My affinity for Costco is a topic that has been well documented in past blogs. This has prompted discussions with many of our clients and readers that share a fondness for the retail giant. While I enjoy the store, the customer service, quality products and competitive prices overall, I don’t always advocate everything they do, especially when it potentially involves my credit score (And don’t get my wife started on their decision to switch their food court fountains from Coke to Pepsi products)!
When the store made a major announcement earlier this year regarding its relationship with American Express (AMEX) and their cobranded True Earnings Rewards card, it dawned on me that this might impact a number of our readers and could warrant a few minutes to discuss the change, why it occurred, the mechanics of how it will impact shoppers and the impact it could have on cardholders.
Earlier this year, Costco announced that it would not be renewing its contract with American Express as its exclusive accepted card. For the last 16 years, Costco has only accepted cash, check, debit cards and AMEX. This has been a boon for the credit card company as recently reported that 8% of all AMEX purchases worldwide are made at a Costco.
On April 1, 2016, that 8% of purchases will no longer exist for American Express. Also gone will be a large portfolio of generally well rated holders of their co-branded Costco True Earnings reward card. AMEX has acknowledged the significant blow to sales, but said that it just could not afford to accept the terms Costco was demanding.
Not long after, Costco announced a new partnership with Visa. Starting April 1, Costco will exclusively accept Visa at all of its locations and offer a cobranded card through Citibank. Details of the rewards program, interest rates and other card details have yet to be released. For comparison, the current Costco AMEX card offers 3% cash back for gas, 2% for restaurants and travel and 1% on everything else. There’s also no annual fee if you’re a Costco member.
Negotiations continue, but the likely scenario is that Citi will purchase the American Express True Earnings Reward portfolio from AMEX in a separate deal from that with Costco. If this is the case, it will allow Citi to simply send existing cardholders new cards. Costco and Citi have an expressed a desire to make this as seamless a transition as possible for Costco members, but this may not be in your best interests.
You do have options. Costco is accepting any Visa card, not just their cobranded card with Citi, so if given the choice to opt out of a new card, you should review your current credit mix, rewards programs and other specifications of any existing Visa cards, etc. before agreeing to move forward.
AMEX has also promised not to go quietly into the night. Their CEO has said on numerous occasions since the announcement that they plan to put product offerings together attractive enough to hopefully maintain a high number of their current Costco customers. They took a similar tact when Costco Canada ended their relationship with the company in 2012.
How Does it Impact Me?
The biggest concern I have with this change, aside from the loss of American Express customer service which is widely regarded as best in class, is the potential impact to members’ credit ratings and loss of benefits. I’ll assume the latter is less of a concern as it’s highly likely Citi will want to make their card as rewarding as possible to compete with existing Visa products.
The credit score issue is another story.
If the transfer from AMEX’s True Earnings Reward Card to Citi’s Costco card goes through, Citi is entitled to do what’s known as a “hard inquiry” on the cardholder’s credit history. If that same cardholder wants to maintain a relationship with American Express and is wooed to try a replacement product from AMEX, they will also do a hard inquiry on that applicant’s history, despite theoretically already having a long payment and borrower history on the same applicant. According to a myFICO report cited by personal finance guru Clark Howard, “multiple credit applications in a 12-month period are a key leading indicator that somebody is in financial distress. That will lead to a lowering of your credit score.”
While the impact to credit might be minor in the long run, anyone considering financing a car, refinancing their mortgage or similar activity in the next 6-12 months should seriously think through how best to approach this switch.
The good news is our ability to understand the impact and how to choose which card options work best for each of us has never been easier.
For starters, you can see how a new application for credit or two might impact your overall score by going to TransUnion’s CreditKarma. Click on “Sign Up” in the upper right hand corner and fill out the necessary information. The site offers truly free credit scores and, from the home menu, click on “Credit Score Simulator” allows you to run various “what if” scenarios involving your credit to see what the impact might be on your score and how long that impact is likely to last.
If you do want to make the switch from AMEX to Visa and you don’t already have a preferred card, I’d recommend first waiting to see exactly what Citi/Costco have to offer with their product. From there, head to NerdWallet where you can enter your spending habits, credit score range and reward preferences to determine which card is best for you.
As always, if you have any questions or want to talk through these or any other personal finance headaches you may be facing, don’t hesitate to contact us to discuss.
Thanks and have a great week!