The first credit cards to offer a rebate on spending were the AT&T Universal Card and the Discover cash back cards, both of which made their debut in the eighties. Of course since then, it’s become the norm for credit cards to dole out cash back, reward points, and airline miles for your purchases. For a long time getting 1% on regular purchases was considered standard but over the last few years, a handful of cards have came onto the market which offer a full 2% on all purchases, regardless of their category. Does that mean 2% will eventually become the new standard… or not?
Here’s what I think…
Personally, I believe it’s highly unlikely that 2% will become the new standard for credit card rewards. There are a couple reasons for this:
Credit card regulation – A lot of money is made on small credit card purchases, like buying a cup of coffee or a pizza. The merchant is charged interchange fees (1) there’s a flat per purchase fee, usually of around 15 to 25 cents, as well as (2) a fee based on the purchase price, typically 1.5 to 3% of the total. As you can imagine, this means card issuers make a higher profit (percentage-wise) on smaller purchases, and in turn, there’s more money to plow into reward programs.
However due to provisions in the credit card reform, businesses can now set minimum purchase amounts (up to $10) and/or try to persuade customers to use a cheaper payment method, like cash or PIN based debit card purchases (previously their merchant agreements prohibited that). If those practices become widespread, you can bet it won’t always be profitable for banks to pay out generous rewards anymore.
Lack of profitability – Let’s face it, the customers that try and squeeze every penny of rewards out of their credit cards are not the type of people that carry balances. That in and of itself makes cards with 2% a lot less lucrative for the banks. This is why even years before the reform, the popular Orchard Bank 2% card was discontinued. Then since the reform, we have seen another casualty – the Charles Schwab card with 2% was discontinued due to the changing market.
Even American Express had to discontinue the 2% rebate for new applicants of their Plum Card, beginning a couple years ago. That says a lot about profitability, when you consider that AmEx business credit cards carry the highest processing fees (and therefore, could most easily afford that generous rebate). As discussed in my American Express Plum Card review, now the card is a straight 1.5% if the statement balance is paid in full within 10 days.
Are there any left?
Yes, there are a few left (three that I can think of off the top of my head) that still give 2% on all spending. I don’t think they will necessarily disappear but I do think it’s unlikely we will see new ones launched. Here are the current ones:
Discover Escape: For a $60 annual fee this card offers 2 “miles” per dollar spent without any caps or tiers. Each mile equals a penny in value, which means this card is giving 2% rebate on all spending.
Capital One Venture: For a $59 annual fee, the Capital One Venture also gives double miles across the board, and like the Escape card, each mile is worth a penny.
Fidelity Retirement Rewards American Express: If you have a Fidelity account this card is probably your best bet. It gives a 2%rebate on all spending, which is deposited into your eligible Fidelity account. This card has no annual fee, which is very nice.