Beware of credit cards bearing gifts
June 29, 2003
By Pat Sabatini, Post-Gazette Staff Writer
Card issuers are promising all sorts of enticing rewards these days. But read the fine print before signing up.
When the first car rebate credit cards rolled onto the scene a decade ago, some were so generous that customers could actually rack up enough points to earn a free car. Those programs were promptly scaled back. But the concept of luring loyal cardholders with the prospect of fabulous freebies quickly caught fire.
Since then, there's been an explosion of reward-type credit cards as issuers have sought ways to stand out in a crowded market. The rush for your business has become even more crucial as interest rates have sunk to 1950s' lows, squeezing returns on the most profitable sector of card issuers' business.
Today, more than 40 percent of credit cards are tied to some kind of reward, estimates card industry guru Robert McKinley, president of CardWeb.com.
Typically, every dollar you charge on the cards earns points redeemable for merchandise, airline tickets, hotel rooms, gasoline, even cash to spend however you like. The more you spend, the more you get, though many cards carry some sort of cap.
Card issuers also have been trying targeted rewards in an effort to tickle your particular fancy. The American Express Golf Card, for example, allows golf junkies to earn points toward golf equipment, apparel and vacation packages at golf resorts. One of the latest entrants, launched two weeks ago, comes from MBNA America Bank and the Web site Vegas.com. The card lets Las Vegas addicts earn everything from trips to Sin City to buffets at Bellagio and tickets to sold-out shows.
Some card issuers have been extending goodies even to corporate accounts, a trend McKinley says may backfire.
Unlike consumers -- roughly 60 percent of whom carry revolving balances -- most corporate customers pay off their card balances each month, avoiding interest charges, which issuers rely on for fat profits.
"Credit card companies are rewarding them, even though they don't carry a balance. It doesn't make economic sense," McKinley said.
With the mind-numbing assortment of reward cards to choose from -- there are hundreds -- how do you pick the best one?
The first thing to remember is that you don't want a card that costs you more than the giveback is worth. How can that happen?
If you're among the roughly two-thirds of card holders who carry a balance each month, rewards typically aren't worth the price you pay in the form of higher interest rates.
Interest rates on reward cards tend to be around five percentage points higher than nonrebate cards. So what the card issuer gives with one hand, it "takes back fivefold with the other," McKinley said.
Card companies say the higher rates are needed to help pay for the givebacks. It's also a way to fatten profits in these days of lower overall rates.
If you're a revolver, you'd probably be better off forgetting about freebies and focusing on getting a card with the lowest rate, McKinley says. Otherwise, you could end up spending a couple hundred dollars in extra interest for rebates that are worth much less.
Plain-vanilla low-rate cards charge interest rates starting at about 4 percent or 5 percent, compared with about 9 percent for reward cards, with some charging as much as 19 percent. (You can find a list of low-rate and reward cards at CardWeb.com.)If you pay off your balance each month, the biggest factor to consider when choosing a reward card is the annual fee.
Unless you're a bigger-than-average spender, you should stick with a no-fee card, since the rewards you earn rarely make up for shelling out $30 to $50 or more a year.
No-fee cards are easy to find, except when it comes to airline reward cards. Issuers of airline cards say they need to charge annual fees to offset costs because many of the cards are held by companies that typically pay off their balances and don't incur the interest charges issuers count on. Overall, 60 percent to 70 percent of air mile cards don't revolve, McKinley says.
If you use your card a lot, charging $1,000 a month or more, and rack up a free ticket fairly quickly, then paying an annual fee can still make sense.
However, if you're like the average cardholder -- someone who charges about $2,800 a year -- it would take nearly nine years to earn the 25,000 points typically needed for a free domestic ticket. (25,000 divided by 2,800 = 8.9 years).
If you paid an annual fee that whole time, say $50, that "free" flight actually would end up costing you $400.
"Make sure you're not paying for the ticket in annual fees," McKinley warned.
Among the 30 airline reward programs listed at CardWeb.com, the only one that doesn't charge an annual fee is the American Express Delta Skymiles Options card. The catch is that on most purchases, you earn rewards at half the rate of typical airline cards: one point for every $2 charged instead of every $1.
McKinley favors airline cards tied to a particular airline instead of generic cards that let you to earn flights on a variety of carriers because the latter may limit the value of the ticket you earn.
"They're going out and buying a ticket for you, so they may limit the value to, say, no more than $500 or $600," he says.
Besides weighing annual fees, you'll have to settle on the type of reward you want to earn.
Cash-back cards offer the advantage of flexibility, allowing you to spend your "reward" on whatever you choose. But taking a reward in the form of merchandise can give you more bang for the buck.
Take the airline cards. Each point earned toward a free ticket typically has a cash value of 2.5 cents. That compares with cash-back cards that earn cash at the rate of 1 cent or less for every dollar charged.
Obviously, you'll want to pick a card that offers rewards you can use. No sense signing up for the GM card, which earns points toward rebates on General Motors vehicles, if you only buy Fords.
Once you've selected a card, be careful not to make any late payments. Not only will you get hit with a late fee, many of which have been increased of late to make up for lower interest rates, you could lose the reward points you earned that month.
That's what happened to McKinley when he paid a few days late on his United Airlines card. He forfeited the 8,000 points he would have earned that month, though he eventually got credit for them after complaining.
Also, be aware that card companies offering terrific rewards may have very strict requirements that are outlined in the fine print. If you don't meet the criteria, they could end up sending you a different card with less favorable terms.
Finally, remember that card companies can change the rules or end a reward program at any time, so don't count on a particular reward being there forever.
McKinley had his heart set on an African Safari, but by the time he got close to having enough points, the trip was no longer available.
"Set your redemption time frame for one or two years," he said, or you risk being disappointed.
In any case, your choice of reward programs probably will continue to grow.
"Card issuers have tried zero percent interest rates, dropped annual fees, what else can they do?" to entice customers, McKinley asked.
"They all try looking for an angle. If they can offer a reward, they make their product stand out and create value."