The Economic Downturn is Coming for Credit Card Rewards

Raise your hand if you’ve ever opened a credit card just for the rewards. TAJ: 🙌

But “free” depends on how you manage those cards.

In recent years, credit card companies have upped their CC reward game — offering more modern rewards and larger signup bonuses to attract customers.

• In 2022, six of the largest banks spent a combined ~$68B on credit card rewards — up ~43% from 2019.
• The amount spent on these rewards grew even faster than the total volume of credit card purchases.

That’s helped American Express (NYSE:AXP) build a $120B business on the back of credit card rewards (+ exceptional customer service). But “good for business” isn’t always “good for consumers.”

The dark side of CC rewards

An IMF study found that reward cards can lead to “overborrowing,” — especially for those with lower credit scores. IMF found that $15B is redistributed annually from low-score to high-score consumers.

It’s all part of the business model. Credit card companies profit from swipe fees, annual fees and increased borrowing — the last point making up 80% of a card’s profitability.

Lower bank earnings could impact rewards

First, the market downturn came after your portfolio, then it wanted your jobs, and now it’s hungry for your CC rewards.

• Bank earnings are pressured by rising interest rates and March’s banking collapses.
• US lawmakers have proposed regulations aimed at reducing swipe fees which could also lower profits on these cards.

Bank earnings start this Friday but more than your CC rewards are at stake. It’s going to be an important tell on how the economy is holding up.