Consumers will soon have a new credit card to reach for at the checkout counter, complete with embedded computer chips, lights, buttons and a micro-thin battery that lasts for years. No, this is not a James Bond gadget, it’s actually the birth of the computerized credit card that some banks, such as Citibank, are currently testing.
The buttons on the Citibank cards allow consumers to choose whether or not they want to make a purchase using the normal credit card process (make the purchase and you receive the bill charged as credit) or press the “Request Rewards” button on the credit card and pay with your accumulated reward points. This means users will have to keep close track of points, which isn't always easy. If you try to pay for something and don’t have the full amount of points available, the full purchase will automatically be charged as credit.
This could be a problem for many consumers, even those attempting to stick to a budget. Americans still yearn for instant gratification and these cards may give them the impression that they’re getting something for free, on the spot, with no wait. Use your points and you get what you’re buying without paying, right? Not exactly, it’s a bit trickier than that . . .
In the past, reward points were usually used for traveling and other items that consumers“saved” for. Now with this immediate option, consumers may be more apt to spend using their credit cards which normally leads to a 30% increase in spending as opposed to the “ancient use of cash”.
Is more spending good for the consumer?
It may come down to what you decide to spend your points on, a tank full of gas, groceries or maybe more stuff that you don’t need but simply want. The most disturbing side effect is that instant gratification experienced by the consumer at the cash register may in fact reinforce and increase the overall credit card usage by consumers, which I am certain that credit grantors are hoping for. This could have detrimental effects on an already debt ridden consumer that has yet to dig out of the current credit quicksand trap that they are in.
This new option may have its pluses, depending on what you spend on, but it may also lead to changes regarding time frames on point expiration. As the “spend your points” trend builds, credit card companies may change expiration dates because they’ll want the points spent quicker, and you could lose your points entirely if you don’t spend them in the allotted time. Many millions of points are already expiring each year producing great savings and a clear financial incentive for the issuers. It’s also been noted that these cards will probably be more expensive to produce so be on the lookout for additional fees, which will alleviate the higher production costs but won’t benefit the consumer.
Consumers should also be aware of the cash-back situation on purchases made with the new cards. The same card without the computer chip for example may offer 2% cash back year round on most purchases. The new computer chip cards may offer only 1% cash back on the majority of purchases and 2% back on specific purchases that change seasonally--which means your rebate will be cut in half unless you spend on those certain items.
Of course there will are advantages associated with these new cards. Some issuers are testing cards that have fraud protection baked into the plastic, others that will prevent thieves from skimming and another will only show the account number after the pin number is entered. Ultimately these anti-theft and consumer protection elements may be the most valuable aspects for the consumer and may be worth the premium that consumers will most likely have to pay. You decide.
Howard Dvorkin, CPA, is the founder of Consolidated Credit Counseling Services, Inc., and the author of Credit Hell: How To Dig Out of Debt. He is also personal finance expert and consumer advocate who has been helping people for more than 15 years.