Credit Card Offers On Steroids = Mini Bubble On The Horizon?


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Of course the concept of credit card companies offering a bonus on new accounts isn’t anything new.In the past, we were lucky to get a $50 or $100 promotion (and that was when times were peachy, before the Great Recession).

Despite the fact that the seasonally-adjusted unemployment rate is sitting at 9.0%, we are now seeing signup bonuses of $500 to $1,000 or more.

How are the banks churning a profit on these? And more importantly, is it reckless for them to be throwing around free money like this?

What started the bonus war?
Since CreditCardForum has advertising relationships with AmEx, Chase, BofA, Citi, Discover, HSBC and other issuers, I am constantly up-to-speed on who’s doing what. During the Great Recession, almost every major card issuer ceased advertising through affiliates. Discover was the only one (not counting subprime/secured issuers) that stayed in the game during the darkest days. This was a smart move because for the most part, that meant only their cards were being promoted by third-parties, so it definitely helped to bolster their presence.

It wasn’t until Q2 of 2010 when most banks started to jump back. By Q1 of 2011, the industry was back to business as usual. In turn, this spurred fierce competition between banks, each trying to outdo each other with bigger and better credit card offers. For example, with airlines we all know it’s the norm to get a free flight (25k miles) with signup. Chase upped the ante by adding $50 on top of the typical Continental Airlines credit card promotions for 25k miles. Meanwhile, Capital One was scheming up something to blow them out of the water… the 100k “match my miles” offer for their Venture card. When fully utilized, the dollar value of that deal was a staggering $1,000!

Within weeks of the Capital One 100k miles, Chase fired back with a 100k miles promotion of their own for for the British Airways card (the latter of which I actually took advantage of myself). You don’t have to be an industry insider to know these offers are insanely expensive for the banks. Even I’m scratching my head asking: How can they afford to give $1,000 away, plus pay commissions to third-parties, and cover their own overhead costs?

Is there any end in sight?
It appears the bonus battle may be cooling off, but not by much. Both Chase and Capital One recently discontinued their 100,000 mile offers. At the end of last month American Express also chopped their Platinum Card offer from 50k points down to 25k. However today, the Chase Sapphire card “Preferred” version came out with an offer valued at $625 and the Continental Airlines incentive is still holding steady.

Ironically, while Capital One and Chase were dueling it out, Discover bowed out of the battle by actually terminating the cash bonus offers for their numero uno card, the More. I found this quite surprising, given Discover’s strength during the recession. Without the bonuses, Discover actually went from being the #1 most popular issuer on CreditCardForum (in terms of applications) to being one of the least.

Then there’s Bank of America, which seems to have made a permanent home on the back burners of personal finance sites, with their uninspiring $50 offers which have remained unchanged for many months now. Citi has stuck with offers ranging from $50 in value for their Thank You Preferred, up to $200 for their Thank You Premier card. Back in say, 2005, those may have been exciting. But now, it seems to take much more than that to catch someone’s attention.

Is this a dangerous trend?
If these credit card wars continue, everyone may come to expect $500 or $1,000 as the norm for a signup bonus. While this may seem like a good thing, it could be setting us up for a bit of a mini credit card bubble down the road if these promotions end up being big money-losers for the banks. Sure, if a customer uses the card for years to come and spends heavily or carries a balance regularly, they will be worth it for the bank. Though I can’t help but wonder… what percentage of applicants are just deal seekers and unemployed folks, milking them for the free money?

Disclosure: As mentioned above, CreditCardForum has affiliate relationships with most major card issuers, including all the ones mentioned in this article, with the exception of Capital One (which CreditCardForum does not advertise nor endorse).