What You Need to Know About the Costco Visa Card

By Markets Fool.com

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Costco has changed from American Express to Visa for its rewards card. Image source:Mike Mozart, Flickr.

Costco (NASDAQ: COST) has learned that changing credit card providers when your chain only accepts one variety of card can cause major upheaval.

Even though there was more than a year's worth of advance notice before the new Citigroup-issued (NYSE: C), Costco-branded Visa (NYSE: V) was rolled out, its arrival still caused problems for the warehouse club. The Costco Anywhere Card entirely replaced American Express (NYSE: AXP) as the retailer's rewards card, but the chain will now let customers pay with any Visa.

Costco promoted the change to its existing cardholders, and stopped taking new reward card members months in advance of the switchover. But given the sheer number of people involved, problems were inevitable, and the abruptness of the switch added to that. On June 19, Costco stores only took American Express. When they opened on June 20, they only took Visa, including the new Costco Visa cards.

What went wrong?

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In the first days of the switch there was confusion at the registers, and long wait times for help when customers placed calls to Citigroup. Those issues were addressed quickly according to Jennifer Bombardier, a spokeswoman for the bank, who spoke to The Motley Fool via an email interview.

"With any conversion of this magnitude and a brand this beloved, call volumes were unprecedented," she wrote. "As a result, some customers experienced longer-than-desired wait times in the first few days of the launch. In response, we swiftly took action to better meet the demand for the new cards and since then, average call wait times have lessened significantly."

And while the media jumped on the story of problems with the conversion, in reality, both Costco and Citigroup addressed the issues quickly. Yes, the first few days were rough, but things improved rapidly.

"The vast majority of call volume was related to a number of topics including card activation, payment queries, online setup and things of that nature. Not complaints,"Bombardier wrote.

What does the new Costco Visa card mean for customers?

Anyone who held the old American Express card should have received the new Costco Visa card well in advance of the June 20 switch date. In making the change, the new credit card company did not do credit checks, and all rewards and balances were supposed to switch over.

Now that the transition has been completed, Costco has also begun taking new members for its credit card rewards program again. That gives customers who previously had been temporarily locked out access to the new Visa card, which offers a number of benefits.

The new Costco Visa card has no annual fee, but to get one, applicants must be members of the warehouse club, which costs $55 a year. They must also pass a credit check, as they would for any credit card.

Assuming you qualify for the card and have joined Costco, the Visa card then serves as your membership ID at the warehouse club.

The new card's benefits are an upgrade from those offered with the Costco American Express: The cash back on gas purchases has been increased from 3% to 4% for the first $7,000 spent in a year, up from a $4,000 limit. The cash back onrestaurant and eligible travel spending increased from 2% to 3%. Customers also maintain the 2% cash back benefit on all Costco purchases, and 1% cash back return on everything else.

Costco's new Visa card also offers worldwide car rental insurance along with worldwide travel accident insurance. In addition, it includes damage and theft protection.

What does this mean for Costco?

While the transition had its rough moments, both the warehouse club and its credit card company recovered quickly. Now, it's business as usual for the chain, which can go back to adding members to its rewards credit card program. The early results for that appear to be very positive, which suggest significant pent up demand.

"Consumer interest and engagement with this card has been extraordinary," Bombardier wrote. "On Day One, approximately 60,000 applications were processed -- more than triple any one day in Costco's 17-year history with Amex. Since then, there have been over 550,000 total applications to date and we don't anticipate the demand to diminish anytime soon."

That's good news for shareholders, as it suggests that despite the early problems the warehouse club has returned to business as usual. Going forward, any problems should fade in importance, and the company should add to its Costco Anywhere cardholder base.

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Daniel Kline has no position in any stocks mentioned. He hopes to catch a Pikachu. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.