Study reveals rewards cards' boom in popularity
Cash back, points cards power surge; subprime borrowers get in on it, too
By Fred O. Williams | Published: September 30, 2014
Rewards cards are practically taking over the credit card market, and subprime consumers with spotty credit are not being left behind by the revolution, according to figures released Tuesday by the American Bankers Association.
The bank industry group's study portrays a credit card landscape that is rapidly being reshaped by rewards. Transactions on reward cards vaulted from $580 billion in the first quarter of 2007 to $1.15 trillion in the first quarter of 2014, up 49 percent. During the same seven-year period, spending on nonrewards cards plunged 32 percent, falling from $672 billion to $460 billion.
Rewards cards made up more than half the new accounts Americans opened since 2012, the ABA study said. Among rewards cards, cash-points-miles cards have become the most popular, surpassing growth in airline cards and other co-branded cards.
The ABA study, based on research performed by Argus Information & Advisory Services LLC, showed that rewards cards have surged in popularity among consumers all across the credit scoring spectrum. In the first quarter of 2014, rewards cards accounted for 85 percent of new accounts going to the top tier of consumers -- those with credit scores of 720 and up. Among people with prime-level credit scores in the 660 to 719 range, rewards were offered with 78 percent of the new card accounts.
Subprime rewards cards rise
Subprime consumers with scores below 660 had fewer rewards cards, but rewards still accounted for 58 percent of new cards handed out to those with less-than-perfect credit in the quarter. That's up from 37 percent just three years earlier, in the first quarter of 2011.
"The shift has happened quickly," the ABA said in its study released Tuesday. "Since 2010, rewards cards' share of new account volume has more than doubled" for subprime consumers.
The study did not address the annual fees and interest rates levied on subprime card holders. Generally, applicants with lower credit scores are charged higher interest rates. And subprime consumers still make a up a minority of card users. They held 50 million total accounts as of the first quarter of 2014, compared to 69 million for prime and 211 million for super-prime groups.
Even so, the prevalence of rewards for consumers with a tarnished credit history flies in the face of widely held assumptions that subprime applicants are unlikely to get a card at all.
Consumers 'savvier' about cards
The rise of rewards cards and increase of spending on them "suggests that credit card customers are savvier about their credit card usage habits," the ABA said. "In other words, credit card users are transitioning to cards that provide greater benefits."
With sign-up bonuses' potential value in the hundreds of dollars, it is no surprise that rewards cards draw a large following. Some applicants who chase top-tier rewards will develop complex strategies to meet bonus deadlines.
The trend toward rewards cards was particularly pronounced in the top spending categories -- travel and entertainment, services and general merchandise. The 2007-2014 growth rate was 151 percent for travel and entertainment rewards cards, for example. Cards without rewards in the same category grew just 9 percent.
[C]redit card users are transitioning to cards that provide greater benefits.
|-- American Bankers Association|
The rise of "transactors" is another trend that is reshaping the way people use cards. The share of people who use their cards as a convenient purchasing tool, instead of for borrowing, has been generally on the rise since the 2009 recession. In the first quarter, transactors accounted for 28.3 percent of card accounts, while "revolvers" who pay interest on revolving debt made up 42.7 percent, the ABA said in its quarterly Credit Card Market Monitor. Dormant accounts were 29 percent.
However, the share of transactors fell slightly in the first quarter, the ABA said, as an economic rough patch caused more consumers to borrow on their cards. During the quarter, the U.S. economy shrank at an annual rate of 2.1 percent retail sales fell at a1 percent rate -- probably due to harsher-than-usual winter weather in much of the country.
Still, the number of new accounts opened grew on a year-over-year basis, and subprime applicants are increasing at a faster rate than other groups, ABA said. The number of accounts open in the first quarter was 330 million, up from 321.6 million in the corresponding period of 2013. The account total is still off from its pre-recession high of 427.4 million.
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