In the past, there has been some speculation that consumers in certain demographics might not benefit from the use of rewards credit cards, but new data shows that this is not the case.
Some financial experts have posited that rewards credit cards really only provide a benefit to more affluent borrowers who can afford the higher costs typically associated with them, but it turns out that many lower-income consumers use and earn rewards from these accounts on a regular basis as well, according to a new survey of consumer card use throughout 2011 conducted by Phoenix Marketing International. In all, 74 percent of households with annual incomes between $20,000 and $29,900 per year had at least one rewards card and 72 percent used those accounts more often than their non-rewards credit cards.
Further, the myth that these consumers provided a larger piece of lenders' earnings from rewards accounts may not be true either, the report said. The average value to card issuers of rewards customers who earned $150,000 or more per year was three times higher than that of a person whose annual income fell between $20,000 and $29,900. Further, that number was more than five times that of lower-income consumers who did not have rewards accounts at all. However, it should be noted that this number was based on interchange fees, finance charges and annual fee revenue, meaning that the out-of-pocket costs as a proportion of consumers' earnings may have varied widely between person or income level and another.
"Rewards cards not only dominated spending dollars but also revolving balance and annual fee dollars," said Greg Weed, director of card performance research at Phoenix Marketing International. "Rewards cards have become such a market mainstay that two-thirds of revenue value among the lowest-income group was tied to rewards accounts."
Usage habits and what they cost borrowers
Consumers who had both rewards and no-frills accounts charged about 80 percent of the total value of their card purchases to the former, the report said. As a consequence, the average monthly spending on rewards accounts was 43 percent higher than on unattached accounts overall, and was at least 30 percent larger in each income group examined.
Further, rewards cardholders typically carried larger balances than those without that type of card, at roughly $3,300 and $2,300 per month, respectively, the report said. However, those with rewards accounts were also less likely to carry a balance from one month to the next overall, with 56 percent saying they did so. In all, 66 percent of non-rewards borrowers had a balance. It should further be noted that interest rates on rewards accounts tend to be higher than those on cards which offer fewer perks, and therefore carrying a larger balance would likely end up costing a borrower more over the course of a year.
Along similar lines, rewards accounts were more likely to come with an annual fee, the report said. In all, 34 percent of these cardholders paid an annual fee, compared with just 23 percent of non-rewards accounts, and the former group became more likely to face such a charge as their annual incomes grew. For instance, just 26 percent of those with annual incomes between $20,000 and $29,900 paid these fees, compared to 30 percent of borrowers with incomes between $75,000 and $99,900. Further, 38 percent of consumers in the $100,000 to $149,900 income range paid annual fees, as did 51 percent of those making $150,000 per year or more.
These days, lenders are significantly broadening their qualification standards so that consumers can once again gain access to new lines of credit, and at the same time, more rewards accounts are being offered to borrowers who maintained healthier ratings during and following the recent national recession. This is being done as a way to earn greater revenues from accounts, which fell considerably in the past because of the large number of charge offs suffered by all major lenders. Often, consumers will see these types of cards as being beneficial because it gives them some form of benefit, whether it comes in as cash back, points or miles, they see as being "free." However, these "free" benefits are paid for with higher interest rates and annual fees.
If you're interested in getting a new rewards credit card, you will likely need to have a strong financial standing. One way you may be able to raise your credit score is by taking the time to check your credit report. This can help you to identify any unfair markings that may be having a possible negative effect on your credit rating. Fortunately, working with a credit repair company can help to clear up any potential problems that may arise as a consequence of these issues.