Churning crackdown worries credit card rewards chasers
A move by American Express to crack down on people who earn multiple sign-up bonuses by opening and then closing the same kind of credit card repeatedly is causing alarm among credit card churners, who see the decision as the latest sign that harvesting cards for miles and points is becoming less lucrative.
To most cardholders, the change might not sound like a big deal: American Express says that effective May 1, it will not award sign-up bonuses on new accounts to people who have held that type of card before. Previously, the company offered bonuses as long as an applicant had not received a bonus on the same type of card in the previous year. An American Express spokeswoman told CreditCards.com that the company is making the change to its consumer cards "to ensure fairness and clarity."
However, to a small but growing segment of cardholders who apply for cards chiefly for the sign-up miles and points, the new policy represents a disturbing derailment of the free-travel gravy train -- especially when combined with changes to airline and hotel award programs that make it costlier for leisure travelers to earn free trips.
"This is the beginning of the end," wrote one commenter on DansDeals, a site that directs people to credit card and Internet deals. "Once churning is gone (as other cards and banks follow suit), there is nothing much left. The whole credit card/miles shtick was good while it lasted."
The change is also a sign that churning cards has become more popular. What started several years ago with a small number of hard-core devotees of the travel site Flyertalk has now blossomed into its own industry, with dozens of similarly named blogs highlighting card deals and advising people on how to accumulate and spend reward points. The best-known bloggers, who, like this website, receive payments from card issuers when new customers are approved, regularly offer their expertise at seminars, travel shows and in national media.
"You have new blogs popping up every day, preaching this to a whole new audience, and bloggers are speaking about it in the media," says Ariana Arghandewal, founder of the blog PointChaser. "The card companies are starting to realize that [as] more people get into this, [it] is not a sustainable model."
Arghandewal, 26, says she has about a dozen active cards and has used the points from sign-up bonuses to take free trips to Maui, Dubai and Turkey. Her rule of thumb is to apply for four new cards every 90 days to "minimize the damage" to her credit score from having too many inquiries in a short period.
For consumers, doing the math on churning credit cards is fairly straightforward. If you pay your bills in full and on time, the only expense is annual fees, which card issuers often waive on travel-reward cards for the first year, plus any expenses you have in claiming the rewards. You also have to be able to spend enough to meet minimum-spending requirements, typically a few thousand dollars over three or six months -- but bloggers have tricks to help hit those targets, too.
The card companies are starting to realize that [as] more people that get into this, [it] is not a sustainable model.
After earning those bonus points or miles -- worth hundreds or even thousands of dollars in free flights or hotel stays -- you can close your account, wait a little while, then apply for the same card again and earn a second windfall of points or miles.
That strategy has gained appeal as sign-up bonuses have risen. Until a few years ago, the standard sign-up bonus from an airline was 25,000 miles, enough for a free round-trip in the continental U.S. Now, offers of 40,000 or more are common, and in the past two years, issuers including Capital One, Citi, American Express and Chase have offered cards with 100,000 miles or points, enough for four round-trip domestic tickets.
Marketing project manager Kevin Barry, 28, of Philadelphia says he's found it easy to get used to sipping Dom Perignon and sleeping on flat beds in first class with the miles he has earned from churning cards. That approach has allowed him to take trips to Europe, Hawaii and Mexico that he otherwise never would have taken.
"I try to share this with as many people as possible, but a lot of them think that it's not true, that it's a scam," he says. "I try to preach that it's real, and it's unbelievable."
He says he has "probably 15 or 20" active cards. In the past few years, Barry says he's received three separate sign-up bonuses from the Barclaycard US Airways MasterCard, plus two each from the Bank of America Alaska Airlines Visa, the American Express Starwood Preferred Guest and the Chase Sapphire Preferred.
He acknowledges that his credit score gets dinged by a few points with every application, but he says it recovers within a few months. He says his credit score is 765, which he figures is higher than the scores of some of his friends who do not churn cards. Barry shares tips on his Disney-travel site, FrugalMouse.
Barry says the biggest obstacle is not earning the points, but spending them. Airlines and hotels have recently been raising the number of points required for trips, and many of them make little inventory available or charge fees to book travel with points.
From the perspective of the banks, the calculation on what makes a profitable customer is murkier. They receive money from annual fees, swipe fees from every use of the card, plus any late fees or interest charges. Lately, annual fees seem to be increasing and spending requirements on new cards seem to be on the rise as well.
We're going to hear a lot of moaning, there's going to be a lot of hand-wringing, and it won't be pretty.
American Express is launching a new card in April that encourages frequent use -- and collection of swipe fees -- by tying rewards to continued use of the card. The AmEx EveryDay card (no annual fee) gives users a 20 percent Membership Rewards point bonus for every month in which they make 20 or more purchases.
But while banks attempt to increase card revenue, they also have expenses. They have to pay for overhead, such as marketing and issuing cards, and partnership fees to airlines and hotels that allow them to offer miles and points in their programs. In 2013, for instance, Alaska Airlines recorded a gain of $150 million associated with extending its credit card agreement with Bank of America.
Several banks contacted for this article declined to discuss their policies on sign-up bonuses.
Veteran award-travel writer Tim Winship, who founded FrequentFlier.com in 1997, says banks should not be shocked that people are responding to incentives the banks created.
"In a sense, it's a problem of their own making," he says. "They're offering these outsized bonuses. What do they expect people to do, sit on the sidelines and say, 'Gee, I don't want 100,000 miles for a new Citi American Airlines card?'"
He says those incentives have given rise to a "very small segment" of the travel market that is likely to complain loudly if other banks follow American Express' lead.
"For that really focused, savvy group of people that pays a lot of attention to these cards and will do anything they can to ratchet up their account balances, that would be a significant setback, no question," Winship says. "We're going to hear a lot of moaning, there's going to be a lot of hand-wringing, and it won't be pretty."
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