Credit Card Reward Programs Under Scrutiny by Federal Regulators
Last updated July 25, 2024
Whether it’s points, miles, or cashback, it’s nice to get rewarded for shopping. But the lure of rewards programs can encourage people to apply for credit cards and use them to earn free airline tickets or hotel nights—and maybe not focus on fees and high interest rates.
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As credit card reward programs—especially those run by the airlines—have become complex and confusing, cardholders have grown increasingly frustrated.
The Consumer Financial Protection Bureau (CFPB) received more than 1,200 complaints about credit card rewards in 2023, an increase of more than 70 percent from pre-pandemic levels.
“Credit card companies promise upfront benefits for signing up and using their rewards card, but often bury complex terms in the fine print for using the rewards,” said CFPB Director Rohit Chopra. “The CFPB will be looking for ways to protect people’s points, stop bait-and-switch scams, and promote a fair and competitive market for credit card rewards.”
A CFPB report issued in May highlighted the “numerous problems” consumers are encountering. It summarized the situation this way:
“Some of these complaints reflect perennial issues involving the administration of credit card rewards, such as consumers claiming credit card companies denied them benefits after they met program requirements. Others suggest that new problems have been created by the growth of co-brand credit cards and rewards programs where consumers can transfer miles or points to merchants.”
The credit card companies are primarily responsible for how rewards programs get offered and administered, but consumer complaints indicate that “credit card companies often claim there is little they can do about their own policies, technical systems, and partnership agreements,” the CFPB’s report noted.
Based on its analysis of several hundred consumer complaints, the CFPB identified four recurring problems with credit card reward programs:
Imposing unexpected conditions to receive promotional offers: Cardholders complain that the requirements to qualify for sign-up bonuses (for example, large amounts of miles) are often buried in the fine print of the program’s terms and conditions. To earn the promotional bonus points or miles, new cardholders typically must charge between $1,000 to $5,000 within three to six months.
Devaluing rewards: Card issuers and their partners commonly reduce the value of rewards already earned by increasing the number of points or miles needed to redeem them for rewards.
Redemption problems: Customer service issues and technical glitches can make it difficult or impossible to transfer rewards to third-party merchants. Cardholders complain that credit card companies often redirect them to partners and fail to reinstate rewards when cardholders cannot redeem them.
Revoking previously earned rewards: Points, miles, and cash-back rewards often vanish when an account closes. Some cardholders complain that their financial institutions have revoked rewards on open and active accounts through expiration policies that were not communicated to them.
Are New Rules on the Horizon?
In May, the CFPB and the U.S. Department of Transportation held a joint hearing on airline and credit card rewards programs. Speakers included airline and bank executives and consumer advocates.
In his opening remarks, Secretary of Transportation Pete Buttigieg noted that point systems, like frequent flier miles and credit card rewards, have become a “meaningful” part of our economy. By some measures, loyalty programs and related transactions “have become more profitable than the operation of flights themselves,” he said.
While these reward programs “bring value to consumers,” they are “enticing enough” that they can influence which airlines people fly and which cards they use, so they need to be fair, transparent and predictable, Buttigieg said.
CFPB Director Chopra noted that frequent flyer programs have evolved from a perk for loyal customers into “a multibillion-dollar currency market where credit card companies and airlines buy, sell, convert, and issue miles and points throughout sectors of the economy.” These programs are now “major assets and competitive weapons for big airlines and big credit card companies,” Chopra said.
The CFPB has not proposed any regulations to address the problems noted in its May report, and neither has the Department of Transportation (DOT). But the banking industry is already on the offensive.
The American Bankers Association (ABA) described the joint hearing as “unusual.” The trade association went even further and called on the DOT and CFPB to focus on “access to reward offerings rather than calling them into question.”
“The credit card market in the U.S. is highly competitive, and consumers have hundreds of card issuers and thousands of card reward programs to choose from,” Rob Nichols, ABA president and CEO, said in a statement. “If the Bureau wants to truly help consumers, it should start by defending the credit card reward programs that Americans use every day to stretch their dollars and help make ends meet.”
The Consumer Bankers Association (CBA) suggested that the CFPB was looking for a problem that wasn’t there. In its blog post following the hearing, CBA said complaints about rewards cards are only 4.5 percent of all credit card complaints to the CFPB.
Travel Rewards Cards Aren’t for Everyone
Syndicated columnist Christopher Elliott, who has been traveling the world since 2017, is a self-described “loyalty program and points skeptic.”
Elliott acknowledges the value these programs provide for frequent travelers. But for the rest of us, he says, these are marketing programs “meant to get you to spend more money and to spend money mindlessly on that particular product, whether it’s an airline ticket or a hotel room. And I think that on balance, that’s bad for customers.”
Elliott said the quest for rewards can cloud people’s judgement when they’re booking flights and hotel rooms.
“It short circuits your common sense… you start making decisions based on how many points you can get,” Elliott cautioned. “These programs are created to benefit the airlines and the shareholders. They’re not there necessarily to benefit you, to put it mildly.”
Most travel rewards cards have annual fees that are significantly higher than traditional credit cards, anywhere from $69 to $150. Premium cards, with top-level rewards, charge $525 to $650 a year. (Note: Some rewards cards waive the annual fee for the first year.)
For frequent travelers, the perks that typically come with these cards, such as free checked bags, priority boarding, free hotel nights, room upgrades, and late checkout, can justify the extra cost of using these types of cards.
Most rewards cards have interest rates that are significantly higher than traditional credit cards, so you shouldn’t even consider getting one unless you pay the bill in full each month.
“That’s just the nature of high credit card rates,” said Ted Rossman, senior industry analyst at Bankrate.com. “Even carrying a balance for a couple of months probably outweighs any rewards.” For most people, he recommends a cash-back rewards card because “it’s very simple, straightforward, and universal.”
A card with no annual fee that pays two percent cash back on every purchase is “surprisingly hard to beat for most people,” Rossman said on Checkbook’s Consumerpedia podcast.
More from Checkbook:
- Credit Cards: How to Choose the Best One
- Credit Cards Provide Strong Protections for Consumers
- Saving on Gas: Which Rewards Credit Cards Offer the Best Deals at the Pump?
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.