Costco has a major credit card problem

Costco does credit cards very differently than any other retailer. It makes an exclusive deal with one credit card brand, then partners with a bank to offer a signature version of that brand’s card. 

The warehouse club ended its exclusive partnership with American Express in 2016, transitioning to Visa cards issued by Citigroup. 

That was big deal because it was not just a swap of banks. Costco members could no longer pay using American Express at all.

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Members who had the AmEx card were offered a generic American Express and could apply for the new Citigroup Visa.

Most retailers have a preferred card that offers perks and bonuses for shopping in-store, but they accept Visa, Mastercard, American Express, and maybe even Discover. Costco  (COST)  works exclusively with one brand and does not accept the others.

The current exclusive co-brand with Citi and Visa expires in 2026, but there are provisions to renew it through as long as 2029. That may not happen unless major changes are made, based on complaints all across social media.

Costco’s credit card perks have gotten weaker 

It’s rare that you find a voice of reason on Reddit, but CoopDude summed up Costco’s credit card problems well in a post on the social media site.

“The Costco Visa was a great credit card when it launched. Today, it is a mediocre credit card. This really boils down to two changes in the last eight years:

1. Credit card rewards have become increasingly competitive. While there were no widely available 2% everywhere Visa cards in 2016 (the Citi Double Cash was 2%, but couldn’t be used in-warehouse at Costco), now there are several, and many of them have sign up bonuses (the best you might get at Costco if you’re lucky to apply for the card is a thing of bottled water or an insulated food tote).
2. The Costco Visa was eviscerated of almost all of its benefits, including purchase protection extended warranty, and most travel benefits by Citi in the last few years.”

Basically, Costco’s card has gotten worse as other kids in the market have gotten stronger. There’s also another major drag on the Citi Costco card compared to the 2% cards readily available in the market now. 

“The biggest problem with the Costco Visa is that it has a 1% everywhere earn rate. This means if you use it as your primary credit card — e.g. almost all or all of your spending goes on it — the 1% everywhere else drags on your effective cashback. If you look at the effective cashback that most people get when they post their yearly summaries on r/Costco, they usually average 1.5-1.8% effective cashback, and would have been better off using a 2%+ anywhere card,” they shared. 

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The poster, who was backed up by hundreds of others saying similar things (and offering examples), made it clear that Costco and Citi aren’t offering a bad card. There are just better ones on the market. 

“When combined with the lack of benefits, and that the Costco Visa makes you wait a full year to redeem cashback as a certificate that can only be cashed out at Costco, I no longer recommend it to people. Again, it’s not a predatory credit card, but you would generally do better with a 2%+ anywhere card. If you’re really trying to maximize Wholesale club rewards as a category, there are cards that do 3%+ for wholesale clubs,” they added.  

Costco can make a change, but not soon

Costco gets multiple benefits out of its Visa relationship beyond its deal for a custom card for members.

• The arrangement allows Costco to pay near-zero interchange fees on in-warehouse Visa transactions, subsidized by Citi and Visa. It’s a pricing structure that essentially removes credit card fees for Costco, including non-Citi-issued Visa purchases.

Costco clearly is happy with deal, even as the card has gotten less valuable for members. It has signed an extension to the original 10-year deal, according to SEC documents.

The agreement effectively keeps the current deal in place.

“Costco hereby exercises its right pursuant to Section 12.01(a) to extend the Initial Term by three years. Therefore, the parties acknowledge that the Initial Term will continue through June 19, 2029.”

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That does not mean that Costco isn’t upset over changes made on the member side. It could use the relatively short-term renewal as leverage to ask for changes.

Ideally, that would include a number of things:

• Higher cash back both in Costco and when used externally
• A return of purchase protections
• New perks to match other top-rated cards

The current Costco Citi Visa does offer 5% off gas when purchased at the warehouse club. It may also try to negotiate better payment terms for when its members get their cash back.