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The following is a Guest Post from Joe Morgan of Simple Debt Free Finance. Joe developed a keen interest in personal finance when he and his wife woke up one day with 5 figure credit card debt, a mortgage, a 5 year loan on a used car, and a new born baby. He paid off the credit card and the car loan 2 years later and has been writing about striving to be debt free ever since.
When Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, it sought to put an end to unfair credit card practices. Those practices were largely centered around fees, interest rate hikes, and billing practices, but unintended consequences of the act are now being seen.
The CARD act has put the breaks on many fees and interest rate increases, but the act doesn’t prevent credit card issuers from creating new fees or cutting other perks. Credit card companies are making up the lost money by reigning in their reward programs. According to industry analysts, reward programs cost the credit card industry billions of dollars per year and those issuers are now saying they can no longer offset those losses with fees and higher rates due to the CARD Act.
Here’s what some credit card companies are doing with their rewards programs:
Charging “redemption fees” on frequent flyer miles and hotel stays. Reward points may accrue the same as always, but it will cost you to trade them in.
Raising the level of points required for certain rewards above the true cost of the item. For example, HSBC Premier offers a $50 gift card for California Pizza Kitchen for 6,000 points. This works out to $60 of spending, which is $10 over the price of the gift card!
Slashing cash-back rewards. Both American Express and Chase have done this. For example, you may have previous earned 1.5% cash back for all purchases, and now you earn 1.25%.
Adding annual fees to offset rewards.
While the Credit Card Accountability Responsibility and Disclosure Act may have led to some much needed reforms in what the Federal Reserve has called “unfair and deceptive” practices of credit card companies, it does come at a cost and credit card issuers are passing that cost on to the cardholders.
Unfortunately, there isn’t much the cardholder can do about this except shop around for a better deal or perhaps a reward program that better suits their spending. Credit card users should also keep a sharp eye on their terms and watch for changes to their existing rewards programs.