Beware of cuts to credit card perks

Published by Ruth Jackson on 25 June 2015.
Last updated on 02 September 2015

Credit cards

The past few years have seen war break out in the credit card market to attract new custom. Balance transfer deals have got longer and longer, fees have fallen and increasing numbers of providers have offered appealing perks to their credit card customers. But this could be about to change.

A new EU rule comes into force in October that will hit profits for the majority of credit card providers. In the past, both credit and debit card firms have made money each time you use your flexible friend. This is because the retailer pays the card provider a fee in return for being able to accept their plastic. This is known as the interchange rate.

At present, shops pay credit card companies 0.7% on average. But from October these fees are being capped at 0.3%. This could add up to a big hit for credit card companies.

Unsurprisingly, firms are looking to recoup that lost profit elsewhere. For many, this could mean cutting back on their cashback and reward schemes. These draw in customers but can cost firms a lot of money.

This is because customers who make the most of cashback and reward schemes tend to be the least profitable for credit card firms - they typically pay their bill in full each month and so avoid paying interest - but the companies pay them in rewards, making them an obvious target for cutbacks.

See top credit cards available to you today

Knock-on effect

"The move to cap the interchange fees charged by banks to handle card transactions will undoubtedly have a knock-on effect on the credit card industry," says Kevin Mountford, head of banking at

"It is possible we will see a reduction in the rewards offered by card providers, as well as an impact on promotional zero-interest offers."

Last month, Capital One scrapped its cashback scheme that used to provide customers with 0.5% back on their spending. At the time, it blamed the EU ruling saying: "Changes in our industry mean it is no longer sustainable for us to offer cashback on your card. This is because the fees we receive when you use your card are reducing."

The firm is not alone. Both British Airways and Sainbury's Bank have changed their rewards schemes so that customers earn fewer points. Several other card providers have also confirmed to Moneywise that they are considering changing their reward schemes.

"We regularly review all our products to ensure they offer value to our customers as well as our shareholders," says a spokesperson for Santander. "Clearly, the change in the way the interchange is now calculated impacts the economics of any card business and we will need to reflect on how to ensure we maintain the right balance going forward."

But many more providers told us they have no plans to change their rewards schemes. One of them is American Express - and for a very obvious reason. The credit card giant is unaffected by the changes to interchange fees as it isn't part of that system.

The company negotiates its own fees with retailers, which are often more expensive for the businesses than those charged by Visa and MasterCard and is why some stores decline to accept it. From a customer point of view though, American Express offers the most generous cashback schemes and other card providers will want to continue to compete with it.

Annual charges

If providers won't reduce their cashback offers or devalue their rewards schemes, they could consider other methods to recoup their lost profits. "We may start to see providers increasing their balance transfer fees and introduce annual charges," says Mountford. At present, only three of the 15 major credit card reward schemes carry an annual fee but this could change as firms try to make these cards more profitable.

In future, it will be important to make sure you fully understand the terms and conditions of any credit card reward scheme you sign up for. Make sure you check for fees or small print that will affect how many rewards you earn.

Also, it may be worth sticking with cashback deals rather than rewards. The problem with rewards schemes is the currency you are building – whether air miles or loyalty points – can be devalued at any time. For example, Avios customers took a blow in April when British Airways radically reduced the number of points you could earn when buying flights. They also previously suffered a massive devaluation of their points when air miles was transformed into Avios back in 2011 and entirely free flights were scrapped.

Stick to cashback and your returns can only be dented by an obvious reduction in the cashback rate.

All in all, the era of fantastic credit card rewards could be nearing its end. "While the EU ruling is designed to help retailers and businesses by reducing costs, the unintended consequence could be a much worse deal for consumers," says Mountford. "It's vital that customers keep an eye out for changes in the terms and conditions and be prepared to switch if a card no longer meets your needs."

The changes to credit card perks we know about so far

American Express Platinum Cashback and Platinum Cashback Everyday Up to 5% cashback No Unaffected by EU ruling
Aqua Credit Card 0.5% cashback No No change
Asda Money Up to 1% cashback No No change
British Airwards Credit Card 1 Avios point for every £1 spent No Cut to air miles took place in February
Capital One 0.5% cashback No Cashback stopped on 1 June
Lloyds Bank Choice Rewards Credit Card Up to 10 points per £1 spent £24 a year Under review
M&S Bank Up to 1 point for every £1 spent No Under review
Nationwide Select 0.5% cashback No No change
RBS/NatWest Cashback Plus Up to 1% cashback £24 a year No change to cashback but YourPoints rewards scrapped from 1 July
Sainsbury’s Bank Nectar Low Rate 1 Nectar point per £1 spent No In April, Sainsbury's halved the number of Nectar points you could earn on your supermarket shop
Santander 123 Up to 3% cashback £24 a year Under review
Tesco Bank Clubcard Credit Card Up to 5 ClubCard points for every £4 spent No Under review
TSB Avios Credit Card 1,500 Avios for a £1,000 balance transfer No Cut to air miles took place in February

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