NerdWallet's Smart Money Podcast - The End of Credit Card Rewards, and When to Cancel Luxury Credit Cards

Episode Date: December 5, 2022

Credit card rewards programs might be on the chopping block in Congress. To start off this episode, Sean Pyles and Liz Weston talk with a credit card Nerd about what’s happening and what it might mean for your credit card rewards. Then Sean is joined by personal finance Nerd Kim Palmer to answer a listener’s question about when to cancel a luxury credit card. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 11:29  Money Question segment: 11:30 - 28:08  Like what you hear? Please leave us a review and tell a friend.

You can get a lot of sweet perks from credit cards with annual fees, but how can you tell if they're worth the cost or whether you're better off canceling the card? Find out this episode. Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Liz Weston. If you want the nerds to answer your money question,

call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD, or email us at podcast at nerdwallet.com. We want to hear as many of your questions as possible, so please send us a voicemail or a voice memo if you can. And if you like what you hear, please leave us a review and tell your friends. In this episode, we'll turn to a credit cards nerd to answer a listener's question about canceling premium credit cards. But first, we'll talk about potential legislation that could completely upend credit card rewards programs. To help us understand these major potential changes, we talk with another credit cards nerd,

Kenley Young. Kenley is an editor for the credit cards team at NerdWallet, and he recently wrote the article, Is Congress Going to Kill Credit Card Rewards? Welcome to the podcast, Kenley. Hello there. It's great to be here. Thank you all for having me. Great to have you, Kenley. Before we ask you to give us an answer on whether Congress is going to kill credit card rewards, let's start with some background. What does credit card rewards encompass? Broadly, you can break down credit card rewards, I think, into two categories. You know, some cards are a cash back, some

percentage of the transaction, and then some earn travel rewards like airline miles or hotel points. And then sort of beyond that, credit cards also offer what we might consider side perks, things like cell phone insurance or airport lounge access, rental car insurance, the list goes on. Those rewards really have a lot of value for consumers. Yeah, absolutely. Just on a personal level, they've allowed me to travel. Most recently, my wife and I went to Australia and our plane tickets were covered by airline miles. Our hotels were covered by hotel points. I've taken my wife

and my parents to Ireland on the strength of credit card bonuses. And we talk about those side perks. I mean, I've used those as well. I've taken advantage of cell phone insurance. I have two young children and they've flung my phones across the room before a few times. Oh dear. And yeah, so I've taken advantage of that as well. My husband just celebrated a birthday and I was able to use a free night certificate at a hotel to give him a luxury weekend experience in downtown LA, which is a really nice getaway. And we constantly use rewards for business class travel, nice hotel rooms, all kinds of stuff. And like you said, lounge access, that is huge for us. And on my end, I tend to be kind of simple with the way I use my rewards.

I'm super into cashback. And I have this credit card that's an absolute workhorse of a cashback card. And I've gotten hundreds of dollars in cashback so far this year. And all this goodness is actually funded by the fees the merchants pay to accept credit cards. They're known as interchange fees, processing fees, swipe fees, and they typically equal one to three percent of each transaction. If so many consumers are benefiting from the rewards like we just outlined, why would Congress try to kill them? That's a great question. So the legislation on the table is called the Credit Card Competition

Act of 2022. And I should note up front that getting rid of credit card rewards is not a stated intention of the bill. Credit card rewards aren't mentioned in that legislation, but it doesn't mean that this wouldn't potentially dramatically affect credit card rewards. As Liz noted, merchants are charged fees when they accept a credit card as payment. And those fees are set by the payment network that your card runs on. That's usually going to be Visa or MasterCard, perhaps Discover or American Express. You can find the logo on your card somewhere. But as of right now, if you present a Visa card to pay for something, then that transaction will be processed through the Visa payment network. And so the merchant is going to be assessed whatever fee Visa charges. The Credit Card Competition Act would change that.

It would require that large credit card issuing banks give merchants more choice as to which payment network a transaction can run on. So a merchant wouldn't be locked into Visa or MasterCard. They could maybe choose one with a cheaper fee. As you can imagine, a bill that might lead to lower fees for merchants is quite popular with large merchants. But opponents say, hold on now, if merchants are paying less in interchange, then, well, that could mean that funding dries up for all these lucrative credit card rewards that we just

talked about they're saying that credit card reward programs could be collateral damage here interesting this really seems like a battle between some major players in the financial sector you've got visa and mastercard on one side and companies large and small walmart amazon plus all the local mom and pop stores on the other. So how will this proposed legislation benefit the merchants that are right now paying these interchange fees to Visa and MasterCard? Well, the thinking by the bill sponsors is that if merchants are allowed this competition in payment networks, if they have this choice, then they're likely going to choose a network

with lower fees, right? And then the savings that they're gaining on interchange would, you know, in theory on paper, trickle down to customers in the form of lower prices. Yeah. But I feel like we all know that trickle down to consumers or to regular folks doesn't typically happen. Although I bet there would be some consumers who might want to see this passed because they're possibly willing to give up cash back or miles for maybe the promise or opportunity to have lower prices on things like groceries and gas. Yeah, absolutely. But the problem, unfortunately, is that it's not at all clear that this bill would actually

lead to lower prices. We've kind of been here before and history hasn't really borne out that theory. Back in 2010, 2011, more than a decade ago, there was similar legislation that was passed on debit card interchange. It effectively reduced those swipe fees. And yes, debit card rewards used to be a thing. But at the time, this was known as the Durbin Amendment. It passed as part of the

2010 Dodd-Frank Act. But at the time, supporters made much the same argument. They said, hey, merchants are saving on these interchange fees, so they're just going to pass that along to their customers. But a lot of studies have found in years since that amendment became law, that didn't really play out that way. It didn't have much effect on retail prices. And some evidence shows that more than a few merchants actually boosted their prices after this went into effect. And then, of course, the other side of this equation is that banks lost a lot of money when this legislation went into effect. And so they found ways to recoup some of that. And one of the effects of that is that what got a lot harder to find free checking accounts, right? Or monthly fees went up on checking accounts.

And so all of this is happening. And on top of that, debit card reward programs, which again, used to be a thing, those pretty much vanished as the swipe fees that had funded them declined. So opponents of the credit card competition act say, look, history is just going to repeat itself here. Yeah, I think it seems pretty clear that these companies are going to try to get money from us one way or another, even if they can't get it from merchant fees. So the legislation is basically stalled in Congress. What's your best guess as to what will be the eventual outcome of this fight? Oh man, if only I had a crystal ball. As an avid credit card user and someone who's benefited quite a bit from rewards, which we've talked about, I'm hopeful that this

doesn't pass. But I do have to say that it's pretty clear to me that many parties here are weary of what they consider to be a Visa MasterCard duopoly. Those payment networks are facing just this immense pressure now from a lot of sides. There's the behemoth merchants, yes, of course, but they're also getting pushback from major banks now. There are smaller competitors in the fintech space that are looking for ways around interchange. The federal government now is getting involved. So it's hard for me to imagine Visa and MasterCard not remaining major players. I mean, they're just so massive, right? They're so ubiquitous. But I do think that we're bound for some shakeups in the

payment industry here. I just hope that I can hang on to my credit card rewards. I hope they don't end up being like... Yeah, I'm right there with you. Great. Well, Kenley, thank you for talking with us about this. Before we let you go, though, we want your help promoting our special end of year episode. So Liz and I are gearing up for one of our favorite episodes of the year. And listeners, we need your help to make it happen. For the past couple of years, we've asked you all to share your biggest financial accomplishments with us for a special episode. And this year we're doing that again, but in a slightly different way. We want to hear your rose, thorn, and bud of 2022.

And you're going to have to explain once again what that means. Yes, this might seem a little complicated, but I swear it's not. So this is a game that my friends and I play when we get together, and it's a really nice way to catch up on what we've been doing in our lives lately. So the rose is the best thing that's happened to you lately. The thorn is something that you're maybe struggling with, and the bud is what you are most excited about. So my rose, thorn and bud for the past week would be that my rose is I finally have my Christmas shopping list mostly finalized. And my thank you, I'm a little late for the game, but at least I've done it. My thorn would be that I'm in the process of spending a

bunch of money on presents and I'm happy to give gifts, but every time I spend the money, it does hurt a little bit, of course. And then the bud is that the holidays are just a few weeks away and I'm super excited to get together with my friends and family to celebrate. All right. I love that. So Kenley, I got to ask you, what would be your rose, thorn, and bud? So, yeah, I love this. My rose is going to be, I finally paid off all of my credit card debt. It's been a big... Congratulations. That's huge.

Thank you. Yeah, it happened early this year, near the middle of January. It took me several years, give or take about five years. And yeah, that's my rose. My thorn, which I think many of us have been feeling inflation. That's my thorn. Uh, it's pushed cost of a lot of things gift giving being one of them, but also. We've been doing some home improvement and, um, I think if I had, if I had

decided to pay my house, like maybe a year ago, six months ago, it was better than now, so inflation was my thorn. Yes, exactly. And, uh, my bud, uh, I'm going to go with a sentimental answer and say my children. I've got a nine year old son and a six year old daughter. And, um, I'm just excited about what this year holds for them. They're they're at the age where their personalities are shining

through for better and for worse. Oh yeah. Just looking forward to having them grow some more. Great. Wonderful. Thank you so much for sharing that, Kenley. Sure. Thank you for having me.

And listeners, like last year, we really want to hear as many of your roses, thorns, and buds as possible. So please leave us a voicemail on the Nerd Hotline at 901-730-6373 or email avoicememo to podcast at nerdwallet.com. You will also accept written submissions to that address. And now let's get on to this episode's money question segment. Sounds good. This episode's money question comes from Cheryl, who wrote us an email. They wrote, Hello, smart money folks. I could use some advice. I'm trying to decide if I should cancel my Amex Platinum card. It has a hefty yearly fee, $695, but it has a bunch of perks that exceed the yearly fee value if I use them all. I don't use them all, so my perks probably equal the yearly fee.

Since it's a charge card, I pay it in full each month and it has no credit limit. I have three other cards. Two of them I almost never use with no or low annual fees. The third gives me 1% when I buy and 1% when I pay my balance. I use this card for almost everything and so far have received about $720 through cashback rewards this year. There is no annual fee, but the credit limit is rather low. So if I put all of my monthly expenses on it and then make a bigger purchase, it looks like my credit utilization is high on that card. For consideration, my credit score is about 810, and my annual base salary is $335,000. But I live in one of the most expensive areas of the country, Silicon Valley.

Should I cut the Amex cord? Thanks in advance, Cheryl. To help us answer Cheryl's question, on this episode of the podcast, we are joined by credit card nerd, Erin Hurd. Hi there. Nice to be here. Hey, welcome to Smart Money, Erin. Thank you. Before we get into the questions I have for you, one quick note. Amex is one of our partners at NerdWallet, but that does not influence how we talk about them.

And my first question for you, Erin, is about the difference between a charge card and a regular credit card, because many folks may not understand the difference. Can you explain that, please? Yeah, that's a great question, Sean. So historically, a charge card has looked and felt a lot like a traditional credit card. You can keep it in your wallet. You use it at the store to charge your purchase. But there's one important difference between a charge card and a credit card. With a charge card, you're required to pay the balance in full every month. So there's no option to carry a balance and pay interest the way that you can do with a credit card. American Express is the issuer that is most well known for charge cards. However, in the past few years, American Express has added a feature called pay over time. And that essentially lets cardholders

turn this charge card into a credit card because it gives you the ability to finance your payments over time with interest, just like a regular credit card. So charge cards, by and large, don't actually exist anymore. So the card Cheryl is talking about isn't actually a charge card. It's really a pay over time card. So it does remain true, though, that these kinds of cards, these charge cards or pay over time cards, they don't have a preset spending limit the same way that credit cards do. Got it. So just to be totally clear, these cards don't even offer the charge card structure anymore. It's all pay over time or can you choose? You can choose. With American Express, you'll be automatically enrolled in the pay over time and you can opt out of it or you can opt not to use it and just pay in full.

Let's also talk about just how to think about the value of credit card perks because sometimes it is a little confusing. They don't always have obvious monetary values. So how do we think about the value that all of those perks are giving us? A lot of the times you'll hear these marketing for these credit cards and they will come packed with perks, just an eye-popping amount of credits and lounge access and just all kinds of things. And it sounds really exciting. And on paper, it really can add up to a lot. And many times for a lot of people, the value of these perks can more than outweigh the annual fee that they'll pay. Even a high annual fee, like Cheryl was talking about with the $695 annual fee.

If you're traveling a lot and you're using these perks, it definitely can be worth it. But the big caveat here I'll say is that will these perks add value for you? If you're not using the airport lounge, if you're not using the travel concierge service, if you're not using all of these perks that sound really nice and in theory have a high value, they really don't have any value for you. Right. I was kind of blown away at just how high the annual fee is on Cheryl's card. Right. It's a hard pill to swallow for a lot of people. And, you know, sometimes you think, oh, yeah, sure, I'll use this. And then maybe you look back at the end of the year and say,

oh, well, actually, I only use this perk once. I thought I was going to be traveling regularly, and I thought I'd be able to use a lounge, you know, a few times a quarter, but really, I only used it once. And so really, the value just might not be there for you. Well, Erin, when do you think it makes sense to pay an annual fee, even if one is bordering on $700? Yeah, I think you have to be really realistic about your spending habits and your goals. For example, some cashback cards can earn much higher rates of return if you pay an annual fee, which sounds kind of crazy. You have to pay money to make money back. But depending on how much you spend on that card, the cash back that you'll get can really outweigh that fee. And that

holds true for a lot of the travel credit cards too. Many hotel credit cards offer a free night certificate every year that you hold the card. And so if the annual fee of that card is say $95, but you know that you're going to use that free hotel night certificate at that property, you can often redeem that hotel night for a room that costs a lot more than the fee. So it seems like you have to be really familiar with the various perks that your card offers. Yeah, that's true. And just another example, some airline credit cards offer free checked bags for you and up to nine travel companions, which sounds crazy. But if you know that you're going to fly that airline at least once or twice and you're going to check bags, paying the annual fee can more than pay for itself in those cases.

Yeah, and your family and maybe a few friends too. Yeah, exactly. Well, our listener is considering canceling their Amex card because they aren't making the most of the perks that it offers. I'm wondering how you think people can make sure they're actually using the perks that they get with their card when there might be so many to sift through. Yeah, I think this is a common pitfall for a lot of new cardholders. You know, they get this new card and they're all excited and they know it has a lot of perks. But really, the first thing you need to do is just carve out a little time right off the bat

to really read through all of the perks and understand the perks that this card really comes with. You know, sometimes in the application process, there'll be one or two really popular benefits that are really highlighted. And you might not realize that some of these lesser perks that are actually also come with the card can be really helpful for you.

Some offer things like cell phone protection. If you use the card to pay for your cell phone, it'll be covered in case of damage or loss. Rental car insurance. There's all kinds of perks that sometimes get buried in some of the marketing. So go through your credit card account, look in the app, and really take notice of all the different perks that the card comes with. It seems like this is a little bit of homework for folks, which often people don't want to do, but it's fun homework. You're getting to activate a lot of benefits that your card is offering you. Exactly. And so that brings up another great point, Sean. So make sure that you activate all of the benefits. Some of these perks can kind of be gotchas for cardholders that don't realize that they have to click a button to activate them. So for instance, like American Express,

some cards come with perks like credits at specific merchants, but you do have to go into your account and take an extra step to activate the benefit on your card or you won't get those credits. And so many people don't realize they have to take this step. How do you personally make sure that you're using all of the perks that a card may offer? Well, I am a spreadsheet gal, so I like to keep a spreadsheet of all of my cards and I have different rows and columns of their benefits just to kind of help keep myself organized, to visually see and remember which cards come with which benefits. And I always like to take a quick look at this before I go on a trip to remember which card I should be using for airport

lounge access, which card I should bring with me out of the country to make sure I'm not paying any foreign transaction fees, things like that. And Erin, I know you're married. Do you coordinate that with your husband? Because this is something that trips me up. We have credit cards. My husband's an authorized user for some of mine. And just how to make sure he knows what benefits to use, when to use what card. I think sometimes and I'll just put little stickies on a few cards for my husband and say, OK, remember to use this one for dining or remember, this is the one that gives you airport lounge access because he's not in as in tune to all the perks as I am. I love that. OK, I'll get some Post-its out for my husband. I'll try that.

And so one thing, too, I think it's worth noting that the benefits change sometimes, right? And so you might want to check in, I don't know, once a year or so just to see if the benefits that are coming with your cards have shifted, if you need to make any changes in terms of what you're using. Have you noticed that kind of thing happen? Yes, absolutely. Things are changing all the time. You know, our NerdWallet editorial team, our content team on credit cards is constantly keeping updated on all the different changes. So I think that's a great tip. Well, our listener is also wondering how to best use a credit card that has a relatively low credit limit. So how would you suggest facing that challenge? Yeah, so first, I would say, you know, it never hurts to ask.

You can ask your issuer if they're willing to increase your limit. Some issuers allow you to click a button and submit this request in the app. Sometimes you'll have to call and some issuers will even do this automatically once they get a better sense of your spending history and your payment history. Sometimes you'll log into your account and see, oh, wow, my credit limit has been increased and I didn't even have to do anything. So I'd say it never hurts to ask. Another thing that could help with this is making sure that if folks recently received a pay raise, putting that new salary in their credit card account. Occasionally, you'll get a prompt to say, oh, is this how much you're making still? You can do that on your own. And if you are making more, they might just go ahead and, as you said, Erin, increase your limit automatically.

That's right, Sean. Okay. So some people might be tempted to make multiple payments throughout their billing cycle so they can keep their utilization low and then potentially even spend more on a card than their monthly credit limit. And this can be a little bit risky. It's actually something called credit cycling. Can you explain how that works, Erin, and maybe why it's not such a good thing? Sure.

There are some good reasons to follow the strategy of making multiple payments throughout your billing cycle. Number one, it can help just keep you budgeting. It can help make sure that you're not spending more on your cards than you can afford. And so if you're paying them down in small increments throughout the month, that can help keep your budget on track. It can also help with your credit utilization so that your statement at the end of the month isn't closing with a high balance, which could negatively affect your utilization. So if you're paying that off

throughout the month, your statement is going to close with a lower balance, and that won't be as detrimental to your credit utilization ratio. But as you mentioned, you really have to be aware of credit cycling. And that is to say, spending more on your card than your credit limit throughout the month and just paying it over and over again. So for example, if you had a $1,000 limit on this card, but you have paid and charged and paid and charged to the tune of $5,000 in that month, that can look like a risk for the credit issuer. And banks don't like that. Yeah. And in some cases, they can just close your account if they see you doing that.

That's right. Any other thoughts for how folks can balance spending and using a card that might have a kind of low credit limit? Yeah, one other thought is that if you have two cards with the same issuer, but say that you use the cashback one and that's really the one that you would like to use more, but it has a lower limit,

you could reach out to the issuer and ask them if they could transfer some of the credit limit from the one card that you don't use as much to the card that you do want to use. And some issuers will happily do that for you. Interesting. Now I want to get to our listeners' bottom line question. Granted, we're not going to tell folks what to do with their money or how to manage it. We're just giving people information. But what do you think about whether or not they should cut the cord with their Amex card? And in general, when should someone think about canceling the credit card? Yeah, it's a good question that a lot of people, I think,

struggle with. So first, I'll say you never want to cancel your oldest credit card, if at all possible. And that's because one component of your credit scores is the average age of your account. I think there's a lot of misunderstandings around this at NerdWallet. As you both know, we recently did a study around this. We asked people about their beliefs surrounding credit scores and what impacts them. And we actually found that almost half of Americans believe incorrectly that closing a card they're not using anymore can help their credit score. That's right. So one thing I would recommend if someone, you know, like Cheryl has a card and they're not sure they're getting enough value and they'd like to

close it, one option is to look into what options you have to downgrade that card so you're not paying such a high fee for perks that you're not using. So if your card isn't bringing you enough values on your current goals or spending, you can contact the issuer to see if there's another card that they offer with a smaller or even a no annual fee that can make more sense for you now. Yeah. And another thing folks I think should keep in mind when they're debating whether to close card is whether they have any rewards built up that they could lose. That's right. It's a great consideration. Some credit cards are what we call co-branded credit cards. So they earn airline miles or hotel points. Most times those points are transferred

directly to the brand like Marriott or United or Hyatt. And so you wouldn't necessarily be in danger of losing those rewards if you close those cards. But many cards do require you to keep the card open in order to retain the rewards. So if you're thinking seriously about closing the card, you'll need to cash out those rewards first or transfer them to a travel partner or redeem them in some kind of way before you close the account so you don't risk losing all those rewards that you've earned. Yeah, that's a good point. Well, Erin, do you have any final thoughts for those who are looking to make the most of their credit card rewards? Yeah, I would say knowledge is power. And it doesn't have to feel like a lot of work.

You know, at NerdWallet, we have lots of resources that can help explain credit card benefits and credit card rewards. But really just taking a few minutes to really know and understand the perks and benefits that your cards come with will really go a long way. Great. Well, thank you so much for talking with us. Thank you so much. And now let's get on to our takeaway tips. First up, explore your options before canceling a credit card. See about downgrading or product changing to keep your credit line open for the sake of your credit scores. Next, know yourself and your spending. Realistically evaluate a card's value for you, not just the flashy marketing bullets about all those parts.

And finally, use what you earn. Have a plan for any rewards you've accumulated if you do close the card so you don't lose them entirely. And that's all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more info on this episode.

And remember to follow, rate, and review us wherever you're getting this podcast. This episode's money question was produced by Liz Weston and myself. Jay Bratton produced our This Week in Your Money segment and wrote the show notes. Kaylee Monaghan edited our audio. And a big thanks to all of the folks on the NerdWallet copy desk for all of their help. And here is our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. With that said, until next time, turn to the nerds.