Kelly Fedynich from Morristown, New Jersey loves to travel.
The 28-year-old teacher had previously used a reward credit card. She even had enough points to visit Iceland and fly to Florida for a wedding.
In February 2018, she signed up for the Chase Sapphire Preferred credit card after being repeatedly recommended by travel blogs. She switched to Chase in the hope of getting better flight awards.
Signing up for the $ 12,000 card brought a boost: if Fedynich spent $ 3,000 in the first three months of using the card, she would receive a bonus of 50,000 points.
She spent $ 3,000 and got the bonus, but it still costs her.
"I purposely spent too much," she said. She persuaded herself to buy and justified purchases on the basis of her scores.
"I simply did not follow any of my budget plans [so I could] meet this money requirement, "she said.
When her school income stopped in the summer, she took money from the savings to pay her credit card bill.
"It was the first time I could not fully pay my credit card bill," she said.
The high cost of credit premiums
Fedynich is just a consumer who feels rewarded by the promise of shopping with a credit card just to overspend – and be in debt.
Among the widely visible bloggers who play the system to travel for free or close by, there are many everyday success stories. It is true that there are free flights, hotel upgrades and more to win. But it takes strategy and planning to get credit card rewards programs up and running.
Reward cards have become increasingly popular in just a few years. A study by the research company Mercator Advisory Group, published by the Wall Street Journal (Subscription required) estimates that 92% of the total purchase volume of US credit cards is made with premium credit cards. from 67% in 2008.
A 2018 NerdWallet survey of 2,000 adults found that more than two-thirds of respondents said they had a credit card that earned travel rewards. One third of cardholders surveyed said they often spend too much to earn rewards.
Rewards credit cards offer several benefits for spending money on your card. For example, cash back credit cards reward customers by giving them credit for their billing.
One point is usually worth 1 or 2 cents, However, some cards offer more when you spend on travel, food, or another purchase category. Some cards reward purchases in certain stores, while others reward all expenses with points or miles.
You can then redeem your points for travel tickets, hotel accommodation, gift cards or other purchases.
The 50,000 Chase Sapphire Preferred bonus points that Fedynich has raised are worth $ 625 for travel or 1.25 cents per person.
What is it worth in cash? That's harder to determine. You will need to click through the details of the login offer and scroll to the last paragraph. There you will find that these 50,000 points have real money worth $ 500.
The interest rates for the card vary between 18% and 25% depending on the applicant's creditworthiness.
Those who are not successful, not only missed the benefits, but can also make debts.
As soon as you have a credit balance on a premium credit card, which generally has higher interest rates, compounding makes it ugly fast. This can ruin your rewards, "said Beverly Harzog, who writes on credit cards in the US news and World Report.
How do you set rewards on overspending?
Boulder, Colorado-based Shannon McNulty used up her Capital One Venture credit card after trying to earn miles for a return flight from Europe. Daniel Brenner for The Penny Hoarder
Shannon McNulty was 20 years old when she applied for the Capital One Venture credit card in 2015. She was preparing for study abroad in England and had heard that using a credit card abroad was safer than using a debit card.
The card had no interest charges in the first year and would allow it to earn miles for future flights. It was not her first credit card, but the $ 5,000 limit was much higher than the starter card limit she already had.
She hoped that the card would help her earn miles on her return flight from England to the US, or travel between her native Vermont and her Indiana college.
In the months leading up to her trip, she began using the credit card to earn miles.
"In retrospect, I stole more than I got for the first time before traveling to collect the points," she admitted.
"I went over there [to England] with the card and with a big piece [of money on] my debit card, which I have to deposit to pay it off, "she said. But she soon realized, "I have this extra money. I should use it. "
During her four-month stay in England, she raised $ 3,000 on her venture card. Most of her spending on the card was neither food nor drink, she said, nor the daily needs.
In retrospect, I wiped more than I first got it before going on a trip to get the points.
Bring back souvenirs for friends and family.
Three years later, at the age of 24, she regrets it. "No one really cares what you bring back for her."
Studies show that credit card users like McNulty are more likely to be debting than benefiting from the benefits.
"There are benefits for those who pay on time, who are subsidized by late payments and high interest rates," said Deborah Goldstein, EVP of the Center for Responsible Lending.
A working paper from the Federal Reserve of Chicago analyzed spending and debts for consumers who recently received a credit card with a rewards program.
According to the report, average spending on a credit card increased by $ 76 a month in the first nine months after the start of a cashback program. Over the same period, users' debts increased by an average of $ 197.
In total, each cardholder received on average only $ 25 in cashback rewards. The data is from 2002. A representative of the Federal Reserve of Chicago said an updated study had not been conducted.
After McNulty's one-year introductory phase, her interest rate rose from zero to 21%. When she paid the card back on her return from England, her monthly minimum payment was $ 140.
"Sometimes I paid my electricity and rent shortly after school and had no more money," McNulty said. The small payments she could make did not do much to lessen her balance.
Her interest rose so quickly that she felt that her efforts to make substantial payments on her card were unsuccessful.
When McNulty telephoned The Penny Hoarder, she put her latest credit card bill online.
"If I pay the minimum payment, I'll pay my balance in 19 years and pay $ 13,076," she said after interest.
There are only a few provisions for rewards programs
Shannon McNulty's European souvenirs are featured on their Capital One Venture credit card. Daniel Brenner for The Penny Hoarder
McNulty has the advantage of keeping track of their monthly billing and the impact of their spending on their efforts to repay the debt. But ten years ago, credit card users did not have this resource.
For the most part, when it came to the long-term consequences of their spending, they were in the dark.
Prior to the Great Recession, credit card issuers were able to increase interest rates on a whim and retrospectively fix the additional interest on existing assets. As a consumer, you could exceed your credit limit to avoid the embarrassing cashier rejection for an additional fee.
Part of the government's response to the predatory lending recession, however, included credit card reform.
According to the Credit Card Accountability, Responsibility and Disclosure (CARD) Law adopted in 2009 with bipartisan support, credit card issuers must issue transparent clearing and limited changes in interest rates.
For each bill, there had to be a box showing how long it would take for a consumer to pay his credit card balance. It confirms the minimum amount due and indicates to the user how much he will pay on his balance, including interest, if he only pays the minimum amount.
Before the recession, credit card companies frequently set up on the college campus and spent loot to promote card applications. The CARD Act prohibited such gifts along with pre-approved offers sent to persons under the age of 21. It also required that young borrowers have a co-signer or prove that they can afford the credit card.
One area not included in the CARD Act mandates is Reward Programs.
Credit card issuers may change their promotional offers, cardholder benefits, scoring formulas or the expiration date of rewards at any time. It is up to the consumer to follow the guidelines of his card.
In the meantime, as the recession was forgotten, the use of credit cards increased. And the rewards went up too.
That's because rewards programs offer benefits such as higher sign-up bonuses when the economy is good, said Harzog, the credit card author. News and World Report.
"Issuers will compete with each other for the best customers who use their cards frequently," she said. "They want these people, so they try to outdo each other."
Since the Consumer Financial Protection Bureau began collecting complaints in 2011, more than 3,000 credit card rewards programs have been implemented. Most big players received the most complaints – American Express, Citibank, JP Morgan Chase, Bank of America and Barclays – in that order.
Of the complaints, only about 900 contain a written description of what happened. Of these:
More than 150 reported a problem in collecting or redeeming airline miles.
About 80 gave a cashback program.
25 were associated with hotel rewards.
The CFPB discontinued the collection and reporting of credit card reward statistics in the spring of 2017. Instead, they are divided into the category of general credit cards.
To determine the number of complaints associated with credit card premiums after this date, The Penny Hoarder has searched the main database for credit card complaints in 21 terms related to rewards programs such as Cashback, Airmiles and Bonus. We've found that the ratio of complaints about premiums to total credit card complaints has tripled since 2015.
The CFPB announced in 2013 that it would review the disclosure of incentive programs with then-CEO Richard Cordray specify that the Office would examine whether such programs require more consumer protection.
Although subsequent CFPB reports from 2015 and 2017 repeated the same concerns regarding transparency and better understanding of the disclosure of bonus programs, no further limitations were identified.
For his 2015 report on the Credit card marketThe CFPB reviewed more than 4,000 reward materials for credit card marketing.
Sign-up bonuses were the biggest source of complaints at the office this year.
"When the offers we reviewed included a sign-up bonus, only about a third of the marketing materials we reviewed included conditions for the wider rewards programs," the report said.
The CFPB Report 2017 The same topic has highlighted the popularity of premium credit cards at all levels of creditworthiness, but most previous concerns about transparency and clarity of program conditions have not been repeated.
"It could be difficult to determine the full terms of the rewards programs from credit card advertising [are]"Said Goldstein. "The CARD bill prevents the worst abuses," said the credit card issuer, "but more could be done to curb the deception."
The CFPB has just taken three CARD Act Enforcement Measures Over the past seven years, the focus has been on mortgage and installment loans. The credit card industry has largely monitored itself.
The tricky psychology of credit card rewards
Dan Seitz, 36, of Somerville, Massachusetts, is working to pay out his Amazon Rewards Visa Card. Katherine Taylor for The Penny Hoarder
Dan Seitz of Somerville, Massachusetts, applied for an Amazon Reward Credit Card in 2014. He bought a small kitchen appliance that he wanted to use a lot. The discount would reduce his order to only $ 50.
Soon Seitz was going to settle the bill for the dinner in the group and release the promise of a refund freely.
"There's a lot of room on the map," he said, he would tell himself.
"But it summed up," he said. "I did not know how deep I was in a hole."
Only after he had made debts of $ 12,000 did he fully understand the card's rewards program. On all his purchases he got back 1% Amazon credit – Basically, one cent for every dollar spent. It was a nice reward for someone who bought a lot from Amazon. But the card had an interest rate of 17.5%.
Seitz, 36, was not unfamiliar with debt. In fact, he had worked hard to pay off previous debts. "I was able to double my student loan payments. I have [through] those"He said, appreciating the budget he and his wife had maintained over the years." I've managed to repay many of the other credit card debt I've had in the past. "
These achievements had made him confident. "I had no debts," he said. "I let myself relax too much."
Manoj Thomas, Ph.D., who works at Cornell University on the psychology of consumer habits, explains that paying with a credit card is slightly too expensive because of its abstract nature.
Paying for goods and services is the most "painful" when you pay with cash because you can see and feel the bills leaving your wallet, Thomas explained. If you use a debit card, the pain is a little lower, and the abstract, digital money is immediately deducted from your checking account.
But credit? Paying with a credit card is almost painless. At the time of purchasing an item or service, not only will your account be charged with zero dollars, but you will also have the option to postpone this payment for weeks, months, years, and forever.
Using a credit card reduces the pain you feel when making a payment, and credit card rewards help you justify the use of these cards, Thomas explained. "If you're trying to buy a handbag, and the handbag costs $ 300 or 500 points … spending 500 points is less painful than $ 300," he said. "Points are not real money."
But consumers know that they have to spend money to earn money. And they feel justified in what they deserve.
"We love to earn points and reach levels," said Scott Rick, Ph.D., a marketing professor at the University of Michigan. "Point and miles based programs are one way to do that. They're more fun than something that gives you a tiny percentage of cash. "
But the gamification of credit card use is dangerous, Rick said. "Many of the decisions to buy credit depend on the games, not the costs."
Even if consumers know the interest rates, they may not fully understand how the interest increases over time. They pay less attention to the pain of pay and the burden of a spinning balance.
"Adding more incentive is also like putting gas in the fire," Rick said.
What it looks like to win the reward game
Dan Miller and his wife have 40 credit cards between them. His blog, Points with a crewHe deals with logistics, getting almost free travel for his family of eight, and provides guidance for newbies trying to replicate.
He knows, however, that his level of success is not realistic for most of his readers.
"It's something I like to do," he said. "I enjoy maximizing the rewards and watching different programs. It goes well with things that I already enjoy and that I am good at. I would not recommend it to most people. "
Reward experts like Miller emphasize the importance of sign-up bonuses for new credit cards that can reach up to 50,000 miles or points.
Many of the decisions to buy credit depend on the games and not on the costs.
However, to benefit from this advantage, applicants must meet two requirements: a solid credit and the ability to spend the required amount within the timeframe of the bonus offer. Spending $ 4,000 in three months is a common requirement to get a sign-up bonus for high-end cards like Chase Sapphire Preferred and Reserve.
It takes some strategies to make these expenditures once, let alone several times a year, when you open new cards to get sign-up bonuses – this is also known as churn.
Some people are waiting for big planned purchases to create their new card, like a car insurance or a vacation package. Some people make issues through gift card purchases and resales, Miller said. Others pull out their cards at every turn and throw them away for group dinners, dates, or other things that affect their balance.
"The value of miles and points applies to people who have no debt and are able to avoid debt," Miller said. The stories and testimonials in blogs are ambitious, but anything but guaranteed.
Online communities of credit card maximizers are filled with Stories of failure, For every blogger with an organized credit card folder, there is a beginner who has not read the fine print or understood the limitations of his reward credit card.
McNulty, the 24-year-old who used her reward card while studying abroad, said she struggled to redeem the rewards she had earned. When checking flights via the credit card portal, she usually found better rates on other websites. She paid only one flight of miles the first year she had the ticket.
"I did not realize that the miles could not be converted into miles or dollars," she said. "It was not translated into a plane ticket."
Why the future of credit premiums is uncertain
The question now is whether these rewards will last for those who want to take advantage of them.
Access to credit and rewards "comes and goes with the economy," said Harzog, noting that Capital One and Discover have lowered credit limits in recent months. Both are aimed at less wealthy customers, she said. "When the economy reaches its peak, credit card companies withdraw."
Just as consumers who pay 20% or more interest per month, subsidizing credit card benefits for users who pay their entire balance every month, the businesses where consumers spend their loans play a role.
Retailers usually need to "redeem all cards" if they accept Visa or Mastercard in the register. However, credit cards with generous rewards programs tend to have higher conversion fees for merchants.
However, card issuers complain to retailers who do not want to subsidize bonus programs with higher exchange fees.
Something Main chains like Target make an end to the rule "honor all cards". As retailers' pressure on card issuers increases, consumers may notice a reduction in their card benefits.
As consumer protection does not directly apply to rewards programs, issuers have almost complete control over how program changes are implemented.
"It's easy to get in. It's hard to get out."
Shannon McNulty She only paid for a flight with miles in the first year when she had her bonus credit card. Daniel Brenner for The Penny Hoarder
McNulty said she has trouble recovering her credit after some late payments with her credit cards. "[I’m] clean up the mess I've made with them. "
She does not want another credit card.
Seitz is still paying his debts, even though he no longer uses his Amazon card. Thanks to his freelance work alongside his full-time employment as a content marketing author, he aggressively pays and pays around $ 1,000 each month.
"It's easy to get started [credit card debt]"He said," It's hard to get out. "
In New Jersey, Fedynich has mostly used cash again as she works to repay her card. "I really want to do another trip and spend those mileage points," she said, but she knows that her score would not cover her room or meals when she arrives there. "I try to pay it out before I go anywhere," she said.
Once she pays the card, she thinks she's done trying to earn rewards. "As cool as it is, I need a budget that I can see every day," she said.
Every time she makes a payment for less than the full amount, she is frustrated.
"It's the ball that keeps rolling," she said.
Lisa Rowan is a former senior writer on The Penny Hoarder. She has previously contributed "The American Nightmare" A four-part series on the impact of the subprime mortgage crisis 10 years later.
Former data journalist Alex Mahadevan contributed to this article.
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