Credit Card Rewards Improve for Best Customers–and a Whole New “Gold” Card

Credit Card Companies Wooing the Creditworthy

Last week, this column explored the theory that credit card companies are trying to lure the best customers from competitors by offering valuable new services and benefits at extra cost. Well, as everyone knows all too well, some of those extra costs are already in place. And CNN reported Friday that the wooing has already begun with a number of credit card rewards programs being enhanced.

For example:

• The Chase Freedom credit card now pays five percent (instead of three percent) cash back on certain types of purchases
• Citibank’s American Airlines-branded card has increased its reward from a mile for every dollar spend to 1.2 miles per dollar
• JPMorgan Chase’s co-branded Marriott and British Airways cards have had their rewards schemes upgraded

Credit Card Rewards–Why They’re Getting Better

As card issuers find their profitability squeezed by writing off bad loans, and new credit card regulation, they’re searching around for business models that deliver more to their bottom lines. Right now, attracting new, creditworthy customers is their favorite strategy.

And, as CNN points out, credit card rewards programs have three key advantages for the companies:

1. They build customer loyalty
2. They attract people who are unlikely to default
3. They expand transaction volumes, so increasing the “interchange fees” (the charges levied on merchants) benefits issuers by between one and two percent of the value of each purchase

Secured Credit Cards–an Innovation

Usually, the cheapest credit card rates are reserved for those with secured cards. That’s because the lender holds sufficient collateral to cover the balance, so the risk of default is close to zero. And now a company has come up with a novel idea that could give a whole meaning to the phrase “gold credit cards.”

Earlier this month, Gold Solutions Marketing, Inc. unveiled plans for secured credit cards that would be backed by gold bullion. The idea is that you would deposit your gold coins or bars in the company’s insured vaults, and then would be permitted to borrow up to 75 percent of their value. Any balances that are carried over would then accrue interest at a rate of eight to 13 percent APR, which is certainly competitive when compared with most unsecured credit cards.

Some Limits

One potential drawback is that the price of gold fluctuates. That shouldn’t affect credit card rates under the scheme, but it does mean that your credit limit could rise or fall as the price changes. As a general rule, the price of gold drops as the economy improves, so–if the current recovery is sustained–it’s likely that those holding these cards eventually find their spending power curtailed.

But Jeff Silver, who’s one of the company’s vice presidents (and who has one of those amazing, job-appropriate names), sees–unsurprisingly–only positives. He says:

The Gold Bullion Card is the ultimate win/win/win situation for the consumer, the bank and the economy. The consumer finds a new source of credit from assets he may already have, the bank issues credit cards to individuals without the bank incurring any risk of default, and into the economy pours a new source of credit and liquidity.