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By Nancy Trejos
Washington Post Staff Writer
Sunday, August 16, 2009

Credit card rewards programs are suddenly less rewarding.

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Months before a new law takes effect restricting the credit card industry's ability to raise interest rates and charge fees, card issuers are scaling back programs that offer lucrative rewards such as frequent-flier miles and cash rebates. Now many customers have to pay additional fees or earn more points to redeem free plane tickets or claim cash-back perks.

"Consumers should understand that rewards programs are unstable right now, and a lot of the best programs are changing. And almost without exception they are changing to the benefit of the bank and the disadvantage of the cardholders," said Joe Ridout, a spokesman for Consumer Action.

On Sept. 1, American Express will increase to $99 from $75 the maximum fee customers in its Membership Rewards program pay to transfer points to any U.S. airline loyalty program. In June, the company decreased its rebate to Blue Cash cardholders for all purchases except everyday ones such as gas and groceries to 1.25 percent from 1.5 percent.

Discover has eliminated one of three tiers in its cash-back program. Previously, customers received 0.25 percent of the first $1,500 spent, 0.5 percent for the next $1,500, and 1 percent for anything above $3,000. Now they will receive 0.25 percent back for the first $3,000 spent and 1 percent above that.

Citi has altered its travel redemption program. Previously, customers could redeem a domestic round-trip airline ticket valued at up to $400 for every 20,000 points earned. Now, the same ticket would require 40,000 points.

The changes follow warnings from bank executives that the new law, which takes effect in February, will limit their ability to set interest rates and fees based on each borrower's risk. That, in turn, would make lending money more expensive, forcing them to withhold credit, charge new customers higher rates and increase annual fees, the executives have argued. Now they say scaling back rewards programs could be another consequence as they try to make up for the losses they expect to incur.

"Valuable rewards programs are still out there for consumers, and they need to look for them," said Ken Clayton, senior vice president for card policy at the American Bankers Association. "That being said, in tough economic times with increased regulation on the ability to handle risk, it does affect the economics of the products."

Since emerging in the 1980s, rewards programs have evolved into a common way for card companies to entice new customers. In the era of easy money, issuers competed for customers by offering increasingly creative rewards, such as concert tickets and electronic gadgets. The programs became so plentiful that people learned how to game the system, snapping up multiple cards just to collect the perks.

Now as more cardholders have failed to pay their bills, companies have written off a record high percentage of debt and are less eager to dangle rewards in front of any but the most creditworthy customers, industry analysts say.

"The days of the free-flowing rewards and 5 percent rebates where the customer has the pick of the litter and 20 different offers in the mailbox are over," said Curtis Arnold, founder of CardRatings.com, a Web site that compares credit card offers.

Card issuers have also become more punitive. People who make two consecutive late payments to Discover, for instance, forfeit all their frequent-flier miles. Starting in September, American Express Blue card customers who make a late payment will lose any reward points earned that month. They can reinstate points for $29 for each month that the rewards were forfeited.


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