Building positive credit is an essential part of the credit repair process.  Many times we find that consumers aren’t making their decisions on interest rates or applicable fees, but instead on the rewards programs that the credit card companies are offering.  But credit card incentive programs aren’t always as “rewarding” as they’d like you to believe.

Credit Card Companies Are Making Less Profit

The credit card companies have encountered two considerable obstacles over the past year or so that have them figuring out ways to increase their profit margin.  The first is that a record breaking amount of credit card users are defaulting on their debts and being written off as a loss for the companies, and the second is the new, stricter credit card laws in the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act).

With the new laws making it harder for credit card lenders to tack on the sometimes astronomical rates and fees that were normally the icing on their earnings cake (see universal default post), they’ve had to get creative and recoup that money elsewhere.  Many have started tinkering with their rewards programs as a result.

Lender Dilemma #1:  Excessive Credit Card Defaults

For the first quarter of 2010, the credit card charge-off rate, as measured by Moody's Credit Card Index, reached an all-time high in their 20-years of documenting the statistic at 11.12%. That's about a 46% increase in charge-offs from the first quarter of 2009. Already, 2009 was a record year for credit card defaults, and so far that upward trend has carried over into 2010.

Industry experts believe that the problematic development will diminish over the next few months.  According to Moody’s Senior Vice President William Black:

“We expect seasonal trends and a nascent consumer recovery to result in lower delinquency rates, which should lead to lower charge-off rates in the months ahead”

Lender Dilemma #2:  New Credit Card Laws

While the CARD Act was supposed to be an overwhelming consumer victory against the ruthless credit card companies, it’ll only succeed in creating new customer gripes to replace the old ones.  By prohibiting one set of hidden fees, the law forces credit card companies to come up with more inventive ways to make that revenue back.

Lender’s Response: Make Earning Rewards More Difficult

As a direct result of these two issues credit card companies have made it a bit trickier to “cash in” on their rewards.  It’s better than simply devaluating the entire rewards or points program, they’re just ensuring that you use the card in a manner that they deem appropriate to earn those rewards.

Both American Express and Diner’s Club have already implemented a policy where late payments reduce rewards.  In order to get those rewards reinstated, consumers can pay $29 to American Express and $15 to Diner’s Club for each month of points they would like restored.  Bank of America’s terms of service indicate that they reserve the right to add similar fees at any time.

Chase takes a more hard-line approach to their rewards with late payments; any customer who has an account closed out after at least 60 days of nonpayment will forfeit the rewards with no possibility of getting them reinstated.  Similarly, Capital One users who make a late payment will lose any rewards accumulated during that particular billing cycle.

Even inactivity is punishable with certain cards.  Discover’s 5% Cashback Bonus is not only forfeited if you’re late with two consecutive payments, but you also lose your rewards if you close the account out or it sits inactive for an 18 month period.

Credit Card Companies Will Make Their Money One Way or Another

There may be laws that have limited the lender’s ability to charge late fees or continually hike up interest rates, but the bottom line is that they’re going to figure out a way to get that money regardless.  Consumers need to read the Terms of Service for each of their lines of credit in their entirety.  It may not be the most exciting part of your day, but if you want to avoid paying these brand new fees, it’s a necessity.

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• New credit laws
• How new credit will help boost your credit score