Liz Pulliam Weston

The Basics

Credit card rewards: 4 new traps

Credit card reform is prompting issuers to water down their rewards programs. While the well-off will be wooed, the rest of us will face petty new fees and other gotchas.

By Liz Pulliam Weston
MSN Money

Credit card rewards programs are about to get worse for many people, with new fees and watered-down benefits. If you have great credit and charge a lot, though, you might not notice because card issuers still will compete fiercely for your business.

That's the consensus of the four credit card experts I asked to predict the future of rewards programs once the final provisions of credit card reform go into effect Feb. 22.

"One of the consequences of the (Credit Card Accountability, Responsibility and Disclosure Act) is going to be a much less lucrative reward card market," said Adam Jusko, the founder of Index Credit Cards. "Depending on your past credit habits, that may be just fine, or it may be cause for a bit of mourning."

People with poor credit -- FICO scores below 620 -- will have a hard time getting any credit card, let alone one with rewards. People with only fair credit will have "far fewer options than in the past," with higher interest rates and less-generous credit lines, said Ben Woolsey, the director of marketing and consumer research for CreditCards.com.

It's the prime and superprime customers who "will get the lion's share of offers and rewards," Woolsey said. Prime credit varies by lender but generally applies to people with FICO scores between 700 and 749. Superprime credit starts at 750.

You don't need to carry a balance to get attention if you're in that crowd, the experts said.

"You may not know it, but if you have a good-paying job and excellent credit and typically charge several thousand bucks or more on your card each month, you've got a big target on your back," said Curtis Arnold of CardRatings.com. "As issuers have become more risk-averse, revolvers (people who carry a balance) have fallen out of favor, and the new elite card customers have become highly coveted."

This change started with the recession, explained Bill Hardekopf of LowCards.com. As credit card defaults started to climb, card issuers began pulling back on riskier customers and abandoning some of their most generous rewards, such as 5% rebates on certain purchases.

Credit card reform is exacerbating those trends by cutting off issuers from unfair but profitable practices, such as retroactive rate hikes, universal default and the application of payments to the lowest-interest balances.

To make up for lost profits, card issuers are experimenting with new fees and tweaking rewards programs.

Here's what to watch for:

1. Rewards that buy less

Credit card companies pay for rewards programs largely through interchange fees that merchants pay on each transaction, Jusko said. A merchant might pay an interchange fee of about 1.5% for a regular credit card transaction, 1.65% for a rewards card transaction and 2.1% on one of the high-end rewards cards, such as Visa Signature.

"So one easy way to increase profits," Jusko said, "is to keep the interchange fees the same while watering down the rewards on the other end."

(Merchants have been protesting these fees, so far to no avail. If they can persuade Congress to wade in, rewards programs could be further affected.)

Going forward, issuers are less likely to cut their advertised rebate amounts than they are to fiddle with the "back end" -- the redemption process that actually determines the value of your points, miles and rebates. They might require you to earn more points or miles to get the same reward, for example, or set up tiers that require you to spend more to earn the same points.

"Most folks take notice when someone cuts their rebate from 3% to 1.5%, for example, but few consumers take the time to realize the grave implications of the fine print associated with a change-of-terms notice," Arnold said. "You can get what appears to be an insignificant notice that slightly alters your redemption options, but the end result may be the same in that your earning power is basically cut in half."

Continued: Beware of gimmicks

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