Credit card companies slash rewards to cushion losses

By Juan Lagorio - Analysis

NEW YORK (Reuters) - Not long ago, Americans were being offered as much as $100 just to sign up for a credit card. Now, up to $300 is being dangled as an incentive for them to give up their plastic.

U.S. credit card issuers -- from Citigroup Inc to JPMorgan Chase & Co to Capital One Financial Corp -- are slashing rewards, raising interest rates and increasing fees as loan losses mount.

"All these (actions) are ways to maintain a certain profit level in the business," said Moshe Orenbuch, an analyst at Credit Suisse.

"The combination of rising losses, funding costs, which at the end of 2008 were high, and difficulties borrowing money put pressure on profits."

Last month American Express Co -- the largest credit card company by sales volume -- took the extraordinary step of offering some clients $300 to pay off their credit card balances and close their accounts.

What a difference a credit crisis makes. Citigroup, the nation's largest credit card issuer, used to offer up to $100 in gift cards to anyone who enrolled in its "Thank You Rewards" program and spent even a trifling amount on its cards.

Now the bank is clamping down on those rewards, circulating a detailed letter explaining to customers how accumulated rewards can be revoked any time the bank sees fit.

To cushion losses, credit card issuers are also lowering credit limits, tightening credit standards, and closing inactive accounts. The companies say the moves are triggered by the riskier economic environment.

Analysts estimate credit card chargeoffs -- debts the card companies believe they will never be able to collect -- could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $75 billion in 2009, Orenbuch said.

"You want to raise revenue from your existing customers because you have a lot of customers that are not paying anything," said David Robertson, publisher of The Nilson Report, which specializes in payment systems.

Reward programs are expensive for credit card companies -- for example, Discover Financial Services posted revenue of $5.7 billion in 2008, while the net cost of its rewards program was $710 million -- so issuers want to make sure they are worthwhile.

In a recent presentation to investors, JPMorgan said cardholders using its reward program showed a faster increase in spending, generated higher revenue and had lower credit loss rates.

But that does not mean card companies will keep offering freebies to attract customers. "They are trying to determine which customers are good bets," said Bill Hardekopf, chief executive of lowcards.com, a website that tracks credit cards.

In addition, lenders are trying to pass on part of the cost of reward programs to merchants by offering joint promotions that could bring new businesses and customers to battered retailers.

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