Credit Card Competition

Credit Card Competition

In the late 1980s when the first loyalty program co-branded credit cards were launched, 5,000 bonus miles for signing up for a new credit card was a competitive offer. The bonus offers continued to stay at these levels in the 1990s, with the highest offers topping out at 10,000 bonus miles. Some programs didn’t even offer a bonus to entice members to acquire their credit card or only offered a few thousand miles as a bonus for signing up for select cards. Today, the standard bonus offer for acquiring a new piece of plastic is around 25,000 to 30,000 miles–five times higher than the initial offers. New cardholders can earn enough miles for a roundtrip coach domestic award ticket for filling out a credit card application and using their new card just one time, which for many members is enough of an incentive to motivate them to fill out an application.

But how about a roundtrip business class flight to Paris in exchange for becoming a new cardholder? At the end of 2009, British Airways was the first airline to up the ante and offer an unheard of bonus of 100,000 miles. And many members jumped on board to sign up for the card. United Airlines has since offered 50,000 bonus miles as their highest sign-up bonus and American AAdvantage has responded with 75,000 and 100,000 bonus mile offers.

Why So Many Miles?

While these mega-mile offers seem insanely generous, what’s the catch? Why are the banks giving away so many miles? One answer can be found on Citi’s Web site. According to the site, “Our strategic focus is to accelerate organic growth via investment in high growth sectors such as, partner programs, travel/affluent markets and small business lending …” The “travel/affluent” market is an attractive market to credit card companies and one way to attract affluent frequent flyers to sign up for a credit card is to offer a massive sign-up bonus. The banks are becoming more aggressive in trying to lure affluent frequent flyers to their credit cards and we know many frequent flyers (and even some not-so-frequent flyers) who signed up for the British Airways Executive Club credit card when they were giving away 100,000 miles.

Ron Shevlin, a senior analyst with the independent research and advisory firm, Aite Group, said that the target for airline reward cards are members who already participate in an airline’s frequent flyer program, “From a new acquisition and growth perspective, it’s challenging. It’s not easy to get them to switch.” Offering a sweet sign-up bonus is an alluring offer. We posted a poll on asking members if they had ever signed up for a credit card primarily for the sign-up bonus and nearly 75 percent of the 1,735 respondents said that they had. And over 30 percent had signed up for three or more cards because of the bonus.

So far, this mega-bonus phenomenon has been seen mostly in U.S.-based frequent flyer programs. Hotel programs have also stepped up their sign-on offers, but not to the tune of 100,000 points. From June 30 to July 6, 2010, Starwood Preferred Guest offered 30,000 bonus points as a limited-time offer to new cardmembers of the SPG American Express card who spent $1,000 in the first three months. The regular offer is 10,000 points after first purchase and 15,000 bonus points after spending $15,000 in the first six months.

The international loyalty programs also offer sign-up bonuses, but they vary from country to country and aren’t nearly as rich. The British Airways Visa offer of 100,000 bonus miles was only offered to U.S. residents. We will be focusing on North American programs for this article.

Affluent Spenders

In general, customers who fall into the travel/affluent sector (and the customers most likely to participate in frequent flyer programs) have more money to spend. Banks don’t plan on earning money from interest charges or late fees from creditworthy customers who pay their bill in full each month, but they do receive money from the merchant each time a customer uses their card. With each credit card transaction, the merchant accepting the credit card pays the issuing bank an “interchange fee” (also known as a swipe fee) of around two percent (on average). The U.S. Government Accountability Office (GAO) published in a Report to Congressional Addressees that the banks earned almost $50 billion in interchange fees alone in 2009. These fees range between 0.95 percent and 2.95 percent for Visa cards and 0.90 percent and 3.25 percent for MasterCard. Typically, rewards cards have a higher swipe fee than standard credit cards, although the exact fees for rewards cards are not publicly available. From the GAO report, “According to analysis provided by the Federal Reserve, Visa and MasterCard introduced higher interchange fee categories in 2005 for premium cards.” Among the costs that card issuers report they incur as the price of running credit card programs is “paying for rewards and other cardholder benefits.” By charging higher interchange fees, the cost of rewards cards are partially being passed on to merchants. Mileage-earning rewards cards also have higher annual fees and interest rates to help cover the additional cost of offering miles or points.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Card Act) that went fully into effect in August 2010 introduced new regulations to the credit card industry. Creditors are no longer allowed to increase interest rates within the first year and on outstanding credit card balances if the cardholder is current with payments, consumers must opt-in to approve purchases that exceed the credit limit (and come with expensive over-the-limit fees) and creditors must allocate payments to balances with higher interest rates first when a customer has balances with different interest rates, to name a few of the changes. With these new customer-friendly regulations, banks are earning less money in interest and fees. According to Robert Hammer, CEO of R.K. Hammer Investment Bankers, banks could lose around $11 billion in fee income in 2011 as a result of these changes. One way for lenders to make up for the losses is to target consumers with higher incomes who are likely to spend more on their cards, which means more revenue from interchange fees. And we’ve seen a few airlines targeting high-spend frequent flyers with tantalizing mega-bonus offers in the past year.

The Mega-Bonus Offers
British Airways Executive Club

With the British Airways Visa Signature card groundbreaking offer of 100,000 miles, new cardmembers received 50,000 bonus miles after first use and another 50,000 bonus miles after spending $2,000 in the first three months. As an ongoing benefit of the card, cardmembers are required to make $30,000 in purchases to receive the annual companion benefit. That’s the equivalent of around $600 in fees that Chase will receive from merchants with one cardmember who spends enough to take advantage of the companion benefit offer. Plus, there’s the $75 annual fee the cardholder is charged.

The 100,000 bonus mile offer is gone, but new cardmembers can earn 50,000 bonus miles with their current offer. You will earn 25,000 bonus miles with your first purchase and an additional 25,000 bonus miles when spending $2,500 in the first 90 days. Chase also recently eliminated the three percent foreign transaction fee on purchases made with the card when traveling internationally, which makes this card more appealing to frequent travelers. Visit to view the current British Airways offer.

American AAdvantage

When the American AAdvantage mega sign-up offers were launched, there were a few variations. There was a 100,000-mile sign-up offer for a targeted group of consumers, but you had to meet minimum spend thresholds for two years to get the full bonus. New cardmembers could earn 50,000 bonus miles after charging $2,000 in the first four months, another 25,000 bonus miles after charging $10,000 in the first year and an additional 25,000 bonus miles after charging $10,000 in the second year. The second offer was 75,000 bonus miles after spending $1,500 within the first six months. These offers expired on Oct. 31, 2010 but the 75,000-mile offer was revived the following month in a revised form. Now to get the 75,000-mile bonus, cardmembers are required to spend $4,000 in the first six months. The Citi Platinum Select / AAdvantage Visa Signature card has a $85 annual fee ($75 for the CitiBusiness / AAdvantage Visa card) that is waived the first year. These offers aren’t publicly available on the AAdvantage Web site, but FlyerTalk members have created a thread with updated links to the current offers at

Continental OnePass

The Continental Airlines offer isn’t as rewarding as the first two we mentioned, but at up to 40,000 bonus miles for the OnePass Plus Card, it’s still worth considering. Plus, the $85 annual fee is waived the first year and you’ll get a $50 statement credit after your first purchase. You’ll earn 25,000 bonus miles after your first purchase, 5,000 bonus miles when you add an authorized user and 10,000 bonus miles annually when you spend $25,000 on your card. The card also comes with two annual Presidents Club day passes and your first checked bag is free when flying on Continental Airlines. Visit to apply. Keep in mind that Continental OnePass will be integrated into United Mileage Plus by Jan. 1, 2012 so basically, the first year is free and that will be the only year you will have the card tied solely into Continental.

United Mileage Plus

In April 2010, United Mileage Plus offered a 50,000-mile bonus promotion that was available for anyone. The $60 annual fee was waived the first year and members earned the bonus after spending $250 to the card. More recently, United Mileage Plus offered a targeted 50,000-mile offer for select Mileage Plus members. We can’t reliably predict whether the 50,000-mile offer will reappear for all members, but seeing that banks are offering these high-mileage bonus sign-up offers more often, we expect to see it again. Although the minimum spend may be higher in the next round.

Future Trends

If the mega-bonuses continue, we expect the minimum spend requirements to remain high and possibly go higher. To earn the sign-up bonus, British Airways raised their minimum spend from $2,000 to $2,500 in the first three months of card ownership and American Airlines raised their minimum from $1,500 in the first six months to $4,000 in the first six months. The banks are competing for customers who will spend a lot with their card and someone spending a couple of hundred dollars a month is less profitable than someone spending $1,000 a month. Plus, someone who generally only spends around $200 a month isn’t likely to be attracted to an offer where the requirement is to spend $10,000 a year ($833 per month) so these offers clearly target higher spenders with the minimum spend requirements. The AAdvantage card required members to keep the card for at least two years, so we may start to see more offers where members have to keep using the card over a longer period of time before they can receive the full bonus amount.

Taking the Credit Card Plunge

It’s important to stay on top of your credit score to be able to take advantage of these mega-bonus offers when they come along. Even if you have 75,000 miles in your account, you might want to earn a quick 25,000 bonus miles through a credit card sign-up offer to have enough miles for a roundtrip business class to Europe, so it’s a good idea to know what your credit score is and to keep the score at a healthy number. We sent out a survey to loyalty program members and close to half (43.5 percent) of survey respondents said they were concerned that their credit score would be adversely affected by signing up for several credit cards for the sign-up bonuses. Taking advantage of sign-up offers is one of the best ways to earn a large number of miles relatively quickly, and with very little effort, but you don’t want to compromise your credit score in the process.

Credit Score

Rick Ingersoll who writes the blog has received over 90 credit card sign up bonuses over the years and continues to receive approvals for credit cards because of his excellent credit. Rick often reminds his blog readers, “Your credit is one of your most important assets.” He recommends that you keep your credit score above 700 on the FICO scale and over 800 with the Vantage scoring model.

There are three credit bureaus that compile credit reports and assign credit scores: Experian, TransUnion and Equifax. Each bureau has a slightly different method for determining a borrower’s credit worthiness and your score will be different with each bureau. The best offers out there are reserved for those with great credit and if your credit score is below 700, we suggest you work on improving your score before applying for any co-branded credit cards.

Credit Monitoring

There a number of ways to find out your credit score for free, but if you intend on applying for credit cards frequently, you may want to invest in a monthly credit score monitoring service to make sure your credit scores aren’t taking a hit. If you don’t want to pay for a tracking service, you can either sign up for a free trial (most credit tracking companies, such as or, will offer a free seven or 30-day trial) or you can sign up for or, both of which are free. is a free service that will give you your credit score based on information from TransUnion. You can check your credit as often as you wish and it won’t impact your credit score. is another free service, but it only allows users to get a new credit report and score every six months. It’s useful to use in conjunction with because Quizzle pulls your information from a different credit reporting agency, Experian, so you’ll get a more accurate picture of your overall credit. Quizzle will give you a CE Credit Score, which they say is close to leading industry scores. So it won’t be the exact number seen by credit card issuers, but it will be close.

By law, everyone is allowed to see their credit reports annually at no charge. You can view a full credit report from each agency every year for free through signing up at – Your credit scores aren’t included in the free reports, but you can view the number of inquiries in your credit history for each credit bureau and make sure your accounts and personal information are accurate.

Improving Your Score

There are many factors that affect your credit score and each one is weighted differently. The most important component is your payment history, which accounts for around 35 percent of your score. Late payments and unpaid accounts will quickly and drastically pull down a credit score.

Your ratio of debt to available credit will account for about 30 percent of your score. If you have an outstanding debt of $5,000 and $20,000 of available credit, your debt to credit ratio is decent at 25 percent (but could be improved). But if you only have a credit limit of $10,000, your ratio would increase to 50 percent, which could lower your score. One way to improve your debt ratio is to lower your balances–but acquiring additional credit or requesting higher credit limits on available cards can also help your ratio. You also want to keep your credit utilization for each individual card at less than 50 percent.

Your length of credit history is the third most important factor at 15 percent, which is why you should always keep your oldest accounts open. Other factors that influence your score include your mix of credit (having a car loan, a mortgage and other types of installment credit along with credit cards is good) and how many new credit applications (i.e. inquiries or hard pulls) are on your report. Inquiries will stay on your credit report for two years and your score may drop a few points (two to five points) each time your credit is pulled. If your credit report shows a string of inquiries for new credit cards, you may end up with a lower credit score or a bank may turn down your request for a credit card because of too many inquiries. According to, “Fair Isaac’s research shows that opening several credit accounts in a short period of time represents greater credit risk.” Be careful when applying for multiple new cards or you may not be approved when a mega-bonus offer comes along that could really boost your mileage balance. And if you have plans to apply for a mortgage, home equity loan, car loan or other type of long-term loan in the near future, you may want to hold off on applying for a new credit card. A temporary dip in your score may result in a higher interest rate that, over time, could end up costing you more than the sign-up bonus is worth.

Key Players

There are only a few banks that issue co-branded hotel and airline loyalty credit cards, and the key players are American Express, Bank of America, Barclays, Chase and Citibank. Knowing which bank is issuing the credit card you are applying for is important in helping you determine which credit bureau the bank is likely to use when pulling your credit. As we mentioned earlier, too many hard pulls on your credit can lower your credit score, making it more difficult to qualify for a credit card. When a big bonus offer comes along, you don’t want to get denied because you had too many inquiries made on your credit. So it’s a good idea to spread out your applications among the three agencies.

How do you know which bank is using which agency? The banks won’t tell you this, but your fellow credit card applicants will. You can visit the Credit Pulls Database at ( is a direct link) and enter the creditor’s name (for example, Citi AAdvantage) and the state where you live. Other members who applied for credit with the same creditor have entered into the database the name of the creditor, the agency where their credit score was pulled, their credit score, the available credit and whether they were approved or not. This will give you an idea of which bureau is likely to get a hit and how high your credit score should be before applying, but 700+ is always a good guideline. FlyerTalk members have started a similar database that can be found at but the database at is more comprehensive.

If You’re Approved

Most loyalty program co-brand cards have an annual fee. In some cases, this fee is waived the first year and you can enjoy your mileage bounty at no cost for a limited time. But keep track of when your account was opened and when the fee-free year is scheduled to end. If the benefits of the card are not worth paying the annual fee, call to cancel the card but ask if there is a retention bonus first. You may be given a few thousand miles to keep the card another year, but you may not, so be prepared to close it when you call. If the card doesn’t have an annual fee, you’re better off keeping the card open. Having another card on your credit report won’t hurt your score and it may even improve your score by giving you more available credit and increasing your debt to credit ratio.

Mega-Bonuses Here to Stay?

Is the age of mega-bonuses for credit card sign-ups here to stay? Chances are they are not once the economy gets back on track and the credit card companies that partner with the various travel loyalty programs see their revenue rise again with increased use of these cards.

What brought these mega-bonuses to life was the economic meltdown and changes in extended credit–there was simply a period of stagnant growth and in fact, a period of no growth.

As we know from our experience with the airlines, rich rewards are the modus operandi in getting the attention of the consumer and these mega-bonuses seem to be coming more from the travel loyalty programs themselves than from the carefully crafted and controlled measures of a somewhat regulated industry.

But for whatever reason, it has worked and spurred interest in the battle for plastic. And it’s not being fought just among the airlines and hotels, witness the continued and convincing message that Capital One’s Venture card has made across your TV screen and elsewhere for the past six months.

The plastic industry has faced this sort of challenge before coming out of the woes following 9/11, and will likely settle down to a more reasonable method to attract and acquire a change of plastic in the wallet of frequent flyers once the economy is back up and running.

While we appreciate the 100,000 bonus miles, practical methods of marketing will settle that back down to a norm of 25,000 to 30,000 bonus miles once the numbers are in and the industry sees that these types of mega-bonus offers create a mania of “spinning” from card to card just for the bonus offer.

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