Credit Cards Push New Loyalty Plans

If you're among the legions of people who game a wallet full of credit cards for maximum rewards, card issuers are onto you -- and they're coming up with ways they hope will persuade you to stick with them.

A bank wants you to use its card as your primary card -- known in the industry as getting to the top of a customer's wallet -- because the bank makes more money that way. That's what cash-back and other rewards were supposed to achieve. But cardholders quickly learned that they could maximize benefits by, for example, using one card at the grocery store and another at the gasoline pump, depending on which card earned the most rewards at a particular merchant.

Now, some credit-card issuers are trying a new tack to build consumer loyalty, introducing flexibility into the terms of cards. Capital One Financial Corp. plans today to announce a new online service that lets consumers create their own card by choosing from a menu of terms, including repayment rates, cash-back options and other features.

Other card issuers -- including J.P. Morgan Chase & Co.'s Chase Card Services and Discover Financial Services -- have begun offering rewards across a broader range of retail categories, and some are eliminating requirements to shop only at specific merchants in order to receive awards.

"This might be the first of a new iteration of products in the loyalty industry in general, where we see card issuers start to cede more control to consumers," says Rick Ferguson, editorial director for Colloquy, a loyalty-research, consulting and publishing firm. "If it's successful, you'll see some other issuers copy it relatively quickly."

Though the new cards promise more flexibility and convenience, some people may find they ultimately end up earning fewer rewards than they used to. That's because many cards' cash-back rewards are getting skimpier, even as some banks begin making rewards more widely available. Meanwhile, even the new programs haven't stopped some consumers from finding ways to juggle their credit cards to get the maximum rewards from each.

The new programs are meant to win back customers like Augie Inciong of Orange County, Calif. Mr. Inciong says that whenever he ate out earlier this year, he used his American Express TrueEarnings card for Costco members because he could get 3% cash back on dining expenses. He used another card -- the American Express Blue Cash card -- to fill up his gasoline tank because it offered up to 5% cash back after he reached certain spending tiers. And when he shopped at a Ralphs supermarket, he pulled out his Discover card because he can take out $60 cash back on top of his purchases. "The rebate percentage is the No. 1 thing I look at," says the 43-year-old software engineer.

Capital One hopes its new card offering will keep customers loyal. At Web site www.capitalone.com/cardlab, consumers can choose from a menu of options, ranging from the types of rewards they want (cash, points or miles) and how quickly they want to earn them, to a range of interest rates and introductory offers. However, customers can't simply choose the best of all features, but will have to make tradeoffs between those features that are most important to them. Those who want a richer reward program, for example, might have to accept a higher interest rate or annual fee.

"Consumers who take the time to go through Capital One's process are more likely to use that card than other cards" in part because they've selected the features that are most important to them, says Colloquy's Mr. Ferguson.

Chase's Freedom card pays bigger cash-back awards that are determined by an individual's spending habits. The goal: to encourage consumers to use the card to pay for a wider variety of purchases, ranging from dry cleaning and utilities to cellphone bills. "We're trying to be top of wallet for your everyday spending," says Kathy Witsil, senior vice president of Chase Card Services.

Chase Freedom automatically awards consumers 3% cash back or triple reward points on purchases in the three retail categories in which they spent the most that month, such as groceries, gasoline and commuting. Purchases in other categories earn 1% cash back. Chase recently expanded the number of categories where users can earn triple awards to 15 from three previously.

The Discover More card combines features from some of the company's more targeted cash-back cards, such as its recently discontinued Restaurant and Home Improvement cards that had offered 5% cash back on purchases.

With the More card, which replaced the Discover Platinum card this year, users can earn a 5% cash-back bonus in categories that the company rotates quarterly to reflect consumers' changing spending patterns over the year.

This year, for example, More card users were able to earn 5% cash back on home and apparel purchases during the spring season, and earn 5% cash back on gasoline and hotel expenses in the summer months. Discover also plans to drop any merchant-specific requirements next year, so users can basically shop at any store within those categories to earn the 5% cash-back bonus.

Many of the newer card programs offer lower cash refunds on card spending than earlier versions or may come with restrictions on how much users can spend to earn the best perks. Discover More card members, for example, will only be able to earn up to $100 next year across four program categories through the card's 5% cash-back bonus rewards program. All other purchases continue to earn 1% unlimited cash back. This year, however, consumers are able to earn up to $125 across five categories through the More card's 5% cash-back bonus rewards program.

And while Chase's Freedom card offers a 3% cash-back bonus across more categories, that percentage is now lower than the 5% cash-back bonus that its Chase Rewards Plus and Chase Cash Plus Rewards cards, which the company recently closed to new card members, had offered on select purchases.

Anurag Mishra of Ashburn, Va., says Chase converted his Chase Cash Plus Rewards card to its new Freedom card last month. "Basically, I'm not getting as much rewards as I used to get earlier, but they did include more places where you can get 3%," says the computer engineer. His previous Chase card paid 5% cash back on purchases in three categories -- gasoline, groceries and drug stores -- and 1% on other things.

Some consumers are already looking for ways to maximize the benefits of the new cards. Mr. Mishra, a 40-year-old computer engineer, says he plans to use his Chase Freedom card only to buy groceries, for which he earns 3% cash back. Meanwhile, he has substituted another card, one from Pentagon Federal Credit Union, that pays him 5% cash back on gasoline. And though the new Chase Freedom card offers more retail categories, such as department stores, in which to earn bonus rewards, Mr. Mishra says he prefers to use his own department-store cards because they typically offer promotions or discounts on purchases.

Keep in mind that credit cards with rewards programs may carry slightly higher interest rates, making them a better bet for people who pay off their balances every month.

According to a 2004 credit-card survey by Consumer Action, average interest rates on rewards cards were 12.55%, compared with the overall average rate of 11.97%. "If you're running a balance, you'll very quickly pay more in interest than you'll get in rewards," says Joe Ridout, a spokesman for Consumer Action, an advocacy group.