Card Schemes Big On Costs, Short On Benefits
Sydney Morning Herald
Saturday November 1, 2003
The high price of loyalty means reward programs are no longer an attractive option for many. Simon Hoyle reports.
The value of credit card reward schemes has deteriorated dramatically over the past two years, and the cost of the schemes may be more than the value of the rewards for many cardholders, according to new research.
A report commissioned by Virgin money and conducted by BIS Shrapnel reveals that the number of reward points a cardholder needs to earn for a Melbourne-Sydney return has increased from 17,000 to 20,000 over two years even though typical airfares have declined significantly over the same period.
Fees, interest costs and the rate at which points are accumulated mean it can take an average cardholder two years to accumulate those points (and three years in the case of National Australia Bank's gold card).
That is unchanged from two years ago, but it doesn't necessarily mean the situation has improved or even remained stable, because significantly greater use of cards and higher average outstanding balances are needed to get there.
BIS Shrapnel assumes the average spend on a credit card has increased from $8500 in 2001 to $10,000 in 2003. It uses two hypothetical cardholders: cardholder A, who never pays interest, and cardholder B, who usually pays interest. BIS Shrapnel assumes the average outstanding balance on cardholder B's card has increased from $1400 in 2001 to $1600 in 2003.
BIS Shrapnel says that even when a cardholder has amassed enough points to redeem them for a flight, it is often difficult to get a seat.
``The proliferation of frequent flyer points has resulted in increased difficulty in obtaining redemptions at desired times on desired routes," it says.
BIS Shrapnel concluded that there is a greater ability today to obtain discounted airfares anyway, without the use of reward schemes thanks in large part to Virgin Money's stablemate, the discount airline Virgin Blue further devaluing the reward scheme concept.
``The introduction of Reserve Bank of Australia credit card reforms is expected to cause further reductions in the value of credit card reward schemes," BIS Shrapnel says.
``The result has been an increase in demand for lower cost credit cards that deliver ongoing cost savings, which for many cardholders exceed the value of possible rewards."
The cost of credit cards with reward schemes has increased particularly for those who use their cards responsibly and don't pay interest, the research shows.
Virgin Money managing director Rohan Gamble says there's long been a suspicion that reward schemes aren't great value, and in fact are worse value now than they used to be, but credit cards are a complex area of personal finance and it hasn't been easy for cardholders to tell.
``We did have an inkling that rewards programs weren't good value, but it's startling just how bad the value is," Gamble says. ``For someone who is a heavy user, the situation is even worse."
Gamble puts the situation down to a lack of competition in the credit card market.
Table 3 shows the cost of having a credit card relative to the value of the reward earned in this case a Melbourne-Sydney return airfare. BIS Shrapnel assumes the value of a return airfare is $315.
The American Express Blue card, for example, costs Cardholder A more than twice as much to use as the value of the reward.
``Cardholders who today pay substantial card fees for reward cards, and particularly those who pay large amounts of interest, may well do better to consider a lower fee, lower rate card," BIS Shrapnel says.
``This enables large savings to be made on the cost of the card with such
savings then being available to purchase airfares without the restrictions
associated with frequent flyer point redemptions."
HOW THEY STACK UP
The following tables show the annual fees, reward program fees and annual
interest rates for the major credit card reward schemes. The cost of operating
such cards for a two-year duration, being the period necessary for an average
cardholder to accumulate sufficient points for a Melbourne-Sydney return
airfare, is also shown. Customer A is a cardholder who never pays interest and
customer B is a cardholder who usually pays interest. These costs do not include
any supplementary card fees, foreign exchange loadings, over-limit fees, late
payment fees, duplicate statement fees, transaction verification fees,
replacement card fees, cash advance fees, or other fees.
Amex Qantas Citibank WBC CBA C'wlth NAB
June 2001 Blue ANZ Silver Altitude Awards Gold** Diners
Annual Fee $25 $27 $30 $49 $45 $88.30 $95
Rewards Fee $20 $22 - - - - -
APR* 15.29% 17.50% 17.95% 16.90% 15.90% 15.50%
N/A
Customer A $90 $98 $60 $98 $90 $176.60 $190
Customer B $453.90 $514.50 $487.21 $500.22 $468.42 $545.50
N/A
October 2003
Annual Fee $35 $40 $55 $75 $59 $88.30 $95
Rewards Fee $59 $55 - - - $33 $55
APR* 16.49% 18% 17.95% 17.15% 16.15% 15.75%
N/A
Customer A $188 $190 $110 $150 $118 $363.90 $300
Customer B $636.53 $679.60 $598.24 $616.48 $557.28 $1006.50
N/A
Card cost relative to the value of reward (2003 Melbourne-Sydney return airfare
at $315)
Customer A 60% 60% 35% 48% 37% 116% 95%
Customer B 202% 216% 190% 196% 177% 320% N/A
*APR is the annual percentage rate.
** Note that at October 2003, NAB Gold cardholders are required to spend $1.50
to obtain 1 Qantas Frequent Flyer point and therefore must operate their card
for three years to accumulate 20,000 points.
SOURCE: BIS SHRAPNEL
© 2003 Sydney Morning Herald
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