Don't Quit Your Day Job…

There’s nothing worse than having something taken from you that you once had.  As Alexis de Tocqueville remarks so elegantly in Democracy in America, “The heart of man is not so much caught by the undisturbed possession of anything valuable as by the desire, as yet imperfectly satisfied, of possessing it, and by the incessant dread of losing it.”  Citi Cards stared down the rule makers, and unfortunately for their responsible customers, they blinked first.  Maybe I’m being too melodramatic, but what I’ll illustrate in this article is merely symptomatic of the sweeping changes you may see in the credit card industry in the near future.

Credit Card Reform

The issue with most financial reform is the unintended consequences.  Yes, there is a populist motivation to do something to quell the rising amount of anger at seemingly ‘unfair’ credit card practices.  As fellow blogger LAL points out, your credit card company didn’t force you to charge whatever thing it was that you charged.  You entered into a mutually beneficial contract which allowed you to smooth out  liqidity (whether you needed money from next paycheck or far in the future), and the credit company extended you that benefit to capitalize on transaction fees and the potential (but not the guarantee) of finance charges.  Yes, credit card disclosure needs help.  That said, rate caps and fee limits are pretty silly.  Changing the profit making opportunities in credit cards will reduce choice and reduce the number of people who qualify for a credit card in the first place.

In short, the changes that need to happen are in disclosure on the credit card company’s side and personal responsibility on the borrower’s side.  To argue for things like rate caps and fee limits is to argue against the math that allows credit card companies to give you a card in the first place.  It also means the credit card companies, to continue to issue cards, have to change the rules for other borrowers.  It’s merely another I example of the responsible bailing out the irresponsible.

Rewards Program Inflation

I currently have one credit card open with Citi, the venerable MTVu card.  It was my first credit card, and it’s been a faithful companion the years that I’ve had it.  With 5% rewards at restaurants, bookstores, and movie theaters, I’ve used the card to much effect.  However, the last good cash option for realizing a 5% return was recently taken.

What do I mean by that?  The Citi ThankYou Network rewards program is a trailblazer in credit card rewards.  With many options to choose from, when I got the card it was a no brainer in terms of flexibility.  When I complete a purchase using my MTVu card, ThankYou points accrue.  They are swept into a ThankYou holding account at the end of each billing cycle.  Therein lies the ingenuity of the Citi plan… they can force inflation of ThankYou points when liabilities (read: ThankYou Point balances) are high.  With the recent changes to credit card laws and disclosures presumably changing the profit picture for Citi, they changed the cash-in requirements for a number of rewards.

Of particular interest to me is the Student Loan Rebate.  ThankYou points accumulate at a rate of 1 per ‘cent’ in the ThankYou world.  If I spend a dollar on food, 5 ThankYou points go into my account at the end of the billing cycle.  Note the cost of a $500 Student Loan rebate… 62,700 points, or $627.00.  I cashed in a $500 rebate a few months back (I guessed, correctly, changes were coming) for 50,000 points.  Yes, that’s 25.4% in ThankYou inflation (hyperinflation?) in a few months.  Of course, there are still options to get full value back- a number of retail gift cards of $100 face value can be had for 10,000 points.  Still, the fact remains that my student loan is a necessity to pay off and retail stores offer things which I may not need.  Of course, I could always earn the extra $127 in rewards, but I’m effectively turning a 5% cash back program into a 3.987% reward program (the $1,000 rebate gets 3.994% in rewards).

Pay to Play

I don’t pay an annual fee on any of my credit cards.  If I have to start, I’ll carefully weigh what I’m paying and what I expect to receive, and make a call whether to keep the card.  Yes, Citi has begun to shift some of their credit card users to an annual fee plan.  One of the reasons I went with the MTVu card in the first place was the fact that it didn’t have any holding costs.  I haven’t seen any notice about changes to my plan yet, but it’s certainly a possibility I hadn’t considered before.  It will be interesting to see what other companies change to fee based models.

What about you, reader?  Have you seen any changes to your reward credit cards?  What do you think about the credit card reforms?  Do you agree with my assessment of the unintended consequences of credit card legislation?

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