Who’s Winning the Cash-Back Welcome Bonus Game, Creditors or Consumers?

Google “top credit cards” and you’ll come across dozens of different lists (like this one) that discuss the top credit cards that save consumers the most money.

Rewards and welcome-bonus promotions are everywhere in our increasingly cashless society. From American Express and Discover, Chase to Capital One, Citi, Bank of America – and a laundry list of others – banks are offering more incentives to sign up for – and spend with – credit cards.

Are consumers getting a good deal here, or are creditors taking society for a ride per usual? Let’s discuss who is winning or losing when it comes to credit cards and introductory rewards.

Winning: Paying the Monthly Statement Balance

There’s a not-so-secret-but-still-overlooked clause in any rewards credit card contract. Without boring you with legal jargon, suffice to say that if a cardholder doesn’t pay off their balance each month, the rewards or cash-back promotions are subject to your payments. Rewards points are often frozen if a payment is missed; and taken if additional payments are missed.

Cardholders who pay their monthly balance off each month are definitely coming out ahead. If the discipline exists to pay for everything in a budget with a credit card, then any-sized budget can generate hundreds to thousands of money each year in rewards that wouldn’t exist if payments were made via check, debit card or cash.

Winning: Creditors

When we feel like we’re getting a good deal on something, it’s easy to overlook the possible drawbacks of our purchases. On the simplest level, if financial institutions weren’t making money off rewards and welcome bonuses, then they wouldn’t offer them.

Getting $500 for spending $3,000 over three months sounds like free money, but card issuers are banking on a certain percentage of people not paying off their balance each month. According to financial entrepreneur Andrew Housser, card issuers aren’t so much betting on consumers’ ability to pay off their debt, as they are preying on the fact that many consumers can’t. The money given to people who pay their balances off pales in comparison to money generated in interest and late-payment fees, and creditors know this. It’s like betting on a fixed game (assuming you’re in the know).

While credit card companies would like us to believe that they care about our financial education and economic betterment, they have a win-win situation on their hands. Either they make money off consumers via interest or they acquire a new user that pays on time and could be a valuable lifetime customer.

Credit card issuers that are also payment processors, like Discover and American Express, have even more financial incentive to get people hooked. These companies make money from cardholder interest and late fees, but also receive a one to three percent processing fee for every transaction.

Losing: Spending More to Hit the Welcome Bonus

Getting any percentage of our money back from a transaction, whether via cash-back or airline miles, is undoubtedly better than getting nothing. However, that becomes more debatable the more someone adjusts their spending behavior to satisfy a welcome bonus or earn rewards.

Some people, dubbed “card burners” even aim to take advantage of this welcome-bonus climate, signing up for cards, earning welcome bonuses, and canceling the card a year later.

Losing: Signing Up for Rewards Cards with Annual Fees

Many of the credit cards that top the “best of” lists come with an annual fee. However, these fees are usually waived in the first year to incite consumer interest. It works, especially for credit cards that give higher monetary value for rewards spent on purchases versus a statement credit or check.

For example, one popular travel card, the Chase Sapphire Preferred, created a buzz when it came out with a 50,000 airline miles promotion (a value of $625 when redeemed for flights) for signing up and spending $3,000 in the first three months.

Chase waives the $95 annual fee in year one, a move that undoubtedly convinces those on the fence. The thing people don’t think about is that after spending $3,000 to get the welcome bonus, they’ll have even more points. Because people like to hoard their points or don’t want to receive less value for trading in for cash, many keep their accounts active and pay the fee.

Debatable: Card Burners

No bank has explicitly addressed the “earn and burn” patterns of select consumers. So, if someone cares to go through the effort, they can make a small fortune by continually signing up for cards, meeting the welcome bonus requirements, then canceling the card before the annual fee (or halting spending if it doesn’t have one).

While the ratio of these types of cardholders is small compared to the broad consumer base, they’re out there. One popular travel-finance blog, Buddy the Points Guy, writes about ‘earning and burning’ strategies regularly.

The idea of card burning can very well lead to some of the losing scenarios on this list. It can also be way too much work for relatively little financial gain. All that matters when using credit cards is being able to keep a budget steady and still enjoy the credit card promotions that complement your spending lifestyle.