Ross Bolton expects to be primped and pampered on his $8,000 vacation to Bali. The 30-year-old bachelor from Greensboro, N.C., will fly business class. Though he’ll have to contend with a layover, that stress can be easily banished with free spa and massage services at an exclusive airport lounge, along with complimentary drinks and hors d'oeuvres. When he arrives at his resort, he can enjoy access to special concierge services to assist with nightlife planning and handling all reservations.
Best of all, the trip will be almost entirely free – a perk from his credit card companies.
Bolton spends about $1,000 in annual fees on his 17 – yes, 17 – credit cards, both personal and business, which he deploys with strategic brio to maximize the cash-back rebates, redeemable points and other benefits that allow the commercial insurance agent to relax like a pasha.
“I can totally justify paying $1,000 a year to have this upper experience," Bolton said. "You want to feel like you're appreciated."
Bolton belongs to a new privileged class, credit card sophisticates who are showered with freebies and lavished with attention by major banks grateful for their spending habit.
But there is, of course, no such thing as a free trip to Bali. Someone picks up the tab for all these pricey benefits, and those people are hardly a secret. Banks charge merchants a transaction fee for swiping their cards, and the merchants pass on the cost to all customers, rich and poor, imposing an invisible fee even on customers who pay with cash. On top of that, financial institutions collect monthly interest payments from the majority of card holders who don't, or can't, pay off their bills every month.
The effect this funding redistribution has on the poor is complex and disputed, but the riches flow back to credit card spenders in a pattern that consumer advocates call the reverse Robin Hood effect.
Uncle Sam also plays a part, albeit a largely passive one. Credit card rewards – even cash-back awards – are considered rebates rather than income by the IRS and are not taxable. Business owners, for example, can charge hefty expenses to their cards and enjoy all the benefits themselves tax free.
The result, consumer advocates say, is a system of corporate and governmental sweeteners to the affluent and to social strivers seeking the trappings of success. The physical card itself is now cherished as a status symbol, a token of membership for a new peerage of adventurers and bons vivants whose lifestyles are beyond the reach of ordinary folks.
"The competition on credit cards is all about the rewards," said Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston. "It's really not about the interest rate or about the pricing terms."
Credit cards have long offered benefits, but this sleepy competition escalated into an arms race after the financial crisis a decade ago, when Congress pushed through a series of Great Recession reforms that outlawed the industry’s worst money-making abuses, and, in a move championed by Sen. Dick Durbin, D-Ill., lowered the fees that banks can charge merchants for debit cards.
Then the nation awoke from its economic doldrums. Pent-up demand for getting and spending hurtled the credit-card industry into a golden age of customer perks, made possible by fine-tuned business models. In a consequence probably not anticipated by reformers in Congress, banks now compete for well-heeled customers by paying them to charge their personal needs and business expenses while offering them high-status experiences with star power.
"It's a cross-subsidization in which the poor are subsidizing the rich through the payment system," said Aaron Klein, an economist at the Brookings Institution in Washington, D.C. "This entire stream is reverse to income."
By the end of 2016, reward credit cards made up 78 percent of total credit card accounts, up from 59 percent in 2008. The full scale of the phenomenon has not been quantified, and is largely ignored by policy-makers, said Klein.
But the credit card industry rejects the prey-and-predator depiction of its business practices as a simplistic morality tale.
For example, it's misleading to say that cash-paying customers are subsidizing credit card customers because all payment methods come with a processing cost, said the American Bankers Association.
"Cash is not costless," said Brian Murphy, a vice president for policy at ABA. "You don't need an armored car to carry away your credit card payments."
Murphy also said that reward credit cards are popular at all income levels because the cards provide consumer benefits that cash can't deliver, like transaction dispute rights, extended warranties and rewards.
The rewards are being fueled by a feverish rise in credit card spending and a parallel increase in credit card debt. Among the top six credit card issuers, which control about two-thirds of the market, rewards have more than doubled to $22.6 billion in 2016 from $10.6 billion in 2010, according to an analysis by MagnifyMoney, an online personal finance resource.
As a result, the total amount that customers spend using their credit cards has moved past previous highs and shows no signs of abating, according to a December 2017 report by the Consumer Financial Protection Bureau. At the same time, many can't help but fall behind on their bills, so that outstanding credit card debt has returned to its pre-recession levels of approximately $1 trillion.
Credit card debt remains a major source of revenue for the issuers, and those who carry debt, the "revolvers," far outnumber the "transactors," who pay their bills every month. As of the end of 2017, according to the American Bankers Association, 44 percent of credit card holders are revolvers, carrying debt and paying interest fees, while 29.5 percent are transactors, who avoid paying interest. (The rest of card holders haven't used their card in the past three months and are classified as "dormants.")
For prime transactors, premium credit or charge cards with annual fees of $450 or $550 a year have a reward payoff of $900 to $1,300, depending on which card holder you ask. That’s an imprecise appraisal of complimentary in-flight meals, lounge massages, free Wi-Fi, gratis Uber rides and what have you, because the actual benefit of the card is ultimately tied to the customer's spending levels that convert to points and rewards.
The rewards and redemptions are unregulated, which can frustrate customers when card issuers cut back on benefits, as happens from time to time. Wu said that consumers would have little leverage if banks were to renege on their generous rewards programs. But those who are reaping rewards are living in the moment.
"Could it all end tomorrow? Sure, it's totally possible," Bolton said. "But I think we're in the heyday of it now and we have been for three or four years."
These cards do not just offer rewards, but a broader sense of membership. American Express doesn’t just cater to but identifies a super-elite class of customers with its near-mythical Centurion card. Stamped out of titanium, requiring a $7,500 initiation fee and a $2,500 annual membership charge, it is available by invitation only, a private country club within the credit card empire.
There are plenty of other more affordable premium credit cards, too, and issuers aren't shy about making overt appeals to aspirational snobbery, dubbing their cards with such regal titles as Chase Sapphire Reserve, Hilton Honors Aspire, Citi Prestige, Citi AAdvantage Executive World Elite, and so on.
The cards illustrate the evolution of status-seeking in an era when consumer goods have become so cheap and plentiful that they have lost their cachet. Even some card perks have become emblematic of “masstige,” the democratic twin of prestige – as when airport travel lounges get so congested at peak travel times the buffet line can feel more like Golden Corral than the Four Seasons.
What the well-heeled card-carriers seem drawn to is technicolor life experiences over conspicuous consumption, a trait identified in the late 19th century by economist and sociologist Thorstein Veblen, a pioneering theorist of status-seeking.
“Tastes have changed to become more experiential and less focused on physical goods," said Gary Leff, a travel blogger and frequent flyer expert from Austin. "A friend of mine used points from Starwood Hotels to have his wife take tennis lessons from Andre Agassi," Leff added. "He couldn't just call up Andre Agassi and arrange that."
Donald Trump seemed well aware of the zeitgeist in the last election. His campaign sent out fundraising appeals offering voters a "Limited Edition Black Card" – which evoked the exclusive AmEx version – in exchange for donations.
The National Bureau of Economic Research issued a report last year concluding that the powerful social cachet of premier credit cards has a particular pull on insecure people. Such people, the report said, are prone to using metal cards in public even if they have better benefits from less-prestigious cards made from humble plastic.
"You definitely see a good portion of people who do not have that lifestyle and are trying to get it," said Robert Harrow, a New York-based product manager at ValuePenguin, an online credit card evaluation resource.
"It's a way for people to buy cheaply into a lifestyle that's maybe a little out of their reach," Harrow said. "It's almost like this step into a different lifestyle is the allure."
Websites and blogs have proliferated to advise shoppers on the best credit cards, catering to a subset of people who turn consumerism into a science, intent on beating the casino and maximizing their winnings.
"There's some pride taken in being the ones who manage to crack the code," said Matt Schulz, senior industry analyst at creditcards.com, an online resource. "There is status to being the people who are up on everything, and who are leading the way with this."
Kevan Kay, who runs a technology consulting company in Green Bay, Wis., currently manages eight cards, two of which come with annual fees: American Express Platinum ($550) and Chase Sapphire Reserve ($450).
"This isn't a hobby for me," Kay said. "It's a money-making scheme."
He estimates the financial value of his cards at about $3,000 a year, but many of the luxuries he craves don't come with a price tag. A seasoned business traveler, Kay speaks highly of the exclusive airport lounges and the security pre-clearance to get him past long lines of clueless tourists and inexperienced travelers.
Kay's credit card fix satisfied a need more deeply rewarding than base lucre. That jaunt to Jamaica or Mexico enters a new dimension when you can "eat shrimp that were plucked out of the ocean a minute before they were dropped into the [boiling] water," he said.
Then there's Ronald Kem, a 21-year-old undergraduate at the Colorado School of Mines, who has accumulated 18 credit cards. He essentially runs a side business, paying friends' rents, parents' insurance, a sister's tuition – all of which are reimbursed by the beneficiaries – just to generate value points on his cards.
Kem has used the AmEx concierge service to score tickets to the musical “Hamilton” in Los Angeles. He takes heavily discounted domestic flights to visit family and to unwind. He is currently planning a 10-day trip to Holland in August, which will largely be paid for by credit card rewards.
"When I first came across all of this I saw that this was totally manageable and I basically treat this like a fun numbers game," Kem said. "I'm still like very surprised that this is working out as it is."