How can credit card companies afford to offer big sign-up bonuses?
It is a numbers game. How many people will sign up for a certain promotion, how much will they charge over a six-month period, how long will this customer continue to keep and use this account, what is the probability that they will pay off their account in full each month, and will they have a big unpaid balance and accrue late fees and interest? The answer to this type of equation is often used to answer the question.
A more simplistic answer is found in exploring debt, interest and late fees. Credit card companies make money off of every transaction from the fees that are charged to businesses for accepting a card. However, card companies make the most money when consumers do not pay their balance in full each month. In the U.S., the average credit card debt is over $5,000 (Ana G, 2017), with those who have the lowest incomes accruing the highest amount of debt.
Thus, credit card companies can easily afford to offer big sign-up bonuses based on the assumption that a very high percentage of cardholders will not pay off their bill in full each month -- thus, making money for the credit card company. The reality is that our economy is transitioning from a paper-based transaction economy to an electronic payment-based economy. Consider all of the different methods of electronic payment and how these easy payment methods increase the demand and usage rate of credit cards.
How important are limited-time promotions to credit card application rates?
Limited-time promotions provide quick bursts of cash for the credit card company and are an easy strategy to increase the number of cardholders. These types of promotions are especially attractive to consumers when there are no membership fees or if the fee is waived for six months to a year. A savvy consumer would use the no-fee card and close the account at the end of the promotion (i.e., no annual fee) period. The problem is that many consumers forget to close the account and are automatically charged the membership fee at the end of the promotional period. Then, since they have paid for a year of card usage they will continue to use the card and increase the unpaid balance (i.e., earning more money for the credit card company). At the end of a year, when a new promotion from a new carrier arrives (hopefully one that offers a zero-transfer fee), the consumer will close the current account and switch to the new card -- thus, the cycle continues.
Are bonus-seekers good customers for credit card companies?
Bonus seekers are often referred to as “cherry pickers.” These are customers who shop for the best deal, in this case a special bonus, but they are not loyal customers. Cherry pickers will quickly close one credit card account and move to another card for a better deal. Bonus-seekers are often more loyal to airlines (if they usually fly using one carrier), and when they earn other incentives such as cash back.
These types of customers can be good for credit card companies because they help build spikes in new card openings. However, there must be a new promotion to counter the effect of customers who leave.
What does the value of credit card sign-up bonuses tell us about the economy?
You can interpret this as either a positive or a negative sign. A few of the positive implications include consumer confidence (i.e., a consumer might charge more when they believe they will be able to pay for their purchases). An increase in credit card sign-up also helps the overall GDP (i.e., more goods and services are purchased and the impact of these purchases on various members of the delivery channel).
Increased acceptance of credit card sign-up bonuses might also signal a weak economy. A quick study of the income brackets that have the highest amounts of credit card debt reveal that lower-wage earners have higher levels of credit card debt than higher-wage earners. For many consumers in lower income brackets, their salary has not kept up with the increased cost of goods and services, especially housing and medical costs. If lower-wage earners are opening new credit card accounts more frequently, it is a signal that the economy is weak. Those with large amounts of debt will open additional cards and take advantage of credit sign-up bonuses because they believe this is a good financial strategy.
We live in a world where a credit card helps consumers purchase what they need and want now. As our economy continues to move to a cashless economy, the need for credit cards will increase. The increase in online shopping has also contributed to credit card debt. Consumers want more and purchase more than they have in previous time periods. The Internet increases consumers’ exposure to products and services and provides a quick and easy method of purchase. Thus, online shopping has increased impulse shopping, credit card usage, and debt.
The oldest group of Baby Boomers (i.e., those over 60) and members of the silent generation (i.e., those over 75) have the least amount of debt (Willims, 2018). Consumers in these age groups have fewer needs (they are beyond the expensive stage of raising a family) and often have a different view toward credit card debt (i.e., debt is bad).