"Affinity cards" are major bank-issued credit cards, such as Visa or Mastercard, sponsored by companies such as publications, airlines, automakers, groceries and department stores. The cards also are gaining popularity with nonprofit organizations such as boys and girls clubs or college alumni associations. The "sponsor" logo generally appears on the card, and the perks are provided by the sponsor, but the account is managed by the issuing financial institution.
Sullivan, who serves on the board of the Federal Reserve Bank of Chicago and is a consultant to a credit counseling service, says the wave of sponsored credit cards is simply good business for the companies involved.
"If a grocery store offers a Visa card with bonus bucks for groceries or travel points on an airline as a perk, that cardholder will probably become a regular customer," she says. "And because the store already has a history with the cardholder, the bank providing the service has an automatic link with that customer without the acquisition cost."
In most cases, Sullivan says, the payoff is a long-term customer for both the issuing bank and the sponsor without spending a lot of money to win the business. And a retail business, for instance, also benefits by reducing the need for the costly overhead of managing cash.
"The affinity card is a giant marketing and risk-management game." Sullivan says. "They are able to target what perks and credit line will be attractive to a particular customer based on his or her purchase history and other demographic information. And I'm much less likely to default on a credit card when I might lose frequent flier miles or a free stay in a hotel."
Douglas Bowman, assistant professor of marketing at Purdue and an editorial board member for the journal Business-to-Business Marketing, agrees with Sullivan. He says the affinity card makes marketing much more efficient.
"The marketing process of prospecting for new customers, targeting the customer and winning the business has been taken care of on the front end by the organization sponsoring the card, whether it's a grocery store, magazine or nonprofit," he says. "The bank can immediately spend its money on service and retention efforts."
The next evolution for credit card marketers, according to Bowman, is deciding who they really want to keep as customers.
"Some sophisticated credit marketers are tracking purchases and balances to decide who is the most profitable. A few cards are beginning to charge if the customer doesn't carry a balance on the card. So the practice of paying off a balance every month may actually cost the cardholder in the future."
Sullivan notes that today's credit card industry is changing rapidly and that it is completely different from five years ago. "The old rules are gone -- just about anyone can get credit now," she says. "The rates are lower and some lines of credit are higher, thanks in part to consolidation in the banking industry that allows banks to take more risks."
Sullivan warns that even in a "win-win" situation for consumers, credit card customers still need to shop around for the best plan for them. She advises consumers to limit the amount of cards they carry and to carefully weigh the rate, service and flexibility each card will offer.
"Consumers should look at the billing cycle to make sure that they understand how the interest rate is calculated," she says. "Consider your lifestyle when a card sponsor offers perks -- for instance, will I really be able to use frequent flier miles, or would dollars toward a vehicle be more useful?"
And more options increase the burden on the consumer to make wise choices.
"We are often giving credit to folks who have not had a history of managing credit," she says. "The responsibility falls on them to understand and control their own credit behavior."
Sources: Charlene Sullivan (765) 494-4382; e-mail, email@example.com
Douglas Bowman (765) 494-4446; e-mail, firstname.lastname@example.org
Writer: Kate Walker (765) 494-2073; e-mail, email@example.com
Purdue News Service: (765) 494-2096; e-mail, firstname.lastname@example.org
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