Published Sept. 4, 2015
NerdWallet’s inaugural Consumer Credit Card Report is an in-depth analysis of the credit card landscape, aimed at identifying the industry trends that are most important for consumers to be aware of in 2015.
We analyzed internal and external data sources, then commissioned an online survey, conducted by Harris Poll, of over 2,000 adults (see methodology below) to uncover current credit card trends. As part of our mission to deliver clarity for all of life’s financial decisions, we’ve scrutinized the results and found three areas consumers should focus on during the next year.
- Fraud and EMV: Online shopping fraud will likely increase — and counterfeit fraud may increase before it begins to decline — when EMV technology is adopted in the U.S. later this year. As EMV technology rolls out in America, we expect to see trends that surfaced in the UK when it adopted the technology in 2005. There, online shopping and other types of card-not-present fraud increased by 120% between 2004 and 2014. And though counterfeit fraud went down 63% during this time, it peaked in 2008 due to cross-border fraud. 
- Cost of rewards: NerdWallet found that consumers are overwhelmingly applying for rewards credit cards , but 31% don’t know how much they’re costing them in fees, and almost one in five didn’t redeem any of their rewards last year. 
- Millennials’ card choices: Millennials have the lowest average credit score — 28.1% have scores below 579  — and the shortest credit history of all age groups, and it may not improve. Some millennials are shunning credit cards completely, while others are applying for the wrong cards and being rejected, both of which are hurting their finances.
“Credit cards are one of America’s most valuable financial tools, but the benefits are often obscured by confusing financial jargon, overwhelming amounts of data and misleading advertisements featuring charming celebrity spokespeople,” says Sean McQuay, NerdWallet’s resident credit card expert and former strategy analyst at Visa. “We sifted through this noise for you and have uncovered three alarming trends all credit card users should be aware of.”
In this report, we will explain EMV technology and its limitations, empower consumers to find the best rewards cards and help millennials understand the importance of good credit and identify the best cards to apply for.
Check your credit card bills: Fraud is about to surge
As the U.S. adopts EMV technology, we can look to the UK for what to expect. While counterfeit fraud there has decreased by 63% over the last decade, online shopping fraud and other types of card-not-present fraud have increased by 120% in that time.
What is EMV?
Before we explain how fraud rates will likely be affected, it’s important to define EMV technology’s role in card security. Credit cards with an EMV chip — that small square chip embedded in your credit card — are more secure than traditional magnetic stripe cards because EMV chips create unique, temporary payment credentials for every transaction while the payment information in a magnetic stripe always stays the same. This lowers consumers’ fraud risk substantially because card data can’t be “skimmed” from a magnetic stripe and put onto a counterfeit card to use for fraudulent transactions. (For more on EMV technology and how it works, check out our ABCs of EMV.)
The liability shift in 2015
While EMV upgrades aren’t mandated for card issuers and merchants, the entity that doesn’t upgrade to EMV cards or terminals will become responsible for fraudulent transactions, a change known as the “liability shift,” in October. Currently, issuers are responsible for fraudulent transactions. Similar liability shifts have occurred in other countries that have adopted EMV, like the United Kingdom.
How EMV adoption affected the UK
Over the last decade, the United Kingdom has experienced a 63% drop in counterfeit fraud — or the type of fraud committed when a real card’s data is stolen and put onto a counterfeit card — due to its liability shift in 2005. In 2014, this resulted in savings of £122 million compared with 2008, when counterfeit fraud peaked after EMV adoption. 
Despite EMV adoption, counterfeit fraud in the UK spiked after 2005 due to cross-border fraud; UK credit cards were being used fraudulently in countries that weren’t yet equipped to accept EMV chips.  Counterfeit fraud rates have since declined again, but they’ve been replaced by another type of fraudulent activity — card-not-present fraud.
EMV chips have to be “dipped” into terminals to be effective, which means they keep only “card-present” transactions — those you make in person — more secure. Transactions made online or by phone, for instance — known as “card-not-present” transactions — aren’t affected by EMV technology, making them an attractive alternative to skimming for fraudsters. In fact, card-not-present fraud increased by 120% in the United Kingdom between 2004 and 2014. It’s likely that a similar trend will occur in the U.S. after the EMV liability shift.
EMV adoption in the U.S.
The U.S. is late in adopting EMV, leaving many consumers confused about how it will affect fraud and who will be responsible for it. In fact, 40% of U.S. adults are “not at all sure” which types of fraud EMV will combat, and 59% don’t know who will be liable for fraudulent transactions on cards with an EMV chip after October. 
While EMV technology should eventually improve counterfeit fraud rates, it’s far from a perfect solution.
“When we think about the 2015 ‘liability shift,’ it’s important to remember that there are very real costs for stores to upgrade their payment terminals to accept EMV. Because of this, some stores will take a while to switch — and any time you swipe your card instead of ‘dipping’ it, the chip is useless,” McQuay says.
This security gap is made even worse by the fact that self-serve gas pumps aren’t liable for fraudulent transactions until 2017.
According to McQuay: “Self-service gas pumps — formally known as automated fuel dispensers — were given this extension because upgrading gas pumps is far more expensive than upgrading normal in-store payment terminals. This represents a huge gap in safety for any consumer that buys gas at self-serve pumps — or, in other words, nearly nine out of 10 Americans.” 
What consumers should do
Learn how to use an EMV card and understand its limitations. “It’s important for consumers to know that EMV chips are not a magic bullet for credit card security. They help prevent only one type of fraud — counterfeit fraud — and even then only when you dip the card as opposed to swiping it. Until all terminals are switched over, EMV isn’t going to have much of a positive impact,” McQuay says.
It’s important to learn how to use an EMV card to lower your chances of counterfeit fraud. It’s not a perfect system, but it’s an improvement on magnetic stripe technology for card-present transaction security.
Buyer beware: Your rewards card’s annual fee may cost you more than it’s worth
Rewards credit cards have an average annual fee of $58 per year , and consumers have an average of 2.3 rewards cards.  Almost a third — 31% — of U.S. adults who have rewards cards with an annual fee don’t know how much their fees cost them each year.
The popularity of rewards credit cards
Rewards credit cards are the most popular type of card across all credit score ranges; overall, they made up nearly 80% of new card volume in the first quarter of 2014.  A good rewards program is so important to consumers that they’re willing to switch to a different card if their current card is lacking. In fact, 52% of people selected their new card for a better rewards program. 
A typical rewards card earns 1% to 2% back on every purchase in the form of cash, miles or points. Many rewards cards, particularly those with large sign-up bonuses or high ongoing rewards, come with annual fees. Some cards waive this fee for the first year, while others charge it immediately when you make your first purchase.
Fee or no fee: Which is best for consumers
Paying an annual fee is worth the cost when the rewards you earn offset the fee and exceed the rewards you’d earn with a no-fee card. At the very least, it’s important to make sure you aren’t paying more in fees than you’re getting back in rewards.
Considering an average annual fee of $58 and an average rewards rate of 1.14 cents per point , you’d need to spend $5,088 per credit card per year to break even. Consumers who spend less should opt for a rewards card without an annual fee.
McQuay says: “The rewards cards with the biggest perks don’t come free. It’s easy to get excited about racking up points, getting lounge access, or being able to check bags for free, but it’s important to remember that those cards charge their annual fees every year in the background.”
What consumers should do
Know your card policies. “It’s important for consumers to think about how much their points are worth. Think about the ads you’ve seen lately advertising rewards credit cards — they’re always focused on how easy it is to earn points, how many points you’ll earn per dollar, etc. But they never mention how much those points are worth,” McQuay says. “This creates a huge blind spot for consumers unless they do their research.” Check out NerdWallet’s points value tool to assess the points value of several top credit cards.
The 50% of consumers who want to avoid annual fees entirely  have several options. There are great free rewards cards, and many top rewards cards waive their fees the first year. Check out our credit card reviews to learn about your favorite card’s rewards program and fees. Pay special attention to applicable bonus spending categories, rewards caps, redemption options and expiration policies.
Millennials are looking for credit cards in all the wrong places
Nearly half, or 48%, of millennials who have ever applied for a credit card selected their most recent card because of an advertisement or promotion.
Millennials and credit scores
Millennials have received a lot of attention for shunning credit cards — 31% of U.S. adults between the ages of 18 and 34 have never applied for a credit card. Getting a credit card is a great way to start building credit, which is crucial for securing loans, renting apartments, getting the best insurance rates and even landing certain jobs. And because the length of credit history is an important factor, millennials should aim to start building credit as soon as possible.
However, it isn’t advisable to apply for cards without understanding the required qualifications. Applying for the wrong cards can be just as damaging as not applying for cards at all, so don’t rely solely on advertisements or peer recommendations.
How applying for the wrong cards can affect your credit
Millennials with low FICO scores — between 300 and 579 — actively seek new credit cards more often than other millennials, but are approved less frequently.  This outcome suggests that millennials are seeking credit in all the wrong places, and this knowledge gap is perpetuating a vicious cycle that can lead to damaged credit.
When a consumer applies for a new credit card, his or her credit score will suffer a small ding called a “hard” credit inquiry. The more inquiries the consumer has, the riskier he appears to be to lenders and the lower his credit score will likely be. The inquiries can be even more damaging if the consumer has no credit or a short credit history. As consumers apply for the wrong cards and are rejected, they’ll continue collecting hard inquiries, which will ultimately negatively affect their credit scores and in turn hurt their chances of being approved for a card.
What consumers should do
Apply sparingly for credit cards that are appropriate for your credit score range. “Credit cards are amazing tools. They can help you build credit, hold you over financially when you need a short term bridge and provide you with great rewards,” McQuay says. “But it’s important for consumers to be thoughtful when they’re considering applying for a card. They should know why they want a card so they can find the credit card that best meets their needs. Applying for the wrong card can, if rejected, lead to damaged credit, and if accepted, lead to paying unnecessary fees or losing out on valuable benefits.”
It’s also important to avoid applying for several new cards at once.
“Especially for younger consumers and anyone trying to build their credit, avoid applying for credit cards too often — a good rule of thumb is to wait six months to a year between card applications,” McQuay says.
Consumers should apply for cards marketed toward users in their credit score range to increase the likelihood of approval and avoid racking up hard inquiries. Millennial consumers — and any other consumers who need to build their credit — should check out NerdWallet’s top picks for first credit cards, secured credit cards and student credit cards.
NerdWallet conducted a nine-question survey to understand consumer experiences with credit card rewards and applying for cards, as well as their knowledge of EMV technology. This survey was conducted online within the United States by Harris Poll on behalf of NerdWallet from August 7-11, 2015, among 2,084 adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact firstname.lastname@example.org.
NerdWallet also reviewed internal and external data sources. Our internal data is included in the study’s accompanying data pack. The external data sources are publicly available online:
- American Bankers Association. “Focus on Rewards Credit Cards: Rewards Cards Gaining in Popularity Across All Consumer Categories.”
- Federal Reserve Bank of Boston. “The 2011 and 2012 Surveys of Consumer Payment Choice.”
- FICO Blog. “Research: Millennials Still Seek ‘Old School’ Credit.” 2014.
- Financial Fraud Action UK. “Fraud the Facts 2015.”
- J.D. Power. “2014 U.S. Credit Card Satisfaction Study.”
- Mercator Advisory Group and FICO. “EMV Adoption and its Impact on Fraud Management Worldwide.” January 2014.
- U.S. PIRG Education Fund. “A New Direction: Our Changing Relationship with Driving and the Implications for America’s Future.” Spring 2013.
 According to Financial Fraud Action UK’s annual fraud study, counterfeit fraud losses dropped from £129.7 million in 2004 to £47.8 million in 2014. Counterfeit fraud during this decade peaked in 2008 at £169.8 million in losses. Card-not-present fraud losses increased from £150.8 million in 2004 to £331.5 million in 2014.
 The results of our survey conducted by Harris Poll showed that 31% of U.S. adults who own a rewards card with an annual fee don’t know how much their annual fee costs. Of those who own a credit card with rewards points, 18% didn’t redeem any of their available rewards points last year.
 According to FICO’s research, 28.1% of Millennials have credit scores between 300 and 579, and 19.1% of the total population falls in this score range.
 According to a Mercator Advisory Group research brief sponsored by FICO, fraud activity increased between 2006 and 2008 in the UK, but the accelerated fraud is attributed to migration from domestic to international fraud in countries without prevalent EMV technology.
 The results of our survey conducted by Harris Poll showed that 40% of U.S. adults are “not at all sure” which types of fraud EMV will protect them against, and 59% don’t know who will be liable for fraudulent transactions on cards with an EMV chip after October 2015.
 According to a study from the U.S. PIRG Education Fund, 86% of driving-age Americans held licenses in 2011.
 NerdWallet’s internal data show an average annual fee of $58 and an average point value of 1.14 cents, as of June 2015.
 According to the Federal Reserve Bank of Boston’s survey of consumer payment choice, the average consumer has four credit cards, 2.3 of which are rewards cards.
 According to the American Bankers Association’s credit card study, rewards credit cards — including cash/miles/points cards, co-branded air cards and non-air co-branded cards — made up 78% of all new account volume in Q1 of 2014.
 According to J.D. Power’s annual credit card satisfaction study, 52% of credit card customers chose their new credit card for a better rewards program.
 The results of our survey conducted by Harris Poll showed that 50% of Americans would not pay to earn credit card rewards.
 FICO’s research showed that 40.5% of millennials with credit scores between 300 and 579 made inquiries between April 2014 and October 2014, and 16.4% of millennials opened new credit accounts during this time period.