Charles Schwab Stops Offering 2 Percent Credit Cards

Back in December, I warned that Charles Schwab’s generous 2 percent cash rebate credit card was in jeopardy. And sure enough, the company pulled the plug two weeks ago. It’s not accepting new applications for the card, though the company isn’t currently making any changes to the rewards structure for existing cardholders.

When this card first emerged, I scrambled to get one myself. But knowing the sad history of other 2 percent Visas and MasterCards that have come and gone, I expressed my skepticism to a Schwab executive, Richard Musci. He told me in January 2009 that the company had carefully modeled its rewards program and wouldn’t have introduced it if Schwab didn’t intend to stand behind it.

But that was early in the financial crisis. Here’s what Schwab’s spokesman, Matt Hurwitz, said via e-mail when I asked him about the card this week:

“The card was designed and modeled based on a very different economic environment than what we’re experiencing now after the financial crisis, in particular a change in people’s approach to using credit,” he wrote. “The economics of the program are being reviewed based on the current environment and usage patterns. For example, the majority of cardholders are not revolving credit.”

The challenge for any generous rewards card is to get enough people to carry a balance (or “revolve credit,” in Mr. Hurwitz’s terms) to subsidize the earnings of those who don’t. The Schwab card had no annual fee, and the merchant fees that Schwab and its card-issuing partner (part of Bank of America) collect weren’t enough to pay for the 2 percent refund plus administrative costs.

So dangling a fat refund in front of customers only makes sense if lots of people are signing up for new brokerage accounts and filling them with money to qualify for the 2 percent card. (Schwab will deposit the cash rebates earned on the card only in a Schwab brokerage account.) And apparently, there wasn’t enough of that new account sign-up behavior going on.

All that said, to my mind it’s pretty obvious that when you offer a generous card, you should expect lots of people who have no intention of carrying a balance to sign up for it and charge thousands of dollars each month. Regardless of the economic environment, I would have assumed that a majority —  even a vast majority — of Schwab cardholders would not carry a balance. If you did,  the interest you would pay would cancel out the cash rebate (and then some).

Meanwhile, Fidelity, which offers credit cards that are just about as generous as Schwab’s, has no plans to make any changes to its products in the near future. Why can Fidelity make it work but Schwab can’t? (Make sure to look at Fidelity’s Visa card and its American Express cards; Fidelity’s site doesn’t seem to allow separate links to both.)

If you’re like me and are grandfathered into the current deal, you may be feeling pretty smug right now. But Mr. Hurwitz said that there “are no changes to existing clients at this time.” (Emphasis mine.)

Cardholders are welcome to post their guesses below as to how long the 2 percent good times will last.

Hat tip to @askmrlee on Twitter for filling me in on the latest.