Are Credit Card Rewards Points Programs Harmful?

August 26, 2013

Over the course of the past ten years, credit card providers have ramped up their efforts to woo consumers with point-based loyalty programs.

Custom gift cards and loyalty cards are a great way to encourage repeat business and so many merchants have embraced the concept that the credit card providers have pushed. These redeemable Transaction Cards let customers make flexible decisions when purchasing goods or services from a merchant.

Early in the history of credit cards, most financial institutions were too dignified to offer game-like rewards systems involving point accumulation. As time went by, it became increasingly clear that nearly all types of credit card users were energized and excited by point systems. In the early part of the last decade, easy credit led to a dizzying proliferation of rewards programs. Although credit limits and eligibility requirements have tightened in recent years, credit card issuers maintain loyalty programs as integral parts of their marketing initiatives.

On an individual, case-by-case basis, rewards programs create very attractive incentives for customers. The public record abounds with stories of individuals who use reward points to gain earn free flights, hotel stays and other financial advantages. Collectively, some loyalty programs inspire widespread exploitation and abuse.
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Since point-based reward programs are textbook examples of gamification, it is little surprise that many program members are gaming these systems irresponsibly. These individuals have perfected cunning “ghost transactions” that earn points without adding real value to the economy.

One popular technique is to purchase numerous gift cards with credit, only to use the gift balances to pay off credit card balances in a circular fashion. Though most of these schemes are technically legal, they consume manpower and resources in an exploitative manner. Point churning is a zero-sum game that leads to more expensive payments processing for retailers. Ultimately, many of these increased costs are passed on to the general public.

Point system abusers only account for a small percentage of loyalty program members. Even for ordinary users, rewards programs aren’t always as beneficial as they first appear. Individuals who use loyalty programs need to read and understand the fine print of program rules and regulations. In many cases, gains from cashing in points are fully offset by the costs of using additional credit. At their best, loyalty programs are engaging systems that spur responsible spending. However, economists argue that aggressive rewards programs can distort incentives and upset natural credit use patterns.

Here at Host Merchant Services, we are sensitive to how responsible credit card use contributes to the health of the broader economy. We provide our customers with tools to better understand and fulfill the needs of the public. Flexible, responsive payment processing encourages consumers to use credit with caution and care.

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