There’s a growing trend among credit card companies to raise fees on elite cards — while also boosting the benefits. These changes can affect you even if you don’t carry an elite card, as more merchants are passing along higher costs to customers who use credit cards.
Recent Changes
Chase recently revamped its Chase Sapphire Reserve® card, raising the annual fee from $550 to $795. Adding an authorized user will now cost an additional $195 a year. The higher fees come with enhanced perks, including boosted rewards points and credits for stays at select hotels and resorts.
Citi also recently debuted a new high-end credit card, the Citi Strata Elite? Card, that comes with a $595 annual fee and a $75 charge for every authorized user. And Southwest announced new annual fees for three of its credit cards. As with the Citi and Chase cards, the Southwest cards offer enhanced perks the issuers say can more than offset the additional fees.
While American Express hasn’t changed anything yet, it teased “major updates” coming to its platinum cards later this year.
These announcements carry both good and bad news for credit card customers. On the downside, there are some significant fee increases. On the upside, credit card companies are juicing up some of their rewards and perks.
The theme running through these announcements is the focus on high-end customers. “These changes are aimed at simultaneously improving both the economics of these products for issuers and the value perception and engagement of elite cardholders,” says John Cabell, managing director of payments intelligence for consumer insights and analytics company J.D. Power.
That focus on the upper end of the market is a key to understanding why credit card companies are making these changes.
[Read: Best Credit Cards.]
Why Are Credit Cards Changing Fees and Other Terms?
One reason credit card companies are so profitable is that they have a few ways of getting paid. The three main categories are:
— User fees, such as annual fees and late fees
— Transaction fees, which are paid by merchants when a credit card is used to purchase something from them
— Interest on credit balances
The relative importance of these revenue sources varies by customer type. People who regularly carry a balance on their credit cards pay more interest. In contrast, wealthy customers who pay off their balances every month tend to generate revenue by paying higher fees and making a higher volume of transactions.
Card issuers’ focus on elite credit cards with high fees and generous perks highlights their strategy to target high-end customers. Cabell notes, “Consumers in products with annual fees over $500 have nearly three times the monthly spend vs. those with annual fees under $500.”
These customers not only pay high annual fees but also generate substantial fees from merchants. As an added benefit, Cabell says high-end cardholders are also more likely to have other types of financial services accounts with the card issuer.
The appeal of these customers to credit card companies is nothing new. So why all the attention to products for this market segment now? Shifts in the economic landscape may be driving this heightened attention on high-end credit card customers.
[Read: Best Rewards Credit Cards.]
A Safe Harbor in a Gathering Storm
The vast majority of credit card profits come from the interest charged by card issuers on balances. Despite this being the industry’s cash cow, card issuers have reason to be concerned about the balances customers are carrying.
“The economy is on the cusp of a downturn,” says David Robertson, publisher of the Nilson Report, which covers the global payment card industry. “That means we’re on the cusp of higher charge-offs due to delinquencies.”
The percentage of credit card balances that are 90 days or more overdue has soared over the past few years to reach the highest level in over a decade, according to the Federal Reserve Bank of St. Louis. With credit conditions worsening, card issuers are increasingly focused on high-end customers who are least likely to be affected by those conditions.
“As long as the prime and super-prime consumers remain employed in their high-salary jobs, they will continue to spend, even if the broader economy struggles,” says Adam Rust, director of financial services for the Consumer Federation of America.
The focus on high-fee, high-rewards credit cards is designed to appeal to this market. “Some of the most established credit card companies are making better offers to top spenders to make sure they retain the customers who are going to be most profitable in the upcoming environment,” Robertson says.
[Read: Best No-Annual-Fee Credit Cards.]
What This Means for Cardholders
Credit card companies are offering more alluring perks but charging a higher price for them. Whether it makes sense to pay that price depends on how much you stand to benefit from those perks.
“Consumers with these products that have increased annual fees should review their projected spending and usage patterns in the context of updates to rewards and benefits,” Cabell says. “Make sure there is still good personal spend alignment with the rewards they’re earning and redeeming, as well as card benefits, such as travel perks or shopping protections.”
In short, if you regularly spend enough to benefit from high rewards, fees on elite cards might be worth it. However, you shouldn’t be influenced to spend more than you normally would. As for perks like airport lounges and access to exclusive offers on concert tickets or restaurant reservations, think about how much you really value those opportunities. Are they worth the price you’ll have to pay for an elite credit card?
Robertson suggests taking stock of the situation this way. “Focus your intention — what is it you really want?” he asks. “We’re in an inflationary period. High-end credit card customers have to figure out how to leverage their higher spending to get a peak benefit that’s above what the mass-market affluent get.”
Unfortunately, even if you don’t hold an elite credit card, you may pay a price for juiced-up credit card benefits. These benefits are financed by the fees credit card companies charge merchants to process transactions. In turn, merchants are increasingly adding surcharges to their prices to make up for those transaction fees.
According to JD Power, nearly two-thirds of cardholders report having been hit by such surcharges. Increasingly, it doesn’t pay to use a credit card unless you are getting worthwhile rewards out of it.
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Credit Cards Are Making Big Changes. Here’s Why. originally appeared on usnews.com
