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.
Hey, how’s it going everyone?
It’s Ernest from Trip Astute.
In this video, we’re 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.
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 just staying
home, but also because of 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.
One thing that many of you might be wondering
is how will the credit card companies respond
in a recession?
It seems like there are two camps of thought.
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.
The other scenario is a bit grimmer.
As the banks and issuers face a shrinking
economy and declining projected revenue, they
may try to release or limit the amount of
credit that they offer.
You can imagine that there is probably a large
amount of credit that’s being used that
may not be paid back by borrowers, especially
those that are struggling financially due
to the crisis.
The banks may want to reduce their risk exposure
by cutting the amount of credit offered.
I’m not an economist, so of course, anything
that I am saying is speculation.
But I was a points and miles nerd during the
last recession.
And I think if we look at the behaviors of
banks and issuers during the last recession,
we can gain some insights on how they’ll
likely respond during this economic crisis.
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 approvals.
In general, the banks and issuers were focused
on reducing their debts, which often translated
in less available credit to consumers.
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-back
securities, which then spiraled as many of
these loans defaulted causing a chain of events.
So, do I think that all credit card offers
are going to be pulled?
No.
I think we’re going to see less promotional
APR offers, higher interest rates, and potentially
less 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 probably
at the highest risk for change.
These are typically not people in the points
and miles hobby, but rather people who use
credit cards to pay their minimum balances
and are essentially 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 highly 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 just default on their debt, which
puts further strain on the issuers and banks.
We, in the points and miles community, are
a different kind of customer.
The 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 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.
For those of you new to credit or 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 that 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 balances and isn’t abusing
their rewards.
I think the key is to try and view it from
the perspective of the bank.
In simplistic terms, 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 to avoid giving or maintaining your
credit.
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 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 seemed to appeal
to millennials.
For more information on Chase’s rise, see
our video on the topic.
I cover why and how American Express and Chase
dominated the travel rewards space.
I personally wouldn’t be surprised if we
see other issuers start to seriously 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,
which are pointing toward a recession.
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.
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 truly an unprecedented time, and just
like how most of us were unprepared for this
scenario, businesses are also struggling,
including the airlines, hotels, and credit
card companies.
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.
If you’re interested in applying for a new
credit card and want to support our channel,
please check out the card offers page on our
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I hope you all are staying safe and healthy.
Until next time, travel safe and travel smart.
