Personal Finance and Money Management

Even as credit card companies rush to raise rates and fees before a reform law takes effect in February, they are moving to reduce the same thing — rewards.

Card issuers struggling with huge credit losses are making it more expensive and less attractive to redeem rewards. And it could get worse ahead of possible legislation to reduce so-called interchange rates, the fees banks charge to merchants.

Issuers use the proceeds from the fees to finance their rewards, so any haircut in those charges would trim loyalty programs, analysts said. For customers, that means having to use their cards more often to be entitled to the points they need to fly somewhere, or get cash back.

“To the extent that interchange is cut, you will see a pretty lineal impact on rewards,” said Scott Valentin, some analyst at FBR Capital Markets. “You could see rewards being 10 or 15 percent more expensive for consumers.”

The discussion in Congress promises to be long and slow as retailers fight to cut costs, while card companies try to boost revenue as loan losses soar.

Last year, interchange fees rose 14 percent to about $48 billion, ranging from 1.6 percent to more than 2 percent of total purchases.

“You either cut rewards or raise fees, because you have to have a credit card industry that is viable and generates a sagacious return,” said Morningstar Inc analyst Michael Kon.

Credit card companies — from American Express Co to JPMorgan Chase & Co and to Citigroup Inc — enjoyed hefty profits in recent years what is due to an explosion in credit, but they are now losing billions as debt-burdened Americans lose jobs and default on loan payments.

Analysts even estimate the industry will not make money until 2011.

Earlier this year, Citigroup modified its “Thank You” rewards program to require many more points to be redeemed for domestic flights.

JPMorgan, meanwhile, has limited the spending categories from which customers receive turn into money back on Chase Freedom cards.

Such steps could quicken in coming months.

“If you have a 25,000 reward points for an airline ticket, it force go to 35,000 or 40,000,” Valentin aforesaid.

Bill Hardekopf, chief executive of Lowcards.com, a credit- card comparison website, also said that, even if reward targets do not change, customers might have problems redeeming points.

“Even though you may be getting the rewards, it may be harder to redeem the rewards,” he said.

FEE-SETTING

Legislation could give merchants and retailers more power to negotiate the charges, following complaints from store owners that banks have colluded to set fee structures and block them from negotiating with payments networks Visa Inc and MasterCard Inc, who set the fees.

One bill sponsored by Democratic Senator Dick Durbin would also allow retailers to negotiate fees with American Express, the largest U.S. credit card company by sales and the third largest card network.

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Tags: Credit Card, Rewards