Why Do Credit Card Companies Offer Sign-Up Bonus Points?
Credit card companies frequently offer sign-up bonus points to attract new customers. These bonuses are usually tied to a specific amount of 'spend' money that must be charged to the card before the points can be redeemed. But why do they offer these bonuses if they know customers might cancel the card after using the rewards?
Understanding the Financial Perspective
To understand the rationale behind offering sign-up bonus points, we need to consider the financial underpinnings. Though card issuers know that many new customers may eventually cancel their cards, they are still betting on the profitability of these offers.
Customer Retention and Profitability
Many customers who sign up for a credit card with a sign-up bonus will continue to use their card after they have met the bonus requirements. For instance, if a card offers a 50,000 point bonus for spending $3,000 in the first three months, many customers may continue to use the card to maximize their rewards. This steady usage keeps them from canceling the card, ensuring long-term engagement and, consequently, revenue for the card issuer.
Potential for Long-Term Usage
Not all customers who receive sign-up bonuses will use their cards to their full potential. Some may keep the account open but use it infrequently. However, it's possible that these customers might increase their usage over time. For example, they might encounter a financial situation that requires them to use the card more often. This fact adds another layer of value to the sign-up bonuses, as even a card with limited usage can still contribute to the issuer's overall portfolio.
Risk vs. Reward
The credit card companies are essentially taking a chance on each customer. They are betting on the average behavior of their customer base. If the majority of customers do indeed use their cards more actively and fulfill the bonus requirements, then the offer remains a profitable venture for the issuer.
Wider Financial Considerations
Even if some customers keep their cards in a drawer, the potential for future use makes the strategy worthwhile. The company calculates that the revenue generated from those infrequently used cards over the long term can offset the cost of the bonuses. Furthermore, the ongoing fees and interest generated by active accounts can more than compensate for the short-term cost of the bonus.
Why Canceling the Card is Ineffective
From a strategic standpoint, it is not effective for customers to cancel their cards after using the sign-up bonuses. Even if canceling the card seems like a logical move in the short term, it can lead to significant financial drawbacks. For instance, closing a credit card can negatively impact the recipient's credit score by reducing the average credit age and increasing the credit utilization ratio. Additionally, if the card did not have an annual fee, the loss of the bonus points may outweigh the benefits of cancellation.
Conclusion
In summary, credit card companies offer sign-up bonus points to entice new customers and increase long-term retention. While they acknowledge the possibility of customer cancellations, they operate under the assumption that the majority of customers will continue to use their cards and potentially generate additional revenue over the long term. The strategic positioning of these bonuses reflects the well-calculated risks and rewards of their customer engagement strategies.