Credit card issuers continue to shift focus to long-term value over short-term bonuses


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The cash back credit card landscape has seen some recent changes: innovative rewards structures from Citi and Bank of America, a new card announcement from Apple and Goldman Sachs, and — most recently — the new first-year offer for the Chase Freedom Unlimited.

New Freedom Unlimited cardholders will now earn three percent cash back on the first $20,000 in purchases made in the first year, and unlimited one-point-five percent cash back on all purchases after. This new rewards structure replaces the Freedom Unlimited’s $150 sign-up bonus.

This new offer is just one example of what we’ve been seeing across the credit card landscape: an anti-card churner trend.

Credit card rewards are costing issuers

The cost to maintain credit card rewards programs grew an average of 15 percent from Q3 of 2017 to Q3 of 2018 across many top issuing banks, as reported by The Wall Street Journal.

Issuers expected rewards credit cards to be a lucrative business and invested a lot of money in their cards and associated programs. Historically, they’ve enticed new cardholders with massive sign-up bonuses worth hundreds of dollars. However, the costs have started to outweigh the payoff as savvy customers have learned how to game the system.

“Churning” has become a common occurrence, and it’s causing issuers to take a step back to rethink their strategy.

How does churning hurt banks and issuers?

Credit card issuers make money from interest charges and an assortment of fees — including annual fees and interchange fees. Basically, the more consistently you use a card, the more money an issuer makes. Churners pay off their card balances at the end of each month, and typically only use a card consistently for three months to a year. Then, these cards will take a backseat to new cards, or they will cancel the old cards, altogether.

Issuers aren’t making money off of interest from those cardholders. They will only receive interchange fees from purchases while the card is in use. They’ll also lose out on annual fees if the cardholder cancels.

To add insult to injury, issuers then have to pay out the rewards earned. According to Chase, cardholders had racked up $5.8 billion in unredeemed rewards by the third quarter of 2018.

Why is it a risk for consumers?

The practice is rather controversial, and for good reason. Issuers are faced with mounting costs, but there is also a real risk for consumers. For those who don’t cancel their credit cards after they get the maximum rewards value in the first year, annual fees can easily begin to spiral out of control.

There is also a risk of permanently damaging your credit score by applying for too many lines of credit within a short amount of time. Closing credit cards affect your credit utilization ratio and the average length of accounts, which can also significantly lower your score.

New trends across the credit card industry discourage “churn and burn” mindset

To combat churning, issuers have had to restrategize welcome offers and rewards structures to promote long-term relationships with cardholders.

Some issuers are abandoning lucrative sign-up bonuses for other welcome incentives — the Chase Freedom Unlimited is just the most recent example. Other issuers are testing tiered sign-up bonuses that require consistent spending throughout the year to earn the max bonus points or miles.

Many issuers have also implemented rules and stipulations that discourage churning. Chase has an unofficial 5/24 rule where cardholders who have applied for five credit cards or more over the past 24 months seem to be ineligible for any new Chase cards. Citi and Wells Fargo both limit the number of sign-up bonuses you can earn within certain timeframes.

Ted Rossman, credit card industry analyst for Bankrate, believes we’ll continue to see issuers move away from sign-up bonuses altogether in the coming year.

“Issuers are gravitating to this [no sign-up bonus] structure because it breeds more loyalty than traditional sign-up bonuses, which can be gamed,” he explains. “Issuers have grown tired of card churners who get a card for the 50,000-point sign-up bonus, spend the required $3,000 in the first 90 days and then stop using the card. That’s not profitable for them.”

Bad for churners, good for everyday consumers

These new trends might spell bad news for credit card churners, but new reward structures and welcome incentives are actually more consumer-friendly for everyday spenders.

Take the new Chase Freedom Unlimited offer. While you might not be able to earn a $150 bonus after three months, you will be able to earn up to $600 in cash back with the introductory 3% cash back (on up to $20,000) by the end of your first year. This new offer essentially doubles the first-year value of the card, even as it eliminates the sign-up bonus.

BJ Mahoney, General Manager of Chase Freedom explained it this way in a press release announcing the new offer: “Freedom Unlimited’s 3% cash back offer provides new cardmembers with the opportunity to make the most of their everyday spending and keep them ‘always earning.’ We are excited to reward new customers even more for their purchases.”

For those who are looking to find credit cards to help them earn a steady flow of rewards, these changes are actually good news. As this Wall Street Journal article states, “banks don’t plan to end rewards, but want to shift them in ways that encourage more card usage and scale back upfront bonuses.”