that argument is most powerful in terms of banks and merchants, who may get hit with fewer fees.\u00a0\u00a0 For consumers, reward card holders especially, the arguments fall flat.<\/p>\n

1. With a credit card, I get a free float until my statement due date. I keep that in mind sometimes when I make a large purchase right after my statement closing date, giving me up to 50 days of interest free finance on every purchase.<\/p>\n

2. With a credit card, I get a charge back power if a merchant doesn\u2019t deliver.\u00a0\u00a0\u00a0 For example, if you book an airline ticket with a debit card, and the airline goes out of business, you loose your money.\u00a0\u00a0 If you used a credit card, you get your money back with no questions.\u00a0 With a debit card, outright fraud is the only way you might get your money back.<\/p>\n

3. Lots of perks. For an extreme example, see Mr. Credit Cards review<\/a> of the vaunted American Express Platinum Card.<\/p>\n

4.\u00a0 No holdbacks.\u00a0\u00a0\u00a0 Hey Ezra Klein, try renting a car or checking into a hotel with a debit card.\u00a0\u00a0\u00a0 If you are lucky, the company may inform you that they have placed a huge hold on your account.\u00a0\u00a0 Often, they fail to notify customers of this policy.\u00a0\u00a0 Either way, they have the power to freeze your funds, usually when you are traveling and need them the most.\u00a0\u00a0 It is the opposite of credit card float, where you are essentially floating your money.\u00a0\u00a0\u00a0 You probably won’t get any car insurance with your debit card either.<\/p>\n

5.\u00a0 Finally, of course, there are the rewards themselves.\u00a0\u00a0\u00a0 Show me a debit card with 2% cash back, and I will start using my debit card every day.\u00a0\u00a0 Until then, it stays in my wallet for ATM purposes only.<\/p>\n","protected":false},"excerpt":{"rendered":"

In the aftermath of the successful passage of the Credit Card Bill of Rights,\u00a0 there has been much speculation on the future of the industry visa-vis reward cards (pun intended). \u00a0 On one side, you have myself and others who feel that the credit card industry was just throwing up so much smoke regarding having […]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[13],"tags":[],"yoast_head":"\nThe Future of Rewards and Credit Vs. 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