What Happens When Credit Card Rewards Are Too Generous?

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Rewards credit card users are getting used to the idea of earning valuable points, miles, and cash back for their spending. At the same time, the card issuers are becoming ever more dependent on offering these rewards in order to attract and retain new cardholders.

But in their frenzy to acquire valuable new customers, do banks sometimes get a bit carried away when it comes to the rewards they offer? Let’s take a look at what happened with three cash-back credit cards that appear to have offered more rewards than could be sustained.

Chase’s AARP Card

In early 2011, Chase and the American Association of Retired Persons (AARP) offered a co-branded credit card with an amazing introductory offer. Cardholders would receive 5% cash back on all purchases with no limits for the first six months after opening an account. In fact, people of any age could apply for this card as an associate member of the AARP. It didn’t take long for everyone from casual credit card users to hard core deal enthusiasts to sign up for this card and use it for every conceivable purpose. At a 5% rate of return, cardholders could profit from making tax payments, mortgage payments, and other types of credit card transactions that normally incur an additional fee of 2-3%.

But within a year, reports were circulating online that Chase was closing the accounts of their most enthusiastic customers under the pretense that they were abusing the rewards program. After complaining to state and federal regulators, many cardholders reported receiving the rewards they had earned. In 2012, Chase quietly changed the terms of the card and removed the 5% cash-back offer.

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American Express Blue Cash Preferred

Chase and American Express are locked in a battle royal for the cash-back reward credit card market. In 2011, American Express introduced their most generous offer to date, the Blue Cash Preferred card. When it was rolled out, this product offered 3% cash back at U.S. gas stations and a whopping 6% cash back for all purchases at U.S. grocery stores (up to $6,000 a year and 1% after that) and unlimited 1% cash back on all other purchases, .

As expected, savvy credit card users pounced on the deal, earning 6% cash back on all sorts of purchases that could be made at supermarkets. In particular, cardholders raided the gift card aisles, earning 6% cash back on purchases of Visa gift cards and cards from other retailers. But in October of 2012, American Express announced that only $6,000 worth of grocery store purchases each year would be eligible for the full 6% cash back. Additional purchases beyond $6,000 would only earn 1% cash back, limiting customers’ 6% cash back rewards to $360 a year.

U.S. Bank Cash+

Not to be left on the sidelines, retail banking giant U.S. Bank introduced its Cash+ card in June 2012, which offers 5% cash back on two spending categories that the cardholder can choose from, and 2% cash back on a third. In addition, cardholders could also earn a $25 Visa gift card each time that they requested $100 or more of their cash back.

By now, it is easy to see where this offer would be going. According to Teri Charest of U.S. Bank Corporate Public Relations, starting in July, US Bank will be making significant changes to this program as the 5% cash back categories will change. Charest explained, “We are swapping out the home improvement, airlines and bill pay with the new categories book stores, sporting goods and cell phone purchases.” In addition she explained that “the $25 Cash+ bonus will be limited to one starting in July.”

[Related Article: The Best Cash Rewards Credit Card in America]

What to do if your credit card offer looks too good to be true

First, never pursue rewards when you are carrying a balance on your credit card as interest expenses will always exceed the rewards earned. But when it makes sense to accept a great offer, first print out a copy of the card’s terms and conditions. This will tell you how the program works, and you can retain the document if there is ever any dispute later. That is how some AARP cardholders were able to convince regulators that they were owed 5% cash back on all of their charges.

Next, take full advantage of these offers, but don’t ever spend more money to earn rewards. Even when earning 6% cash back, cardholders are still losing the other 94% when they make unnecessary expenditures.

And finally, pay attention to how and when changes to rewards programs are implemented. In the case of the American Express offer, existing cardholders were grandfathered in for several months before having a cap imposed on their awards.

Whether or not rewards credit card issuers can be overly generous or some cardholders are just being too greedy is a matter of debate. But by understanding how banks sometimes offer (and withdraw) amazing credit card rewards, you can keep an eye out for the next bombshell deal.

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At publishing time, American Express Blue Cash Preferred is offered through Credit.com product pages and Credit.com is compensated if our users apply for and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.