The NY Times has a regular column called “The Ethicist”, and it recently talked about credit card rewards. A reader writes in and asks:
When shopping at big retailers, take up the offer for a new credit card to take advantage of the, say, 10 percent discount. Then when the bill comes, pay it and cancel the account (and risk a slight but temporary dent in your credit rating). I think this isn’t ethical.
That 10 percent discount is a sale by another name. It’s designed to get you in the door and shopping. As long as you buy something, you’re helping to make the store’s promotion a success. These credit-card offers never ask you to promise that you’ll keep the account open. They just ask you to sign up. After that, it’s up to the store to make you feel as if additional purchases are in your interest.
Whenever you are dealing with a big business, I always prefer to look at these things from a practical point of view. Retailers and financial companies are not offering these promos out of the kindness of their hearts. Their promotions are carefully planned to make them money overall, often in ways most people don’t even know about. Does a sale on milk mean that you have to buy all your other groceries at the store? No, but since you’re there you probably will buy something else. Are you obligated to? I don’t see how.
The real reason why credit cards have to offer things like $500 to sign-up for a new credit card is that people are really lazy. Most people have the same bank account they opened when they were 18 years old, and the same auto insurance company as their parents because by default that was their first insurance company. Most people that qualify for promotions have good to excellent credit scores and don’t even carry balances. It’s just that change is hard, and new customer acquisition costs are notoriously high in the financial industry.
You’ll notice that many sign-up bonuses now require a minimum spending requirement. Again, this is to make you put the card in your wallet or purse and use it several times, hopefully building up that habit. Also notice how credit card rewards focus on “everyday” categories like groceries. Another small psychological nudge.
I always look at new credit cards as trials. I will try them out, and see how I like it. I give them a chance – that’s all that I owe them. If I do, then I keep it. I’ve paid annual fees on the Starwood American Express card for years because I ended up discovering the benefits are worth it to me. If I don’t like it, then I cancel. That seems like the ethical thing to do.