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As we approach a recession (and possibly a depression), many of you have been wondering how the credit card and points and miles landscape will change. Will issuers try to entice us with new offers, or will there be a reluctance to offer new products and extend more credit? Will you still be able to find credit card offers during a recession?
In this post/video, I’m going to examine what happened during the Great Recession of 2008 and see if we can better understand how the issuers and banks may respond in this economic crisis.
My spending habits have changed
Life has certainly changed for many of us. I know that I’m spending a lot less money nowadays, which is a result of not only staying home but also a general sense of uncertainty for the future.
As we continue to fight the pandemic, we know that our recovery will be more than just physical. The economic recovery is going to be a long and painful process, and we’ll all have to do our part to help our communities bounce back from the recession.
How will credit card companies respond?
One thing that many of you might be wondering is how the credit card companies will respond in a recession. There are two camps of thought.
Theory #1: Enticing new customers to help get the economy back on track
On the one hand, it seems like companies that are heavily invested in travel or partnered with specific travel brands will try to bring customers back through special offers and promotions.
For example, hotels and airlines may try to entice customers to start flying again through heavy marketing and promotions, which may include lucrative credit card offers.
Theory #2: Cutting as much risk exposure as possible
The other scenario is a bit grimmer. As the banks and issuers face a shrinking economy and declining projected revenue, they may try to limit the amount of credit that they offer. There is probably a large amount of credit that’s being used right now and may not be paid back by borrowers, especially those who are struggling financially due to the crisis. The banks may want to reduce their risk exposure by cutting the amount of credit offered.
Understanding how the issuers and banks responded during the Great Recession of 2008
I’m not an economist, but I was a points and miles nerd during the last recession. I think if we look at the behaviors of banks and issuers during the last recession, we can gain some insights into how they’ll likely respond during this economic crisis.
Contraction of credit and lending
During the Great Recession of 2008, we saw a major contraction of credit and lending as banks tried to reduce their risk exposure. That translated to many people having their credit lines cut and reduced overnight without any warning. This change was especially devastating for businesses that require revolving credit to manage their inventory and cash flow.
We also saw a decline in promotional offers and bonuses during this time, as well as additional scrutiny for credit card approval. In general, the banks and issuers were focused on reducing their debts, which often translated to less available credit to consumers.
All lending was affected
It wasn’t just credit cards either. Other lending channels were tightened as well. Most famous, of course, were mortgages, which a lot of economists blamed for the recession itself. This is because lending guidelines were relaxed, allowing more people to get bigger home loans. This was fueled by investor demands for mortgage-backed securities, which then spiraled as many of these loans defaulted, causing a chain of events.
What will happen now?
I think we’re going to see fewer promotional APR offers, higher interest rates, and fewer welcome offers as the issuers look to focus on certain types of customers.
Since credit card companies tend to generate revenue from various sources, it’s likely that their traditional customers are at the highest risk for change. These are typically not people in the points and miles hobby but people who use credit cards to pay their minimum balances, creating debt by only paying the minimum balance or carrying balances (hopefully, this isn’t you!). The card companies make money by charging interest on this debt.
While this model is profitable for the issuers and banks in the long-term, it is risky in an environment where unemployment is rapidly rising and more people are unable to pay their bills. Like mortgages in 2008, there is a fear that people may default on their debt, which puts further strain on the issuers and banks.
“Points and miles” customers
We, in the points and miles community, are a different kind of customer. The credit card companies generate income from us typically from annual fees, unused benefits, and transaction fees charged to businesses.
But while there is less risk of us overusing our benefits, especially since travel is restricted, you can see that transaction fees are also likely to dwindle as people are spending less money. And if you’re not gaining enough value from your annual fee card, then you’re more likely to close your account, which means that the companies lose on the acquisition cost. Just like how companies can measure how much it costs to hire a new employee in terms of marketing, recruiting, and training, the same is true for acquiring a new card customer.
So, my guess is that current offers will likely stay put for this segment of customers, and I don’t expect to see much innovation or aggressive promotions to acquire new customers until the economy stabilizes. Retention offers will likely be strong for customers that are identified as low-risk as the issuers and banks hope to keep the revenue flow.
Difficult time to get into the hobby
For those of you who are new to credit or are rebuilding your current credit, this might be a tough time to get a new card.
Also, for those that have been aggressively applying for cards for the purpose of gaining offers, that approach and history may hurt you now as card companies assess each customer’s credit history profile.
But for the majority of you who are steady and long-term users of cards, I think you’ll see that issuers will likely want to keep you, especially if you’re someone who pays their statement balance and isn’t abusing their rewards.
I think the key is to try and view it from the perspective of the bank. If you’re someone who they think makes them money, they are going to be more likely to retain you as a customer. On the other hand, if you’re someone who has a pattern of only trying to gain welcome offers, you can’t blame the issuers and banks that avoid giving or maintaining your credit.
It’s not all doom and gloom!
So, I know that might not be good news for those of you waiting for a big offer, but there is a silver lining. After the last recession, we saw a huge uptick in offers for customers when the economy was starting to recover.
Chase, in particular, bounced back from the recession and became a major player in the space that was traditionally dominated by American Express. They launched their Sapphire line of cards and their Ultimate Rewards program, along with a lot of marketing that appealed to Millennials.
Other issuers may jump at the opportunity
I wouldn’t be surprised if we see other issuers start to challenge Chase and American Express too. Issuers like US Bank and Capital One might take this opportunity to introduce new or revamped programs that compete in the premium card space.
Though again, I don’t think we’ll see this until things start to stabilize within the economy. And it makes sense too. If you’re a bank, you probably wouldn’t want to lend out more money when there are so many indicators, like high unemployment, pointing toward a recession.
What about reward redemptions?
One other area that I think we need to keep an eye out for is rewards redemptions. We’re starting to see more companies restrict certain types of redemptions in an effort to reduce expenses.
It’s not a good trend for us, but it’s a reality of this hobby. This is already happening with some airline and hotel loyalty points, and I wouldn’t be surprised if we see something similar on some flexible points programs.
This is bad news if you’re trying to cash out your points. Though for most of us who are serious about points and miles, we are looking at the long term. We’d rather use those points at their highest value, which is typically toward travel.
Everyone is struggling—including airlines, hotels, and issuers
Lastly, I see a lot of people slamming airline, hotel, and credit card companies online. I know people are frustrated right now with having trips canceled and, in some cases, not getting the response they want.
However, I think we need to also keep a perspective on the level of strain that’s occurring in our economy. This is an unprecedented time, and just like how most of us were unprepared for this scenario, businesses are also struggling, including airlines, hotels, and credit card companies.
Airlines and banks are vital to our economy
While I’m not trying to make excuses for these companies, I think it’s important to keep a bigger perspective on the situation. While we may be frustrated with the airlines and banks, I do think that they are vital businesses both economically and socially.
And while we may be stuck on hold or told that we are only getting a credit rather than a refund for a flight, I encourage you to consider that these companies are trying to do their part to help the situation.
It may not be perfect. In fact, it probably isn’t. But I think we are all trying to get through this difficult time. The situation will get better. It’s just a matter of time and effort on our part to slow the spread.
What are your thoughts on the credit card landscape? Do you think that offers will be better or worse during the recession? Also, I’m curious whether you all are rethinking your card strategy and approach during this difficult time.
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